10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

OR

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

FOR THE TRANSITION PERIOD FROM          TO          .

COMMISSION FILE NO. 0-28218

AFFYMETRIX, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE	77-0319159
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
3420 CENTRAL EXPRESSWAY
SANTA CLARA, CALIFORNIA	95051
(Address of principal executive offices)	(Zip Code)

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

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

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

Large accelerated filer x           Accelerated filer o           Non-accelerated filer 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

COMMON SHARES OUTSTANDING ON NOVEMBER 3, 2006: 67,847,821

AFFYMETRIX, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited), as restated
		Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005, as restated
		Condensed Consolidated Statements of (Loss) Income for the Three and Nine Months Ended September 30, 2006 and 2005, as restated
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005, as restated
		Notes to Condensed Consolidated Financial Statements, as restated
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 1A.	Risk Factors
	Item 5.	Other Information
	Item 6.	Exhibits
SIGNATURES

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

(UNAUDITED)

	September 30, 2006			December 31, 2005
				Note 1 (as restated)
ASSETS
Current assets:
Cash and cash equivalents	$	66,487		$	100,236
Available-for-sale securities – short-term	179,055			184,696
Accounts receivable, net	65,097			93,028
Accounts receivable from Perlegen Sciences	5,153			4,082
Inventories	45,654			35,980
Deferred tax assets—current portion	26,375			26,230
Prepaid expenses and other current assets	7,584			12,622
Total current assets	395,405			456,874
Property and equipment, net	132,465			85,560
Acquired technology rights, net	57,204			61,426
Goodwill	124,787			124,498
Deferred tax assets—long-term portion	18,087			17,594
Notes receivable from employees	2,364			1,824
Other assets	33,051			27,318
	$	763,363		$	775,094
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	60,939		$	71,551
Deferred revenue — current portion	34,316			35,644
Total current liabilities	95,255			107,195
Deferred revenue — long-term portion	12,029			15,606
Other long-term liabilities	5,279			4,184
Convertible notes	120,000			120,000
Stockholders’ equity:
Common stock	678			672
Additional paid-in capital	660,732			646,186
Deferred stock compensation	—			(10,799		)
Accumulated other comprehensive loss	(1,503		)	(1,227		)
Accumulated deficit	(129,107		)	(106,723		)
Total stockholders’ equity	530,800			528,109
	$	763,363		$	775,094

Note 1:The condensed consolidated balance sheet at December 31, 2005 has been derived from the audited consolidated financial statements at that date included in the Company’s Form 10-K/A for the fiscal year ended December 31, 2005.

See accompanying notes.

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AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
				(as restated)						(as restated)
Revenue
Product sales	$	56,139		$	69,044		$	183,154		$	211,808
Product related revenue	17,971			10,456			45,621			32,707
Total product and product related revenue	74,110			79,500			228,775			244,515
Royalties and other revenue	5,969			1,727			10,263			5,280
Revenue from Perlegen Sciences	4,593			2,220			12,091			6,318
Total revenue	84,672			83,447			251,129			256,113
Costs and expenses:
Cost of product sales	23,618			20,755			62,338			57,986
Cost of product related revenue	8,859			2,655			22,712			7,619
Cost of revenue from Perlegen Sciences	1,646			1,359			4,304			4,351
Research and development	21,639			19,835			66,737			57,724
Selling, general and administrative	35,865			30,362			114,107			92,499
Stock-based compensation	—			141			—			257
Restructuring	10,008			—			10,008			—
Total costs and expenses	101,635			75,107			280,206			220,436
(Loss) income from operations	(16,963		)	8,340			(29,077		)	35,677
Interest income and other, net	2,942			2,294			10,949			3,961
Interest expense	(350		)	(413		)	(1,174		)	(1,129		)
(Loss) income before income taxes	(14,371		)	10,221			(19,302		)	38,509
Income tax benefit (provision)	216			(823		)	(3,082		)	(3,330		)
Net (loss) income	(14,155		)	$	9,398		(22,384		)	$	35,179
Basic net (loss) income per common share	$	(0.21	)	$	0.15		$	(0.33	)	$	0.56
Diluted net (loss) income per common share	$	(0.21	)	$	0.14		$	(0.33	)	$	0.52
Shares used in computing basic net (loss) income per share	67,248			63,786			67,320			63,112
Shares used in computing diluted net (loss) income per share	67,248			70,463			67,320			69,966

See accompanying notes.

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AFFYMETRIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

	Nine Months Ended September 30,
	2006			2005
				(as restated)
Cash flows from operating activities:
Net (loss) income	$	(22,384	)	$	35,178
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	16,733			15,289
Amortization of intangible assets	6,236			5,666
Amortization of investment discounts, net	(664		)	(1,256		)
Stock-based compensation	20,058			257
Realized (gain) loss on sales of available for sale securities	(7		)	114
Realized loss on equity method investment in Perlegen Sciences	—			2,000
Deferred tax assets	(1,362		)	(2,436		)
Write down of equity investment	165			123
Tax benefit from employee stock options	—			6,096
Amortization of debt offering costs	569			569
Accretion of interest on notes receivable	(40		)	(78		)
Loss on write-off of equipment	631			10
Change in operating assets and liabilities:
Accounts receivable, net	26,860			25,988
Inventories	(9,674		)	(16,643		)
Prepaid expenses and other current assets	(5,160		)	(6,379		)
Accounts payable and accrued and other current liabilities	(10,860		)	(5,394		)
Deferred revenue	(4,905		)	(11,001		)
Other long-term liabilities	1,095			(524		)
Net cash provided by operating activities	17,291			47,579
Cash flows from investing activities:
Capital expenditures	(64,269		)	(18,492		)
Purchases of available-for-sale securities	(85,642		)	(220,645		)
Proceeds from the sales or maturities of available-for-sale securities	94,260			160,799
Proceeds from the capital distribution of a non-marketable equity investment	—			411
Purchase of non-marketable equity investment in Perlegen Sciences	—			(2,000		)
Purchase of non-marketable equity investment	(950		)	(1,000		)
Purchase of technology rights	(250		)	(500		)
Issuance of loan receivable	—			(4,500		)
Net cash used in investing activities	(56,851		)	(85,927		)
Cash flows from financing activities:
Issuance of common stock through the Company’s stock option plans	5,728			47,079
Net cash provided by financing activities	5,728			47,079
Effect of exchange rate changes on cash and cash equivalents	83			375
Net (decrease) increase in cash and cash equivalents	(33,749		)	9,106
Cash and cash equivalents at beginning of period	100,236			42,595
Cash and cash equivalents at end of period	$	66,487		$	51,701

See accompanying notes.

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AFFYMETRIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on August 30, 2006.

Restatement of Prior Period Information

The financial results of operations for the three and nine month periods ended September 30, 2005 have been restated to correct certain errors resulting from the recording of additional non-cash stock-based compensation expense, and the related income tax impact.  Refer to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2005 for a detailed discussion of the restatement.

Use of Estimates

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

Revenue Recognition

Overview

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

The Company derives the majority of its revenue from product sales of GeneChip® probe arrays, reagents, and related instrumentation that may be sold individually or combined with any of the product or product related revenue items listed below. When a sale combines multiple elements, the Company accounts for multiple element arrangements under Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.”

EITF 00-21 provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. In accordance with EITF 00-21, 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. In the absence of fair value of a delivered element, the Company allocates revenue first to the fair value of the undelivered elements and the residual revenue to the delivered elements. The Company recognizes revenue for delivered elements when the delivered elements have standalone value and the Company has objective and reliable evidence of fair value for each undelivered element. If the fair value of any undelivered element included in a multiple element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

Product Sales

Product sales, as well as revenues from Perlegen Sciences, include sales of GeneChip® probe arrays, reagents and related instrumentation. Probe array, reagent and instrumentation revenues are recognized when earned, which is generally upon shipment

6

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.

Product Related Revenue

Product related revenue includes subscription fees earned under GeneChip® array access programs; license fees; milestones and royalties earned from collaborative product development and supply agreements; equipment service revenue; product related scientific services revenue; and revenue from custom probe array design fees.

Revenue from subscription fees earned under GeneChip® array access programs is recorded ratably over the related supply term.

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.

Revenue related to extended warranty arrangements is deferred and recognized ratably over the applicable periods. Revenue from custom probe array design fees associated with the Company’s GeneChip® CustomExpressÔ and CustomSeqÔ products are recognized when the associated products are shipped.

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

Royalties and Other Revenue

Royalties and other revenue include royalties earned from third party license agreements and research revenue which mainly consists of amounts earned under government grants. Additionally, other revenue includes fees earned through the license of the Company’s intellectual property.

Royalty revenues are earned from the sale of products by third parties who have been licensed under the Company’s intellectual property portfolio. Revenue from minimum royalties is amortized over the term of the creditable royalty period. Any royalties received in excess of minimum royalty payments are recognized under the terms of the related agreement, generally upon notification of manufacture or shipment of a product by a licensee.

Research revenues result primarily from research grants received from U.S. Government entities or from subcontracts with other life science research-based companies which receive their research grant funding from the U.S. Government. Revenues from research contracts are generated from the efforts of the Company’s technical staff and include the costs for material and subcontract efforts. The Company’s research grant contracts generally provide for the payment of negotiated fixed hourly rates for labor hours incurred plus reimbursement of other allowable costs. Research revenue is recorded in the period in which the associated costs are incurred, up to the limit of the prior approval funding amounts contained in each agreement. The costs associated with these grants are reported as research and development expense.

License revenues are generally recognized upon execution of the agreement unless the Company has continuing performance obligations, in which case the license revenue is recognized ratably over the period of expected performance.

Transactions with Distributors

The Company recognizes revenue on sales to distributors in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” or SAB 104. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectibility is reasonably assured. The Company’s agreements with distributors do not include rights of return.

Net (Loss) Income Per Share

Basic net (loss) income per 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) income per share gives effect to the dilutive common stock subject to repurchase, stock options and warrants (calculated based on the treasury stock method), and convertible debt (calculated using an as if-converted method).

7

The following table sets forth a reconciliation of basic and diluted net (loss) income per share (in thousands, except per share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
				(as restated)						(as restated)
Numerator:
Net (loss) income —basic	$	(14,155	)	$	9,397		$	(22,384	)	$	35,179
Add effect of dilutive securities:
Interest on convertible notes (inclusive of amortization of debt issuance costs)	—			415			—			1,244
Net (loss) income — diluted	$	(14,155	)	$	9,812		$	(22,384	)	$	36,423
Denominator:
Weighted-average shares outstanding	67,498			63,868			67,430			63,201
Less: weighted-average shares of common stock subject to repurchase	(250		)	(82		)	(110		)	(89		)
Shares used in computing basic net (loss) income per common share	67,248			63,786			67,320			63,112
Add effect of dilutive securities:
Employee stock options	—			2,725			—			2,890
Common stock subject to repurchase	—			82			—			89
Warrants to purchase common stock	—			—			—			5
Convertible notes	—			3,870			—			3,870
Shares used in computing diluted net (loss) income per common share	67,248			70,463			67,320			69,966
Basic net (loss) income per common share	$	(0.21	)	$	0.15		$	(0.33	)	$	0.56
Diluted net (loss) income per common share	$	(0.21	)	$	0.14		$	(0.33	)	$	0.52

The following securities were excluded from the computation of diluted net (loss) income per common share, on an actual outstanding basis, as they were anti-dilutive (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2006	2005	2006	2005
Employee stock options	6,878	507	6,878	1,647
Common stock subject to repurchase	250	—	110	—
Convertible notes	3,870	—	3,870	—
Total	10,998	507	10,858	1,647

Change in Functional Currency

Beginning April 1, 2006, Affymetrix, UK Ltd, a wholly-owned subsidiary incorporated in the United Kingdom, and Affymetrix Pte Ltd, a wholly-owned subsidiary incorporated in Singapore, changed their functional currencies from their local currencies to the U.S. dollar. The change in the functional currency of these subsidiaries is in accordance with SFAS 52, “Foreign Currency Translation”, (SFAS 52) and reflects the changed economic facts and circumstances pertaining to these subsidiaries. Under the requirements of SFAS 52, the Company assessed the various economic factors relating to Affymetrix, UK Ltd and Affymetrix Pte Ltd and concluded that due to changes in facts, circumstances, scope of operations and business practices, the U.S. dollar is now the currency of the primary economic environment in which these subsidiaries operate. Consequently, these subsidiaries will no longer generate translation adjustments which would impact the balance of accumulated other comprehensive income. Translation adjustments from prior periods will continue to remain in accumulated other comprehensive income.

8

Recent Accounting Pronouncement

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”).  Under FIN 48 a company would recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position.  FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits.  FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the income statement and presented in the balance sheet.  FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by the Company effective January 1, 2007.  The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption.  The Company is currently evaluating FIN 48 and its possible impacts on the Company’s financial statements and is not yet in a position to determine such effects, if any.

NOTE 2—RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

On August 9, 2006, the Company concluded that its consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 should be restated to record additional non-cash stock-based compensation expense, and the related income tax impact, resulting from stock options granted during fiscal years 1997 to 1999 that were incorrectly accounted for under U.S. generally accepted accounting principles. The Company’s decision to restate its financial statements was based on the results of an internal review of the Company’s historical stock option granting practices from January 1, 1997 through May 31, 2006 performed under the direction of the Audit Committee of the Board of Directors.  The internal review identified certain errors and documentation lapses but did not find any pattern or practice of inappropriately identifying grant dates with hindsight in order to provide “discounted” or “in-the-money” grants.

The Company concluded that there was a material accounting error as a result of a documentation lapse in July 1999, in which the option grant for an aggregate of 1.99 million shares should have been measured for accounting purposes as of a later date.  In light of the restatement required by this matter, the Company also included in this restatement corrections relating to certain other errors and documentation lapses in the fiscal years 1997 and 1998.  Approximately 97% of the charges relating to the restatement arose from the documentation lapse in July 1999.

The Company determined that the cumulative, pre-tax, non-cash, stock-based compensation expense resulting from revised measurement dates for options granted between 1997 and 1999 was approximately $21.5 million. Accordingly, the Company recorded stock-based compensation expense of $0, $0, and $1.7 million for the years ended December 31, 2005, 2004 and 2003, respectively, and $19.8 million for the five years preceding 2003, based on the vesting periods of the respective grants.  In addition, the Company recorded an income tax benefit of $8.3 million in 2005.  Principally as a result of cumulative losses incurred through 2004, the Company recorded a full valuation allowance against all deferred tax assets for the years ended December 31, 2004 and 2003 and consequently, there was no income tax effect of the additional stock-based compensation expense recorded in those years.  The cumulative effect of the restatement adjustments on the Company’s consolidated balance sheet at December 31, 2005 was an increase in additional paid-in capital of $21.5 million offset by an increase in the accumulated deficit of $13.2 million, which resulted in a net effect on stockholders’ equity of $8.3 million.  The adjustments increased previously reported basic and diluted net income per common share by $0.13 and $0.12, respectively, for the year ended December 31, 2005 and decreased basic and diluted net income per common share by $0.03 for the year ended December 31, 2003.

As part of the Company’s review, the Company assessed whether there were other matters that should have been corrected in its previously issued consolidated financial statements. Apart from the errors underlying the restatement described above, no other matters came to the Company’s attention that should have been adjusted in its previously issued consolidated financial statements.

9

The following tables set forth the effects of the restatement on certain line items within the Company’s consolidated statements of income for three and nine months ended September 30, 2005 and condensed consolidated balance sheet as of December 31, 2005:

	Three months ended September 30, 2005		Nine months ended September 30, 2005
Income tax provision:
As previously reported	$	1,508	$	5,767
As restated	$	824	$	3,330
Net income:
As previously reported	$	8,713	$	32,742
As restated	$	9,398	$	35,179
Basic net income per share:
As previously reported	$	0.14	$	0.52
As restated	$	0.15	$	0.56
Diluted net income per share:
As previously reported	$	0.13	$	0.49
As restated	$	0.14	$	0.52

	December 31, 2005
Deferred tax assets – current portion:
As previously reported	$	22,117
As restated	$	26,230
Deferred tax assets – long-term portion:
As previously reported	$	13,436
As restated	$	17,594
Additional paid-in capital:
As previously reported	$	624,727
As restated	$	646,186
Accumulated deficit:
As previously reported	$	(93,535	)
As restated	$	(106,723	)

Certain other footnotes appearing in these financial statements were impacted by the error corrections reflected in the restatement.  Refer to footnotes 1, 3, and 8.

NOTE 3—STOCK-BASED COMPENSATION

Stock-Based Compensation Plans

The Company has a stock-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 non-vested stock awards (also known as restricted stock) granted under various stock plans. Stock options are generally time-based, vesting 25% on each annual anniversary of the grant date over four years and expire 7 to 10 years from the grant date. Non-vested restricted stock awards are generally time-based, vesting 33% on each of the second, third and fourth anniversaries of the grant date. As of September 30, 2006, the Company had approximately 1.2 million shares of common stock reserved for future issuance under its stock-based compensation plans. New shares are issued as a result of stock option exercises and non-vested restricted stock awards.

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Adoption of SFAS 123R

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R using the modified prospective transition method.  Under the modified prospective transition method, prior periods are not restated for the effect of SFAS 123R.  Commencing with the first quarter of 2006, compensation cost includes all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and compensation for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes the fair value of its stock option awards as compensation expense over the requisite service period of each award, generally four years. Compensation expense related to stock options granted prior to January 1, 2006 is recognized using the graded method while compensation expense related to stock options granted on or after January 1, 2006 is recognized on a straight-line basis.

Prior to the adoption of SFAS 123R, the Company applied SFAS 123, amended by SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (SFAS 148), which allowed companies to apply the existing accounting rules under APB 25, “Accounting for Stock Issued to Employees,” and related Interpretations. In general, as the exercise price of options granted under the Company’s plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation cost was recognized in the Company’s net income (loss) for periods prior to the adoption of SFAS 123R. As required by SFAS 148 prior to the adoption of SFAS 123R, the Company provided pro forma net income (loss) and pro forma net income (loss) per common share disclosures for stock-based awards, as if the fair-value-based method defined in SFAS 123 had been applied.

As a result of adopting SFAS 123R, the Company’s loss before taxes, net loss and basic and diluted loss per share for the three months ended September 30, 2006 was $5.1 million, $4.1 million, $0.06 lower, respectively, than if the Company had continued to account for stock-based compensation under APB Opinion No. 25 and for the nine months ended September 30, 2006 was $12.6 million, $9.2 million and $0.14 lower, respectively.  In accordance with SFAS 123R, the Company is also required to present excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows. No income tax benefit was realized from stock option exercises during the nine months ended September 30, 2006, therefore no such amounts are presented as financing cash flows.

The following table sets forth the total stock-based compensation expense resulting from stock options and non-vested stock awards included in the Company’s Condensed Consolidated Statements of (Loss) Income upon the adoption of SFAS 123R (in thousands):

	Three Months Ended September 30, 2006			Nine Months Ended September 30, 2006
Costs of product sales	$	408		$	1,126
Research and development	934			3,038
Selling, general and administrative	2,290			8,350
Restructuring	7,544			7,544
Total stock-based compensation expense	$	11,176		$	20,058
Income tax benefit	(1,596		)	(3,326		)
Total stock-based compensation expense, net of tax	$	9,580		$	16,732

Selling, general and administrative expense included a $1.1 million charge in the second quarter of 2006 due to the modification of an executive officer’s stock option grant to include an extension of time to exercise as well as the vesting of certain stock options without a requisite service period.  Restructuring expense included a $7.5 million charge in the third quarter of 2006 due to the modification of a former Neomorphic employee’s equity awards, all of which became fully vested under the terms of a prior leave of absence agreement when he was involuntarily terminated in connection with the Company’s third quarter restructuring effort (see Note 4).

As of September 30, 2006, $23.5 million of total unrecognized stock-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2010. The weighted average term of the unrecognized stock-based compensation expense is 1.6 years.

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The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share amounts):

	Three months ended September 30,						Nine months ended September 30,
	2005			2005			2005			2005
	(as previously reported)			(as restated)			(as previously reported)			(as restated)
Net income—as reported	$	8,713		$	9,398		$	32,742		$	35,179
Add: Stock-based employee compensation expense included in reported net income, net of tax	—			—			—			—
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of tax	(4,691		)	(4,691		)	(12,321		)	(12,321		)
Pro forma net income	$	4,022		$	4,706		$	20,421		$	22,858
Net income per share:
Basic net income per common share—as reported	$	0.14		$	0.15		$	0.52		$	0.56
Diluted net income per common share—as reported	$	0.13		$	0.14		$	0.49		$	0.52
Basic net income per common share—pro forma	$	0.06		$	0.07		$	0.32		$	0.36
Diluted net income per common share—pro forma	$	0.06		$	0.07		$	0.31		$	0.33

Stock Options

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Risk free interest rate	4.5	%	4.1	%	5.0	%	3.9	%
Expected dividend yield	—	%	—	%	—	%	—	%
Expected volatility	39.4	%	46.6	%	39.4	%	48.4	%
Expected option term (in years)	4.5		3.2		4.5		3.3

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 three and nine months ended September 30, 2006 is based on a blend of historical and market-based implied volatility. The expected volatility for the nine months ended September 30, 2005, is based solely on historical volatility. The Company’s management changed its expected volatility estimation approach based upon the availability of actively traded options on the Company’s common stock and because management believes this blended method is more representative of future stock price trends than historical volatility alone. Using the assumptions above, the weighted average grant date fair value of options granted during the three months ended September 30, 2006 and 2005 was $8.12 and $18.49, respectively, and for the nine months ended September 30, 2006 and 2005 was $11.77 and $17.93, respectively.

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Activity under the Company’s stock plans for the nine months ended September 30, 2006 is as follows (in thousands, except per share amounts):

	Shares		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
					(in Years)
Outstanding at December 31, 2005	6,757		$	31.31
Grants	926		29.40
Exercises	(296	)	19.88
Forfeitures, cancellations or expirations	(509	)	33.85
Outstanding at September 30, 2006	6,878		$	31.37	4.6	$	6,9965
Exercisable at September 30, 2006	4,578		$	30.73	4.0	$	6,003
Vested and expected to vest at September 30, 2006	6,588		$	31.29	4.5	$	6,913

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 second quarter of 2006 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 September 30, 2006. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised is $0.6 million and $12.2 million for the three months ended September 30, 2006 and 2005, respectively and $4.7 million and $56.8 million for the nine months ended September 30, 2006 and 2005, respectively.

Restricted Stock

The following table summarizes the Company’s non-vested restricted stock activity for the nine months ended September 30, 2006 (in thousands, except per share amounts):

	Number of Shares		Weighted-Average Grant Date Fair Value
Non-vested stock at December 31, 2005	121		$	56.54
Granted	242		26.74
Vested	(81	)	60.03
Forfeited	(8	)	31.29
Non-vested stock at September 30, 2006	274		$	29.93

Total fair value of shares vested is $1.7 million and $0.1 million for the nine months ended September 30, 2006 and 2005, respectively.

NOTE 4—RESTRUCTURING

Fiscal 2006 Restructuring Plan

In the third quarter of 2006, the Company initiated a restructuring plan (“the plan”) to better align certain of its expenses with the Company’s current business outlook.  The Company’s primary focus of the plan was in the general and administrative functions and included rationalizing its facilities.  In August, the Company terminated certain employees in the general and administrative functions.  Additionally, in September, the Company announced its plan to close its Bedford, Massachusetts based instrumentation manufacturing and development facility. The Company plans to consolidate the Bedford facility’s instrument manufacturing operations with its probe array manufacturing facility in West Sacramento, California. The Company’s instrumentation development capabilities will be consolidated with its principal research and development facilities located in Santa Clara, California. Implementation of the plan is expected to begin in the fourth quarter of 2006 and continue into the first half of 2007 and will eliminate or transfer certain positions. The Company expects the closure of its Bedford, Massachusetts facility to be materially completed by the third quarter of fiscal 2007.

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The Company estimates that the total restructuring expenses to be incurred in connection with the plan will be approximately $28 million. Of this total, the Company estimates that $19 million relates to employee severance and relocation benefits, $7 million relates to contract termination costs associated with vacating the leased Bedford facility, and approximately $2 million relates to other restructuring costs such as fixed asset write downs and equipment and inventory relocation costs. The Company has incurred restructuring expenses beginning in the third quarter of 2006 and expects to continue incurring related expenses through the third quarter of 2007. Cash outlays incurred in connection with these restructuring activities are estimated to be approximately $21 million.  In accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), the costs relating to employee severance and relocation will be accrued over the remaining service periods of the employees.

During the third quarter of 2006, the Company recognized approximately $10.0 million of expense which was presented in a single line item labeled restructuring in the Company’s Statement of (Loss) Income, of which approximately $7.5 million of the expense related to the modification of a former Neomorphic employee’s equity awards, all of which became fully vested under the terms of a prior leave of absence agreement when he was involuntarily terminated in connection with the plan.

The activity in the accrued restructuring balances related to the plan described above for the three and nine months ended September 30, 2006 was as follows:

	Balance as		Three and nine months ended September 30,								Balance as		As of September 30, 2006
	of December 31, 2005		2006 charges (reversals)		Cash Payments			Non-Cash Settlements			of September 30, 2006		Total costs to date		Total expected costs
Employee severance and relocation benefits	$	—	$	10,008	$	(1,541	)	$	(7,544	)	$	923	$	10,008	19,000
Contract termination costs	—		—		—			—			—		—		7,000
Other restructuring costs	—		—		—			—			—		—		2,000
Total restructuring costs	$	—	$	10,008	$	(1,541	)	$	(7,544	)	$	923	$	10,008	28,000

NOTE 5—ACQUISITION

On October 21, 2005, the Company acquired 100% of the outstanding shares of ParAllele BioScience, Inc. (“ParAllele”), a provider of comprehensive genetic discovery solutions to the life science research, pharmaceutical and diagnostic sectors. Affymetrix accounted for the merger under the purchase method of accounting in accordance with the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations.” Under this accounting method, the Company recorded the assets acquired and liabilities assumed at their estimated fair value, with the excess purchase price reflected as goodwill. Additionally, certain costs directly related to the merger were reflected as additional purchase price in excess of net assets acquired. The results of operations of ParAllele have been included in Affymetrix’ condensed consolidated financial statements for the three and nine months ended September 30, 2006.

Upon the adoption of SFAS 123R, the Company reversed all unamortized deferred stock-based compensation against additional paid in capital. There have been no other significant changes in the ParAllele acquisition compared to the disclosures in Item 8 of the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2005.

NOTE 6—INVENTORIES

Inventories consist of the following (in thousands):

	September 30, 2006		December 31, 2005
Raw materials	$	18,630	$	13,094
Work-in-process	11,743		10,423
Finished goods	15,281		12,463
Total	$	45,654	$	35,980

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NOTE 7—ACQUIRED TECHNOLOGY RIGHTS

Acquired technology rights are comprised of licenses to technology covered by patents to third parties and are amortized over the expected useful life of the underlying patents, which range from one to fifteen years. Accumulated amortization of these rights amounted to $28.6 million and $22.2 million at September 30, 2006 and December 31, 2005, respectively.

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

For the Year Ending December 31,	Amortization Expense
2006, remainder thereof	$	2,082
2007	8,326
2008	8,314
2009	7,446
2010	6,676
Thereafter	24,360
Total expected future annual amortization	$	57,204

NOTE 8—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

	September 30, 2006		December 31, 2005
Accounts payable	$	19,216	$	29,718
Accrued compensation and related liabilities	18,153		20,419
Accrued taxes	11,766		10,354
Accrued legal	2,733		1,357
Accrued warranties	4,865		6,223
Other	4,206		3,480
Total	$	60,939	$	71,551

NOTE 9—COMPREHENSIVE (LOSS) INCOME

The components of comprehensive (loss) income are as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
				(as restated)						(as restated)
Net (loss) income	$	(14,155	)	$	9,398		$	(22,384	)	$	35,179
Foreign currency translation adjustment	(26		)	91			83			375
Unrealized (loss) gain on debt securities	(436		)	(174		)	(111		)	17
Unrealized gain (loss) on hedging contracts	356			(348		)	(248		)	2,088
Comprehensive (loss) income	$	(14,261	)	$	8,967		$	(22,660	)	$	37,659

NOTE 10—RELATED PARTY TRANSACTIONS

Perlegen Sciences, Inc.

As of September 30, 2006, the Company, and certain of its affiliates, including the Company’s chief executive officer and members of the board of directors, held approximately 25% ownership interest in Perlegen Sciences, Inc. (“Perlegen”), a privately-held biotechnology company. In addition, two members of Perlegen’s board of directors are also members of the Company’s board of directors. See the Company’s most recent Proxy Statement as filed on May 1, 2006 for further information.

The Company accounts for its ownership interest in Perlegen using the equity method as the Company and its affiliates do not control the strategic, operating, investing and financing activities of Perlegen; however, the Company does have significant influence over Perlegen’s operating activities. Further, the Company has no obligations to provide funding to Perlegen nor does it guarantee or otherwise have any obligations related to the liabilities or results of operations of Perlegen or its investors. Through January 2005, the Company’s investment in Perlegen had no cost basis; accordingly, the Company has not recorded its proportionate share of Perlegen’s operating losses in its financial statements since the completion of

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Perlegen’s initial financing. In February 2005, the Company participated in Perlegen’s Series D preferred stock financing and recorded a $2.0 million investment related to this transaction, which was included in the Company’s balance sheet as a component of other assets.  As of June 30, 2005, the Company had reduced the carrying value of its investment to zero through the recording of its proportionate share of Perlegen’s operating losses.

In accordance with Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” as amended, the Company has concluded that Perlegen is a Variable Interest Entity in which the Company holds a variable interest, and that the Company is not the primary beneficiary. Accordingly, no change to the Company’s historical accounting for Perlegen is required.

In December 2003, the Company sold 950,000 shares of Perlegen preferred stock and realized a gain of $1.4 million which was included in interest and other income, net. Additionally, in January 2004, the Company sold 400,000 shares of Perlegen preferred stock and realized a gain of $0.6 million which was included in interest income and other, net.

In June 2005, the Company executed an agreement with a customer pursuant to which the Company agreed to provide genotypic data in the context of whole genome association studies. The Company had subcontracted certain elements of this agreement to Perlegen which will use Affymetrix GeneChip® technology to provide the genotypic data. As of September 2006, the agreement has ended and no expenses were incurred.

In October 2006, the Company entered into four new supply and license agreements with Perlegen.  These four agreements, consisting of a commercial products supply agreement, non-commercial products supply agreement and two intellectual property license agreements, replace the prior supply and intellectual property license agreements entered into by the Company and Perlegen in 2003.  Under the new supply agreements, which include terms that are generally consistent with the Company’s standard supply terms, the Company shall supply commercial GeneChip products and certain non-commercial custom GeneChip products for Perlegen's use in defined fields. 

NOTE 11—COMMITMENTS AND CONTINGENCIES

Product Warranty Commitment

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 the first quarter of 2006, the Company adjusted its warranty reserve by approximately $0.4 million for anticipated costs associated with its decision to replace certain gene expression products. Information regarding the changes in the Company’s product warranty liability for the three and nine months ended September 30, 2006, respectively, was as follows (in thousands):

Beginning balance at December 31, 2005	$	6,223
New warranties issued	849
Repairs and replacements	(1,312		)
Adjustments	391
Ending balance at March 31, 2006	6,151
New warranties issued	812
Repairs and replacements	(1,880		)
Adjustments	—
Ending balance at June 30, 2006	$	5,083
New warranties issued	1,463
Repairs and replacements	(1,681		)
Adjustments	—
Ending balance at September 30, 2006	$	4,865

Legal Proceedings – General

The Company has been in the past and continues to be a party to litigation which has consumed and may in the future continue to consume substantial financial and managerial resources and which could adversely affect its business, financial condition and results of operations. If in any pending or future intellectual property litigation involving the Company or its collaborative partners, the Company is found to have infringed the valid intellectual property rights of third parties, the Company, or its collaborative partners, could be subject to significant liability for damages, could be required to obtain a license from a third party, which may not be available on reasonable terms or at all, or could be prevented from

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manufacturing and selling its products. In addition, if the Company is unable to enforce its patents and other intellectual property rights against others, or if its patents are found to be invalid or unenforceable, third parties may more easily be able to introduce and sell DNA array technologies that compete with the Company’s GeneChip® brand technology, and the Company’s competitive position could suffer. The Company expects to devote substantial financial and managerial resources to protect its intellectual property rights and to defend against the claims described below as well as any future claims asserted against it. Further, because of the substantial amount of discovery required in connection with any litigation, there is a risk that confidential information could be compromised by disclosure.

Shareholder Derivative Lawsuits

Three shareholders of the Company have filed purported derivative lawsuits on behalf of the Company, which lawsuits name the Company (as nominal defendant) and several of the Company's current and former officers and directors, and allege that these officers and directors breached their fiduciary duties and breached other laws by participating in backdating stock options grants.  Two of these lawsuits were filed in the United States District Court for the Northern District of California on August 30, 2006 and September 13, 2006 and the third was filed in the Superior Court of the State of California on October 20, 2006.  The substance of the allegations in all three lawsuits is similar, and the plaintiffs in the two federal actions are seeking to have those actions consolidated, relief that the Company has supported in papers filed with the Court.  Allegations made in one or more of the three actions include allegations of breaches of fiduciary duty, unjust enrichment as a result of the receipt and retention of backdated stock option grants, violations of federal securities laws, violations of Generally Accepted Accounting Principles, violations of Section 162(m) of the Internal Revenue Code, and other violations of state law including violations of the California Corporations Code.  In one or more of the actions that have been filed, the plaintiffs seek to recover, on behalf of the Company, damages resulting from the alleged violations, including treble damages pursuant to California law, disgorgement or voiding of any backdated stock options or the proceeds of any such exercised stock options from the individual defendants, changes in the Company’s corporate governance and internal control procedures, other equitable relief, punitive damages, an award of attorneys' fees and costs, and other relief.  The Company may be subject to other lawsuits from private plaintiffs concerning this subject matter based on allegations similar to those described above.  As previously disclosed in the Company’s Form 10-K/A for the year ended December 31, 2005, the Company’s decision to restate its consolidated financial statements was based on the results of an internal review of its historical stock option granting practices from January 1, 1997 through May 31, 2006 performed under the direction of the Audit Committee of the Board of Directors.  The review did not find any pattern or practice of inappropriately identifying grant dates with hindsight in order to provide “discounted” or “in-the-money” grants.  The Company does not believe that the claims in these derivative lawsuits have merit and the Company intends to vigorously defend the cases.

SEC Informal Inquiry

On September 12, 2006, the Company received written notice from the Securities and Exchange Commission that it is conducting an informal inquiry into the Company’s stock option practices.  The Company is responding to the request for information and are cooperating fully in the informal inquiry.  The Company was advised in the SEC’s notice that the SEC’s request should not be construed as an indication by the SEC or its staff that any violations of law have occurred; and nor should the request be considered an adverse reflection upon any person, entity or security. 

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 now 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

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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 tortious 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 U.S. District Court for the Southern District of New York has related the Company’s case. There is no trial date in the actions between Enzo and the Company.

The Company believes that the claims set forth in Enzo’s complaint are without merit and have filed the action in the Southern District of New York to protect its interests. However, the Company cannot be sure that it will prevail in these matters. The Company’s failure to successfully defend against these allegations could result in a material adverse effect on its business, financial condition and results of operation.

Administrative Litigation and Proceedings

The Company’s intellectual property is subject to a number of significant administrative and litigation actions. For example, in Europe and Japan, we expect third parties to oppose significant patents that the Company owns or controls. Currently, third parties, including several of Affymetrix’ competitors, have filed oppositions against several of the Company’s European patents in the European Patent Office. These opposition proceedings are at various procedural stages and will result in the respective patents being either upheld in their entirety, allowed to issue in amended form in designated European countries, or revoked. Further, in the United States, the Company expects that third parties will continue to “copy” the claims of its patents in order to provoke interferences in the United States Patent & Trademark Office. These proceedings could result in the Company’s patent protection being significantly modified or reduced, and could result in significant costs and consume substantial managerial resources.

NOTE 12—INCOME TAXES

For the nine months ended September 30, 2006, the tax provision principally consists of federal, state and foreign taxes partially offset by a $1.3 million reduction in an income tax reserve based on the conclusion of an audit of a foreign tax authority in the first quarter of 2006 and by a $1.8 million reduction in an income tax reserve related to U.S. and foreign transfer pricing issues in the third quarter of 2006. Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”) provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Additionally, SFAS 123R prohibits the recognition of a deferred tax asset related to the excess tax benefit resulting from the exercise of employee stock options that has not been realized. Based upon the weight of available evidence, which included an analysis of projected future book and taxable income, as of September 30, 2006, the Company has provided for a valuation allowance of $75.2 million.

NOTE 13—OTHER EVENTS

Default Under Convertible Notes

The Company violated the reporting covenant under the indentures governing the Company’s $120 million aggregate principal amount 0.75% Senior Convertible Notes due 2033 (the “Notes”) as a result of the Company’s failure to file its Form 10-Q for the quarter ended June 30, 2006 by the required deadline. As a consequence of these violations, the holders of the Notes had the right to accelerate the maturity of such Notes if they or the trustee provide the Company with notice of the default and the Company was unable to cure the default within 60 days after that notice.  The Company cured the default within 60 days of the notice by filing its Form 10-Q for the quarter ended June 30, 2006 on August 30, 2006.

NASDAQ Notice

On August 17, 2006, the Company announced that it requested a hearing before the NASDAQ Listing Qualifications Panel (the “Panel”) in response to the receipt of a NASDAQ Staff Determination letter dated August 17, 2006 indicating that the Company is not in compliance with the filing requirements for continued listing as set forth in Marketplace Rule 4310(c)(14). As anticipated, the letter was issued in accordance with NASDAQ procedures due to the delayed filing of the Company’s Form 10-Q for the quarter ended June 30, 2006. The Company returned to compliance by filing its Form 10-Q for the quarter ended June 30, 2006 on August 30, 2006 and therefore, a hearing before the Panel was not required.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2006 and for the three and nine month periods ended September 30, 2006 and 2005 should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K/A for the year ended December 31, 2005.

All statements in this quarterly report that are not historical are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act as amended, including 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 caution investors that there can be no assurance 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, risks of our ability to achieve and sustain higher levels of revenue, higher gross margins, reduced operating expenses, market acceptance, personnel retention, global economic conditions, the fluctuations in overall capital spending in the academic and biotechnology sectors, changes in government funding policies, unpredictable fluctuations in quarterly revenues, uncertainties related to cost and pricing of Affymetrix products, dependence on collaborative partners, uncertainties relating to sole source suppliers, uncertainties relating to FDA, and other regulatory approvals, risks relating to intellectual property of others and the uncertainties of patent protection and litigation.

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

Restatement of Consolidated Financial Statements

On August 9, 2006, we concluded that our consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 should be restated to record additional non-cash stock-based compensation expense, and the related income tax impact, resulting from stock options granted during fiscal years 1997 to 1999 that were incorrectly accounted for under U.S. generally accepted accounting principles. Our decision to restate our financial statements was based on the results of an internal review of our historical stock option granting practices from January 1, 1997 through May 31, 2006 performed under the direction of the Audit Committee of the Board of Directors.  The internal review identified certain errors and documentation lapses but did not find any pattern or practice of inappropriately identifying grant dates with hindsight in order to provide “discounted” or “in-the-money” grants.

We concluded that there was a material accounting error as a result of a documentation lapse in July 1999, in which the option grant for an aggregate of 1.99 million shares should have been measured for accounting purposes as of a later date.  In light of the restatement required by this matter, we also included in this restatement corrections relating to certain other errors and documentation lapses in the fiscal years 1997 and 1998.  Approximately 97% of the charges relating to the restatement arose from the documentation lapse in July 1999.

We determined that the cumulative, pre-tax, non-cash, stock-based compensation expense resulting from revised measurement dates for options granted between 1997 and 1999 was approximately $21.5 million. Accordingly, we recorded stock-based compensation expense of $0, $0, and $1.7 million for the years ended December 31, 2005, 2004 and 2003, respectively, and $19.8 million for the five years preceding 2003, based on the vesting periods of the respective grants.  In addition, we recorded an income tax benefit of $8.3 million in 2005.  Principally as a result of cumulative losses incurred through 2004, we recorded a full valuation allowance against all deferred tax assets for the years ended December 31, 2004 and 2003 and consequently, there was no income tax effect of the additional stock-based compensation expense recorded in those years.  The cumulative effect of the restatement adjustments on our consolidated balance sheet at December 31, 2005 was an increase in additional paid-in capital of $21.5 million offset by an increase in the accumulated deficit of $13.2 million, which resulted in a net effect on stockholders’ equity of $8.3 million.  The adjustments increased previously reported basic and diluted net income per common share by $0.13 and $0.12, respectively, for the year ended December 31, 2005 and decreased basic and diluted net income per common share by $0.03 for the year ended December 31, 2003.

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As part of our review, we assessed whether there were other matters that should have been corrected in our previously issued consolidated financial statements. Apart from the errors underlying the restatement described above, no other matters came to our attention that should have been adjusted in our previously issued consolidated financial statements.

Overview

We are engaged in the development, manufacture and sale of consumables, systems and services for genetic analysis in the life sciences and clinical diagnostics fields.  Other emerging markets we are focused on include agricultural, environmental testing, pathogen detection and bio-defense.  There are a number of factors that influence the size and development of our industry, including: the availability of genomic sequence data for human and 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 and private funding for basic and disease-related research, the amount of capital and ongoing expenditures allocated to research and development spending by biotechnology, pharmaceutical and diagnostic companies, 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.

We have established our GeneChip® system as the platform of choice for acquiring, analyzing and managing complex genetic information. Our integrated GeneChip® platform includes disposable DNA probe arrays (chips) consisting of gene 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 information obtained from the probe arrays. We currently sell our 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, Europe and Japan. We also sell our products through life science supply specialists acting as authorized distributors in Latin America, the Middle East and Asia Pacific regions, including China. We have incurred net losses and negative cash flows from operations in the past, have achieved profitability for the three previous consecutive fiscal years, but have now incurred a net loss for the first nine months of fiscal 2006. The following overview describes key elements of our business strategy and our goals:

Continue to develop and expand sales of our GeneChip® system. We intend to continue to enhance our GeneChip® technology through substantial investments in research and development and collaborations. As we continue to enhance the functionality and work to decrease the unit costs of our GeneChip® products, we aim to encourage our customers to expand their uses for our GeneChip® system, which we believe will create new market opportunities for us.

Leverage our technologies into new markets. A key driver will be increasing the breadth of scientific and diagnostic applications of our technology, while also industrializing, automating and standardizing our technology to open new markets which will assist us in driving revenue growth. The aim of our automation efforts is to reduce the cost per experiment, minimize operator variability and improve experimental throughput. We believe that our automation solutions will enjoy commercial success in industrial applications and high-volume markets just as our bench-top systems have in the research markets. We have several active collaborations aimed at extending our existing technologies and products into diagnostic applications and we continue to look for new applications for our technology, new collaborative opportunities and new markets.

Strengthen our product line. Our goal is to grow our product and product related revenue. We can achieve this goal through growth in sales of our consumable probe arrays and reagents as well as instruments and related services as we focus on new product solutions for the genotyping market, new advances in the expression arena, and continued progress in the clinical products market.  In 2006, we have experienced a decline in instrument sales and we expect this decline to continue for the remainder of fiscal 2006 as we finish our instrument upgrade cycle.

Maintain our operating margins. Management is focused on growing the business and increasing its operating profitability. We will continue to closely manage our manufacturing costs and operating expenses. We expect a decline in gross margins for 2006 as we continue to expand our manufacturing capacity to support our anticipated sales growth in consumables and forward price our 500K genotyping product in expectation of launching this onto one chip later this year. In addition, we will see increased operating costs and expenses related to our adoption of SFAS 123R and our integration of the ParAllele acquisition.  In July 2006, we announced our intent to restructure our general and administrative cost structure, including rationalizing our facilities requirements in order to bring our operating expenses in line with our current business requirements. We began those efforts and have incurred charges of approximately $10.0 million in the third quarter of 2006 and anticipate seeing a decrease in headcount related expenses in our general and administrative functions starting in the fourth quarter of 2006.  We expect to incur additional charges through the third quarter of fiscal 2007 of approximately $18.0 million related to this effort. 

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Acquisition

On October 21, 2005, Affymetrix acquired 100% of the outstanding shares of ParAllele BioScience, Inc. (“ParAllele”), a provider of comprehensive genetic discovery solutions to the life science research, pharmaceutical and diagnostic sectors. ParAllele’s products and services utilize a unique approach that leverages novel biochemical processes rather than complex instrumentation to discover and analyze minute variations in the human genome. We expect the acquisition to accelerate the development and commercialization of new products and create greater opportunities for market penetration and revenue generation as well as increase our core assay development capabilities.

The results of operations of ParAllele have been included in the accompanying consolidated financial statements from the date of acquisition. See Note 5 for further information regarding this acquisition.

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 condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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.

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. We recognize revenue for delivered elements only when the fair values of undelivered elements are known and customer acceptance has occurred. Changes in the allocation of the sales price between delivered to undelivered elements might impact the timing of revenue recognition, but would not change the total revenue recognized on any arrangement.

Accounts Receivable

We evaluate the collectibility of our trade receivables based on a combination of factors. We regularly analyze our significant customer accounts, and, when we become aware of a specific customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position, we record specific bad debt allowances to reduce the related receivable to the amount we reasonably believe is collectible. We also record allowances for bad debt on a small portion of all other customer balances based on a variety of factors including the length of time the receivables are past due, the financial health of the customer, macroeconomic considerations and historical experience. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further adjusted.

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

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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. Revisions to our inventory adjustments may be required if actual demand, component costs, supplier arrangements, or product life cycles differ from our estimates.

Non-marketable 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. Our non-marketable equity securities are carried at cost unless we determine that an impairment that is other than temporary has occurred, in which case we write the investment down to its impaired value. 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 equity markets over the past few years.  However, we are not able to determine at the present time which specific investments are likely to be impaired in the future, or the extent or timing of the individual impairments.

Deferred Taxes

Income tax expense is based on pretax 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. We must then 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 net deferred tax asset. 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 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, and changes in overall levels and mix of pretax earnings.

Contingencies

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

Accounting for Stock-Based Compensation

Beginning January 1, 2006, we account for employee stock-based compensation in accordance with SFAS 123R. Under the provisions of SFAS 123R, we estimate 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 stock-based awards granted in future periods.

SFAS 123R requires that employee stock-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 the first nine months of 2006, we recognized employee stock-based compensation of $1.1 million in cost of product sales, $3.0 million in

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research and development expense and $8.4 million in sales, general and administrative expenses, which includes approximately $1.1 million related to the modification of an executive officer’s stock option grant to increase the associated exercise period. We also incurred a charge of $7.5 million which was included in restructuring related to the modification of a research and development employee’s equity awards, all of which became fully vested under the terms of a prior severance agreement when he was involuntarily terminated as part of our cost reduction efforts.  We adopted SFAS 123R on a modified prospective basis. As of September 30, 2006, $23.5 million of total unrecognized compensation cost related to non-vested stock options not yet recognized is expected to be allocated to cost of products sales and operating expenses over a weighted-average period of 1.6 years.

There was no stock-based compensation expense related to employee stock options recognized under SFAS 123R during the nine months ended September 30, 2005.

Restructuring

 We have recently engaged in, and may continue to engage in, restructuring actions, which require management to utilize significant estimates related to expenses for severance and other employee separation costs, lease cancellation, realizable values of assets that may become duplicative or obsolete, and other exit costs.  If the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.  For a full description of our restructuring actions, see Note 4.

Results of Operations

The following discussion compares the historical results of operations for the three and nine months ended September 30, 2006 and 2005, respectively.

Product Sales

The components of product sales are as follows (in thousands, except percentage amounts):

	Three Months Ended September 30,									Nine Months Ended September 30,
	2006		2005		$ Change			% Change		2006		2005		$ Change		% Change
Probe arrays	$	37,422	$	44,577	$	(7,155	)	(16	)%	$	120,790	$	138,240	(17,450	)	(13	)%
Reagents	10,166		10,692		(526		)	(5	)	30,247		30,354		(107	)	—
Instruments	8,551		13,775		(5,224		)	(38	)	32,117		43,214		(11,097	)	(26	)
Total product sales	$	56,139	$	69,044	$	(12,905	)	(19	)	$	183,154	$	211,808	(28,654	)	(14	)

Probe array sales for the third quarter of 2006 as compared to the same period in 2005 declined primarily due to a decrease of $8.2 million in revenue related to a decrease in the average selling price of our probe arrays primarily due to the reduction of the selling price of our current two-chip 500K genotyping product.  This decline was partially offset by an increase in probe array revenue of $1.0 million related to an increase in unit sales.  Instrument sales decreased primarily due to a decrease of $2.6 million in revenue related to a decline in unit sales of our GeneChip® Scanner 3000, a decrease of $0.8 million due to a drop in unit sales of our GeneChip® Scanner 3000 high-resolution upgrades and a decrease of $0.8 million in unit sales of our automation equipment.

Probe array sales in the first nine months of 2006 as compared to the same period in 2005 declined primarily due to a decrease of $9.4 million in revenue due to a decline in unit sales and a decrease of $8.1 million in revenue related to the reduction of the average selling price of our probe arrays primarily due to a decrease in the selling price of our current two-chip 500Kgenotyping product. Instrument sales decreased primarily due to a decrease of $7.5 million in revenue related to a decline in unit sales of our GeneChip® Scanner 3000, a decrease of $1.7 million due to a drop in unit sales of our GeneChip® Scanner 3000 high-resolution upgrades and a decrease of $1.8 million in unit sales of our automation equipment.

In July 2006, we announced a decrease in the selling price of our current two-chip 500K genotyping product as we believe this will enable scientists to run more samples, and thereby increase the power of their genetic association studies.  We believe this decrease in the selling price could cause our future probe array revenues to decline from prior periods if unit sales do not increase.

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Product Related Revenue

The components of product related revenue are as follows (in thousands, except percentage amounts):

	Three Months Ended September 30,									Nine Months Ended September 30,
	2006		2005		$ Change			% Change		2006		2005		$ Change			% Change
Subscription fees	$	1,868	$	3,066	$	(1,198	)	(39	)%	$	5,576	$	9,536	$	(3,960	)	(42	)%
Service and other	12,445		3,789		8,656			228		29,270		12,218		17,052			140
License fees and milestone revenue	3,658		3,601		57			2		10,775		10,953		(178		)	(2	)
Total product related revenue	$	17,971	$	10,456	$	7,515		72		$	45,621	$	32,707	$	12,914		39

Service and other revenue increased for the third quarter of 2006 and in the first nine months of 2006 as compared to the same periods in 2005 primarily due to increases of approximately $7.7 million and $16.0 million, respectively, in other revenue related to our genotyping services business. These increases were partially offset by declines in subscription fees earned under our GeneChip® array access programs as we continue to transition customers to volume-based pricing on array sales.

In January 2003, under the terms of an expanded collaborative agreement, Roche paid us an access fee of $70 million, which we are recognizing as a component of product related revenue in license fees over the estimated research and development period of approximately five years. The expanded collaboration agreement, which is subject to Roche’s option to terminate on December 31, 2007, December 31, 2010 or any time on or after December 31, 2015, with one year’s prior notice, includes a broad range of other compensation payable by Roche to us throughout the life of the agreement based on annual royalties on sales of diagnostic kits, milestone payments for technical and commercial achievements, a manufacturing and supply agreement, and related license installments.  In accordance with Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables,” if this agreement is modified, it could materially affect the periods in which certain product related revenues will be recognized. 

Royalties and Other Revenue (in thousands, except percentage amounts)

	Three Months Ended September 30,								Nine Months Ended September 30,
	2006		2005		$ Change		% Change		2006		2005		$ Change		% Change
Royalties and other revenue	$	5,969	$	1,727	$	4,242	246	%	$	10,263	$	5,280	$	4,983	94	%

The increases in royalties and other revenue for the third quarter of 2006 and in the first nine months of 2006 as compared to the same periods in 2005 were primarily related to the recognition of $4.5 million related to a license agreement with no continuing performance obligations in the third quarter of 2006. We also recorded an additional $5.3 million in deferred revenue related to this license agreement which will be recognized when the payment is received which we anticipate will occur during 2008.

Revenue from Perlegen Sciences (in thousands, except percentage amounts)

	Three Months Ended September 30,								Nine Months Ended September 30,
	2006		2005		$ Change		% Change		2006		2005		$ Change		% Change
Revenue from Perlegen Sciences	$	4,593	$	2,220	$	2,373	107	%	$	12,091	$	6,318	$	5,773	91	%

Perlegen revenue increased for the third quarter of 2006 and in the first nine months of 2006 as compared to the same periods in 2005 primarily due to increases of approximately $4.0 million and $9.5 million, respectively, related to increased demand by Perlegen for our probe arrays and whole wafers used for certain new applications.  These increases were partially offset by a decrease in demand for wafers used by Perlegen for internal research and development of $0.9 million and $2.7 million for the third quarter of 2006 and in the first nine months of 2006, respectively. Probe arrays and wafers used by Perlegen for use in their research and development activities are sold at our fully burdened cost of manufacturing. We also earn a royalty on certain of these wafers if they are used by Perlegen for certain revenue activities. Royalties recognized were $1.1 million and $1.6 million in the first nine months of 2006 and 2005, respectively.  We rely on reports from Perlegen to recognize royalty revenue.

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Product and Product Related Gross Margins (in thousands, except percentage/point amounts)

							Dollar /									Dollar /
	Three Months Ended September 30,						Point change from			Nine Months Ended September 30,						Point change from
	2006			2005			2005			2006			2005			2005
Total gross margin on product sales	$	32,521		$	48,289		$	(15,768	)	$	120,816		$	153,822		$	(33,006	)
Total gross margin on product related revenue	9,112			7,801			1,311			22,909			25,088			(2,179		)
Total gross margin on product and product related revenue	$	41,633		$	56,090		$	(14,457	)	$	143,725		$	178,910		$	(35,185	)
Product gross margin as a percentage of product sales	57.9		%	70.0		%	(12.1		)	66.0		%	72.6		%	(6.7		)
Product related gross margin as a percentage of product related revenue	50.7		%	74.6		%	(23.9		)	50.2		%	76.7		%	(26.5		)

The 12.1 point decrease in product gross margin for the third quarter of 2006 as compared to the same period in 2005 is primarily due to the following three factors:  5.3 points of the decrease can be attributed to a decrease in the average selling price of our probe arrays primarily due to a decrease in the selling price of our two-chip 500K genotyping product;  2.4 points of the decrease is due to start-up costs for our new Singapore manufacturing facility; and 6.9 points of the decrease is due to underutilized capacity in our probe array and instrument manufacturing facilities. These decreases were partially offset by an increase of 2.3 points as we sold more of our higher margin products.

 The 6.7 point decrease in product gross margin in the first nine months of 2006 as compared to the same period in 2005 is primarily due to the following three factors:  1.4 points of the decrease can be attributed to a decrease in the average selling price of our probe arrays primarily due to a decrease in the selling price of our two-chip 500K genotyping product;  2.3 points of the decrease is due to start-up costs for our new Singapore manufacturing facility; and 4.5 points of the decrease is due to underutilized capacity in our probe array and instrument manufacturing facilities and increased manufacturing costs for our chips. These decreases were partially offset by a 1.3 point increase in product gross margins as we sold more of our higher margin products.

In July 2006, we announced a decrease in the selling price of our current two-chip 500K genotyping product as we believe that this will enable scientists to run more samples, and thereby increase the power of their genetic association studies.  We believe this decrease in the selling price may continue to unfavorably impact our product gross margin for the remainder of fiscal 2006.

The 23.9 point and 26.5 point decrease in product related gross margin for the third quarter of 2006 and in the first nine months of 2006 as compared to the same periods in 2005 were primarily due to an increase in expenses related to our genotyping services business as well as the continuing decline in sales of our access agreements as we continue to transition customers to volume-based discounting on product sales.

Cost of Perlegen Revenues (in thousands, except percentage amounts)

	Three Months Ended September 30,								Nine Months Ended September 30,
	2006		2005		$ Change		% Change		2006		2005		$ Change			$ Change
Cost of revenue from Perlegen Sciences	$	1,646	$	1,359	$	287	21	%	$	4,304	$	4,351	$	(47	)	(1	)%

Cost of Perlegen revenue was relatively flat for the third quarter of 2006 and in the first nine months of 2006 as compared to the same periods in 2005 primarily due to decreased demand by Perlegen for wafers used for internal research and development which are sold at our fully burdened cost of manufacturing which was offset by an increase in the costs of products purchased by Perlegen for use in certain new applications.

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Research and Development Expenses (in thousands, except percentage amounts)

	Three Months Ended September 30,								Nine Months Ended September 30,
	2006		2005		$ Change		% Change		2006		2005		$ Change		% Change
Research and development	$	21,639	$	19,835	$	1,804	9	%	$	66,737	$	57,724	$	9,013	16	%

The increase for the third quarter of 2006 as compared to the same period in 2005 was primarily due to an increase in headcount related costs of $1.7 million primarily due to our acquisition of ParAllele as well as an increase in new hires and an increase of $0.9 million of stock-based compensation expense related to our adoption of SFAS 123R.

The increase in the first nine months of 2006 as compared to the same period in 2005 was primarily due to an increase in headcount related costs of $5.7 million primarily due to our acquisition of ParAllele as well as an increase in new hires and an increase of $3.0 million of stock-based compensation expense related to our adoption of SFAS 123R. We believe a substantial investment in research and development is essential to a long-term sustainable competitive advantage and critical to expansion into additional markets and expect our expenses to increase in absolute dollars as we integrate our ParAllele acquisition, develop new products and incorporate our stock-based compensation charges related to our adoption of SFAS 123R.

Selling, General and Administrative Expenses (in thousands, except percentage amounts)

	Three Months Ended September 30,								Nine Months Ended September 30,
	2006		2005		$ Change		% Change		2006		2005		$ Change		% Change
Selling, general and administrative	$	35,865	$	30,362	$	5,503	18	%	$	114,107	$	92,499	$	21,608	23	%

The increases in the third quarter of 2006 and in the first nine months of 2006 as compared to the same periods in 2005 were primarily due to $2.3 million and $8.4 million, respectively, of stock-based compensation expense related to our adoption of SFAS 123R. Our stock-based compensation expense included a $1.1 million charge in the second quarter of 2006 due to the modification of an executive officer’s stock option grant to include an extension of time to exercise as well as the vesting of certain stock options without a requisite service period.   We also increased legal expenses by $1.4 million and $3.1 million in the third quarter of 2006 and the first nine months of 2006, respectively, as we continue to defend our patent rights.  In the third quarter of 2006, we also incurred approximately $1.1 million in costs related to our stock option review. In addition, we saw an increase related to higher headcount-related costs of $8.0 million in the first nine months of 2006.  We anticipate that our cost reduction efforts launched in the third quarter of 2006 will decrease our headcount costs in future periods as we continue to bring our general and administrative costs in line with our current business requirements.

Stock-Based Compensation (in thousands, except percentage amounts)

	Three Months Ended September 30,									Nine Months Ended September 30,
	2006		2005		$ Change			% Change		2006		2005		$ Change			% Change
Stock-based compensation	$	—	$	141	$	(141	)	(100	)%	$	—	$	257	$	(257	)	(100	)%

With our adoption of SFAS 123R on January 1, 2006 all stock-based compensation expense has been included for the third quarter of 2006 and the first nine months of 2006 in cost of product sales, research and development expenses, selling, general and administrative expenses and restructuring expenses. Under SFAS 123R, stock-based compensation cost is calculated on the date of grant using the Black-Scholes method. The compensation cost is then amortized straight-line over the vesting period. For the first nine months of 2005, we recorded stock-based compensation expense related to restricted stock awards granted to certain employees and one fully vested restricted stock award granted to a non-employee that were calculated using prior accounting standards.

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Restructuring (in thousands, except percentage amounts)

	Three Months Ended September 30,								Nine Months Ended September 30,
	2006		2005		$ Change		% Change		2006		2005		$ Change		% Change
Restructuring	$	10,008	$	—	$	10,008	100	%	$	10,008	$	—	$	10,008	100	%

In the third quarter of 2006, we initiated a restructuring plan (“the plan”) to better align certain of our expenses with our current business outlook.  Our primary focus of the plan was in the general and administrative functions and included rationalizing our facilities.  In August, we terminated certain employees in the general and administrative functions.  Additionally, in September, we announced our plan to close our Bedford, Massachusetts based instrumentation manufacturing and development facility. We plan to consolidate the Bedford facility’s instrument manufacturing operations with our probe array manufacturing facility in West Sacramento, California. Our instrumentation development capabilities will be consolidated with our principal research and development facilities located in Santa Clara, California. Implementation of the plan is expected to begin in the fourth quarter of 2006 and continue into the first half of 2007 and will eliminate or transfer certain positions. We expect the closure of our Bedford, Massachusetts facility to be materially completed by the third quarter of fiscal 2007.

We estimate that the total restructuring expenses to be incurred in connection with the plan will be approximately $28 million. Of this total, we estimate that $19 million relates to employee severance and relocation benefits,  $7 million relates to contract termination costs associated with vacating the leased Bedford facility, and approximately $2 million relates to other restructuring costs such as fixed asset write downs and equipment and inventory relocation costs. We have incurred restructuring expenses beginning in the third quarter of 2006 and expect to continue incurring related expenses through the third quarter of 2007. Cash outlays incurred in connection with these restructuring activities are estimated to be approximately $21 million.  In accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), the costs relating to employee severance and relocation will be accrued over the remainng service periods of the employees.

During the third quarter of 2006, we recognized approximately $10.0 million of expense which was presented in a single line item labeled restructuring in our Statement of (Loss) Income, of which approximately $7.5 million of the expense related to the modification of a former Neomorphic employee’s equity awards, all of which became fully vested under the terms of a prior leave of absence agreement when he was involuntarily terminated in connection with the plan.

Interest Income and Other, Net (in thousands, except percentage amounts)

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

	Three Months Ended September 30,											Nine Months Ended September 30,
	2006			2005			$ Change			% Change		2006			2005			$ Change			% Change
Interest income	$	2,831		$	2,315		$	516		22	%	$	8,666		$	5,546		$	3,120		56	%
Realized loss in Perlegen	—			—			—			—		—			(2,000		)	2,000			100
Write down of equity investment	(57		)	117			(174		)	(149	)	(165		)	55			(220		)	(400	)
Currency gains (losses), net	251			(107		)	358			(335	)	2,593			189			2,404			1,272
Other	(83		)	(31		)	(52		)	168		(145		)	171			(316		)	(185	)
Interest income and other, net	$	2,942		$	2,294		$	648		28		$	10,949		$	3,961		$	6,988		176

Interest income increased for the third quarter of 2006 and in the first nine months of 2006 as compared to the same periods in 2005 due to an increase in the returns on our cash and marketable securities balances.  In the first quarter of 2006, we also realized a $1.6 million currency gain on assets held in various foreign currencies. In the first and second quarters of 2005, we realized losses related to the recognition of our proportionate share of Perlegen’s net loss. The carrying value of our investment in Perlegen was written down to zero at December 31, 2005; therefore, to the extent we do not make any additional future investments in Perlegen, we do not expect further expenses related to this investment.

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Income Tax (Benefit) Provision (in thousands, except percentage amounts)

	Three Months Ended September 30,										Nine Months Ended September 30,
	2006			2005		$ Change			% Change		2006		2005		$ Change			% Change
				(as restated)									(as restated)
Income tax (benefit) provision	$	(216	)	$	824	$	(1,040	)	(126	)%	$	3,082	$	3,331	$	(249	)	(7	)%

The provision for income tax decreased approximately 126% or $1.0 million in the third quarter and decreased approximately 7% or $0.2 million in the first nine months of 2006 as compared to the same periods in 2005.  The decrease in the third quarter and first nine months of 2006 is primarily due to lower profitability.  The provision for income tax for fiscal 2006 differs from the amount computed by applying the federal statutory rate of 35% due to various factors, including the tax impact of non-U.S. operations, non-deductible stock option compensation expense recorded under FAS 123(R), state taxes, release of tax reserves, export incentives and research and development credits. 

We believe realization of our deferred tax assets as of September 30, 2006, is more likely than not based upon future taxable earnings.  An additional valuation allowance against deferred tax assets may be necessary if it is more likely than not that all or a portion of the deferred tax assets will not be realized. 

Liquidity and Capital Resources

Cashflow (in thousands)

	Nine Months Ended September 30,
	2006			2005
Net cash provided by operating activities	$	17,291		$	47,579
Net cash used in investing activities	(56,851		)	(85,927		)
Net cash provided by financing activities	5,728			47,079
Effect of foreign currency translation on cash and cash equivalents	83			375
Net (decrease) increase in cash and cash equivalents	$	(33,749	)	$	9,106

Net Cash Provided by Operating Activities

Cash provided by operating activities is net (loss) income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was comprised of a net loss of $22.4 million, non-cash depreciation and amortization of $16.7 million, and non-cash stock-based compensation expense of $20.1 million.  Significant changes in assets and liabilities are as follows:

Our total accounts receivable, including Perlegen, was $70.3 million at September 30, 2006, a decrease of $26.9 million from December 31, 2005. The decrease is primarily due to lower product sales of probe arrays and instruments.

Our inventory balance was $45.7 million at September 30, 2006, an increase of $9.7 million from December 31, 2005. The increase is primarily due to the buildup of consumables as we continue to transition production to our Singapore facility and prepare for anticipated year end sales.

Our accounts payable and accrued payables balance was $60.9 million at September 30, 2006, a decrease of $10.6 million from December 31, 2005. The decrease was primarily due to the payment of accounts payable related to our manufacturing expansion in West Sacramento and capital costs on our new manufacturing facility in Singapore.

Net Cash Used in Investing Activities

Our investing activities, other than purchases, sales and maturities of available-for-sale securities, primarily consist of capital expenditures and strategic investments. Cash used for capital expenditures was $64.3 million and $18.5 million in the first nine months of 2006 and 2005, respectively. Our capital expenditures in the first nine months of 2006 primarily related to our manufacturing expansion in West Sacramento and capital costs related to our new manufacturing facility in Singapore. In the first quarter of 2005, we made a $2.0 million purchase of non-marketable equity investment in Perlegen Sciences.

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Net Cash Provided by Financing Activities

Our financing activities consist of activity under our employee stock plans. Cash provided by the issuance of stock under our employee stock plan was $5.7 million and $47.1 million in the first nine months of 2006 and 2005, respectively.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

There have been no other significant changes in our off-balance sheet arrangements and aggregate contractual obligations as compared to the disclosures in Item 7 of our Annual Report on Form 10-K/A for the year ended December 31, 2005.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no other significant changes in our market risk compared to the disclosures in Item 7A of our Annual Report on Form 10-K/A for the year ended December 31, 2005.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures.

Our principal executive officer and our principal financial officer, based on their evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that our disclosure controls and procedures are effective for ensuring that information required to be disclosed by us in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information pertaining to legal proceedings can be found in “Item 1. Condensed Consolidated Financial Statements – Note 10. Commitments and Contingencies” to the interim condensed consolidated financial statements, and is incorporated by reference herein.

ITEM 1A. RISK FACTORS

In evaluating our business, you should carefully consider the following risks, as well as the other information contained in this quarterly report on Form 10-Q. If any of the following risks actually occurs, our business could be harmed.

The matters relating to our internal review of our historical stock option granting practices and the restatement of our consolidated financial statements may have a material adverse effect on us.

We have conducted an internal review, performed under the direction of our Audit Committee of the Board of Directors, of our historical stock option granting practices from January 1, 1997 through May 31, 2006.  As a result of this review, we have restated our consolidated financial statements to record additional non-cash stock-based compensation expense and the related tax impact resulting from stock options granted during fiscal years 1997 to 1999.  We may in the future be subject to litigation or other proceedings or actions arising in relation to our historical stock option granting practices and the restatement of our prior period financial statements.  For example, three purported derivative lawsuits have been filed against us and several of our current and former officers and directors alleging that the defendants breached their fiduciary duty by backdating stock option grants, as well as violations of federal securities laws in connection with the dissemination of our financial and proxy statements, violations of Generally Accepted Accounting Principles, violations of Section 162(m) of the Internal Revenue Code and violations of state law including violation of the California Corporations Code.  In addition, we have received notice from the Securities and Exchange Commission that it is conducting an informal inquiry into our stock option practices.  Litigation and any potential regulatory proceeding or action may be time consuming, expensive and distracting from the conduct of our business.  The adverse resolution of any specific lawsuit or any potential regulatory proceeding or action could have a material adverse effect on our business, financial condition and results of operations.  Also, as a result of our delayed filing our Form 10-Q for the quarter ended June 30, 2006, we will be ineligible to register our securities on Form S-3 for sale by us or resale by others until we have timely filed all periodic reports under the Securities Exchange Act of 1934 for one year. We may use Form S-1 to raise capital or complete acquisitions, which could increase transaction costs and adversely affect our ability to raise capital or complete acquisitions of other companies during this period.

We may not maintain profitability.

We incurred losses each year from our inception through the year ended December 31, 2003, and as a result we had an accumulated deficit of approximately $129.1 million at September 30, 2006. We expect to continue experiencing fluctuations in our operating results and cannot assure sustained profitability. Our losses have resulted principally from costs incurred in research and development, manufacturing and from selling, general and administrative costs associated with our operations.

Our ability to generate significant revenues and maintain profitability is dependent in large part on our ability to expand our customer base, increase sales of our current products to existing customers, manage our expense growth, and enter into additional supply, license and collaborative arrangements as well as on our ability and that of our collaborative partners to successfully manufacture and commercialize products incorporating our technologies in new applications and in new markets. If our revenues grow more slowly than we anticipate, or if our operating expenses increase more than we expect or cannot be reduced in the event of lower revenues, our business will be materially and adversely affected.

Our quarterly results have historically fluctuated significantly and may continue to fluctuate unpredictably and any failure to meet financial expectations may disappoint securities analysts or investors and result in a decline in our stock price.

Our revenues 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. However, we have historically experienced customer ordering patterns for GeneChip® instrumentation and GeneChip® arrays where 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 revenues.  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 revenues will materially reduce our profitability and may cause us to experience losses. In particular, our revenue growth and profitability depend on sales of our GeneChip® products. Factors that could cause sales for these products to fluctuate include:

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

·the loss of or reduction in orders from key customers;

·the frequency of experiments conducted by our customers;

·our customers’ inventory of GeneChip® products;

·the receipt of relatively large orders with short lead times; and

·our customers’ expectations as to how long it takes us to fill future orders.

Some additional factors that could cause our operating results to fluctuate include:

·weakness in the global economy and changing market conditions;

·general economic conditions affecting our target customers;

·changes in the amounts or timing of government funding to companies and research institutions;

·changes in the attitude of the pharmaceutical industry towards the use of genetic information and genetic testing as a methodology for drug discovery and development; and

·changes in the competitive landscape.

We cannot forecast with any certainty the impact of these and other factors on our sales and operating results in any future period. Results of operations in any period, therefore, should not be considered indicative of the results to be expected for any future period. Because of this difficulty in predicting future performance, our operating results may fall below 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.

We may lose customers or experience lost sales if we are unable to manufacture our products and ensure their proper performance and quality.

We produce our GeneChip® 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 not fully understand all of the factors that affect our manufacturing processes or product performance. For example, in 2005, we announced that due to low initial-production yields of our commercial Mapping 500K Array Set, shipment volumes had been constrained and, as a result, we were unable to manufacture enough product to meet our revenue targets for the third and fourth quarters of 2005.

Although we are taking steps to increase our manufacturing capacity, including the expansion of our existing West Sacramento, California probe array manufacturing facility and the development of a new probe array manufacturing facility in Singapore, there are uncertainties inherent in the expansion of our manufacturing capabilities and there can be no assurance as to when any additional capacity may be available to us. For example, manufacturing and product quality issues may arise as we begin our manufacturing operations at the new Singapore facility or as we increase production rates at our West Sacramento facility and launch new products. In addition, 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 manufacture our GeneChip® instrumentation products at our manufacturing facility in Bedford, Massachusetts.  In the third quarter, 2006, we announced that we will be consolidating our Bedford instrumentation manufacturing facility with our probe array manufacturing facility in West Sacramento, California as part of our previously announced efforts to reduce expenses in the general and administrative functions including the rationalization of our facilities.  The successful reorganization of our instrumentation manufacturing capabilities to our West Sacramento site will require regulatory approvals, including the registration of our West Sacramento site with the United States FDA, and is expected to be materially completed by the third fiscal quarter 2007.  This transition is subject to risks and uncertainties that may cause interruptions in our ability to supply GeneChip® instrumentation products to our customers, which could result in lost revenue and seriously harm our business, financial condition and results of operations.

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 probe arrays 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’

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performance expectations, demand for our products will decline. In addition, we do not maintain any backup manufacturing capabilities for the production of our GeneChip® instruments. 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 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 public databases throughout the world. These databases are rapidly expanding and evolving. In addition, the accuracy of such 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 depends on 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.

We face risks associated with technological obsolescence and emergence of standardized systems for genetic analysis.

The RNA/DNA probe array field is undergoing rapid technological changes. New technologies, techniques or products could emerge which might allow the packaging and analysis of genomic information at densities similar to or higher than our microarray technology. Other companies may begin to offer products that are directly competitive with, or are technologically superior, to our products. There can be no guarantee that we will be able to maintain our technological advantages over emerging technologies in the future. Over time, we will need to respond to technological innovation in a rapidly changing industry. In addition, although we believe that we are recognized as a market leader in creating systems for genetic analysis in the life sciences, standardization of tools and systems for genetic research is still ongoing and there can be no assurance that our products will emerge as the standard for genetic research. The emergence of competing technologies and systems as market standards for genetic research may result in our products becoming uncompetitive and could cause our business to suffer.

Our success depends on the continuous development of new products and our ability to manage the transition from our older products to new products.

We compete in markets that are new, intensely competitive, highly fragmented and rapidly changing, and many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do. In addition, many current and potential competitors have greater name recognition, more extensive customer bases and access to proprietary genetic content. The continued success of our GeneChip® products will depend on our ability to produce products with smaller feature sizes, our ability to dice the wafer, and create greater information capacity at our current or lower costs. The successful development, manufacture and introduction of our new products is a complicated process and depends on our ability to manufacture enough products in sufficient quantity and at acceptable cost in order to meet customer demand. If we fail to keep pace with emerging technologies or are unable to develop, manufacture and introduce new products, including the development of new assay protocols and training our customers, we will become uncompetitive, our pricing and margins will decline and our business will suffer.

Our failure to successfully manage the transition between our older products and our new products may adversely affect our financial results. As we introduce new or enhanced products, we must successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. When we introduce new or enhanced products, we face numerous risks relating to product transitions, including 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.

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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, 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. We will not be able to expand our business if we are unable to hire, train and retain a sufficient number of qualified employees. There can be no assurance that we will be successful in hiring or retaining qualified personnel and our failure to do so could have a material adverse impact on our business, financial condition and results of operations.

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. A scientific advisor’s other obligations may prevent him or her from assisting us in developing our technical and business strategies.

We expect to face increasing competition.

Future competition will likely come from existing competitors as well as other companies seeking to develop new technologies for analyzing genetic information. For example, companies such as Agilent Technologies, Applied Biosystems, GE Healthcare (through its acquisition of Amersham Biosciences) and Illumina have products for genetic analysis which are directly competitive with our GeneChip® products. In addition, pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs. In the molecular diagnostics field, competition will likely come from established diagnostic companies, companies developing and marketing DNA probe tests for genetic and other diseases and other companies conducting research on new technologies to ascertain and analyze genetic information. Further, in the event that we develop new technology and products that compete with existing technology and products of well established companies, there can be no guarantee that the marketplace will readily adopt any such new technology and products that we may introduce in the future.

The market for molecular diagnostics products is currently limited and highly competitive, with several large companies already having significant market share. Companies such as Abbott Laboratories, Bayer AG, Beckman Coulter, Becton Dickinson, bioMérieux, Celera Diagnostics, Johnson & Johnson and Roche Diagnostics 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, regulatory expertise, manufacturing capabilities and the distribution channels to deliver products to customers. Established diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which are not compatible with the GeneChip® system and could deter acceptance of our products. In addition, these companies have formed alliances with genomics companies which provide them access to genetic information that may be incorporated into their diagnostic tests.

Recent accounting pronouncements may impact our future financial position and results of operations.

There have been new accounting pronouncements or regulatory rulings that will have an impact on our future financial position and results of operations. For instance, on December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. SFAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS 123R is similar to the approach described in Statement 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. We adopted SFAS 123R effective January 1, 2006 under the modified-prospective transition method. The adoption of SFAS 123R’s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position.

Our effective tax rate may vary significantly.

Our future effective tax rates could be adversely affected by various internal and external factors. These factors include, but are not limited to, earnings or losses being different than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates; changes in the valuation of our deferred tax assets and liabilities; establishing or changing our valuation allowance; or changes in tax laws or interpretations thereof; changes in tax rates, future levels of research and development spending, and changes in overall levels of pretax earnings. Any new interpretative accounting guidance related to accounting for uncertain tax positions could adversely affect our tax provision.

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Our business depends on research and development spending levels for pharmaceutical and biotechnology companies and academic and governmental research institutions.

We expect that our revenues in the foreseeable future will be derived primarily from products and services provided to a relatively small number of pharmaceutical and biotechnology companies and academic, governmental and other research institutions. Our success will depend upon their demand for and use of our products and services. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers. For example, reductions in capital expenditures by these customers may result in lower than expected instrumentation sales and similarly, reductions in operating expenditures by these customers could result in lower than expected GeneChip® array and reagent sales. These reductions and delays may result from factors that are not within our control, such as:

·changes in economic conditions;

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

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

·market-driven pressures on companies to consolidate and reduce costs; and

·other factors affecting research and development spending.

Our success in penetrating emerging market opportunities in molecular diagnostics depends on the efforts of our partners and the ability of our GeneChip® technologies to be used in clinical applications for diagnosing and informing the treatment of disease.

The clinical applications of GeneChip® technologies for diagnosing and informing the treatment of disease is an emerging market opportunity in molecular diagnostics that seeks to improve the effectiveness of health care by collecting information about DNA variation and RNA expression in patients at various times from diagnosis through prognosis and on to the end of therapy. However, there can be no assurances that molecular diagnostic markets will develop as quickly as we expect or reach what we believe is their full potential. Although we believe that there will be clinical applications of our GeneChip® technologies that will be utilized for diagnosing and informing the treatment of disease, there can be no certainty of the technical or commercial success our technologies will achieve in such markets.

The molecular diagnostics market is relatively new for us and presents us with new risks and uncertainties. Our success in this area depends to a large extent on our collaborative relationships and the ability of our collaborative partners to successfully market and sell products using our GeneChip® technologies. As a result, we are also dependent on the ability of our collaborative partners to achieve regulatory approval for such products in the United States and in overseas markets. Although Roche received FDA approval of the first diagnostic genotyping test for use with our GeneChip® System 3000Dx in late 2004, there can be no assurance that other products using our GeneChip® technologies will achieve needed approvals.

We may not successfully obtain regulatory approval of any diagnostic or other product or service that we or our collaborative partners develop.

The FDA must approve certain in-vitro diagnostic products before they can be marketed in the U.S. 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 U.S. Commercialization of our and our collaborative partners’ in-vitro diagnostic products outside of the research environment that 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 for product approval 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.

Even where 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.

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.

Our diagnostic clinical laboratory will be subject to extensive federal and state regulation including the requirements of the Clinical Laboratory Improvement Act of 1988 (CLIA). CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by requiring all laboratories to meet specified standards in the areas of personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. There can be no assurance that regulations under and future administrative interpretations of CLIA will not have an adverse impact on the potential market for our diagnostic clinical laboratory.

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

We are currently developing diagnostic and therapeutic products with our collaborators. The ability of our collaborators to commercialize such products may depend, in part, on the extent to which reimbursement for the cost of 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 U.S., third-party payor price resistance, the trend towards managed health care and legislative proposals to reform health care or reduce government insurance programs could reduce prices for health care products and services, adversely affect the profits of our customers and collaborative partners and reduce our future royalties.

We depend on a limited number of suppliers and we will be unable to manufacture our products if shipments from these suppliers are delayed or interrupted.

We depend on our vendors to provide components of our products in required volumes, at appropriate quality and reliability levels, and in compliance with regulatory requirements. Key parts of the GeneChip® product line are currently available only from a single source or limited sources. In addition, components of our manufacturing equipment and certain raw materials used in the synthesis of probe arrays are available from limited sources. If supplies from these vendors were delayed or interrupted for any reason, we would not be able to get manufacturing equipment, produce probe arrays, or sell scanners or other components for our GeneChip® products in a timely fashion or in sufficient quantities or under acceptable terms. Furthermore, our business is dependent on our ability to forecast the needs for components and products in the GeneChip® product line 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.

Our success will require that we establish a strong intellectual property position and that we can defend ourselves against intellectual property claims from others.

Maintaining a strong patent position is critical to our business. Litigation on these matters has been prevalent in our industry and we expect that this will continue. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and the extent of future protection is highly uncertain, so there can be no assurance that the patent rights that 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 will 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 assure investors that any such patent applications will not have priority over our patent applications. 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. Because of the size and breadth of our patent portfolio we may or may not chose 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.  In addition, we have incurred and may in future periods incur substantial costs in litigation to defend against patent suits brought by third parties or initiated by us. For example, we currently are engaged in litigation regarding intellectual property rights with Enzo Life Sciences, Inc. For additional information concerning intellectual property litigation and administrative proceedings, see Part II, Item 1, Legal Proceedings, of this Form 10-Q.  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 for our confidential and proprietary information. There can be no assurance, however, that such measures will provide adequate protection for our copyrights, trade secrets or other proprietary information. In addition, there can be no assurance that trade secrets and other proprietary information will not be disclosed, or that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose our trade secrets and other proprietary information. There can also be no assurance that we will be able to effectively protect our copyrights, trade secrets or other proprietary information. If we cannot obtain, maintain or enforce intellectual property rights, our competitors may be able to offer probe array systems similar to our GeneChip® technology.

Our success also depends in part on us neither infringing patents or other proprietary rights of third parties nor breaching any licenses that may relate to our technologies and products. We are aware of third-party patents that may relate to our technology, including reagents used in probe array synthesis and in probe array assays, probe array scanners, synthesis techniques, polynucleotide amplification techniques, assays, and probe arrays. We routinely receive notices claiming

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infringement from third parties as well as invitations to take licenses under third party patents. There can be no assurance that we will not infringe on these patents or other patents or proprietary rights or that we would be able to obtain a license to such patents or proprietary rights on commercially acceptable terms, if at all.

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

We believe that our success in penetrating our target markets depends in part on our ability to develop and maintain collaborative relationships with key companies as well as with key academic researchers. Currently, our significant collaborative partners include Qiagen GmBH for sample preparation and purification systems, Invitrogen Corporation for reagents, and Ingenuity Systems, Inc. for analytical software. We collaborate with both Beckman Coulter Inc. and Caliper Life Sciences in the development of automation for GeneChip® technology applications for use in drug discovery, drug development and clinical research. Roche, bioMérieux and Veridex are collaborative partners in the development of chip products for medical diagnostic and applied testing markets. Relying on these or other collaborative relationships is risky to our future success because:

·our partners may develop technologies or components competitive with our GeneChip® products;

·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;

·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

·we may not be able to negotiate future collaborative arrangements on acceptable terms.

The size and structure of our current sales, marketing and technical support organizations may limit our ability to sell our products.

Although we have invested significant other resources to expand our direct sales force and our technical and support staff, we may not be able to establish a sufficiently sized global sales, marketing or technical support organization to sell, market or support our products globally. 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. These and other third parties on whom we rely for sales, marketing and technical support in these geographic areas may decide to develop and sell competitive products or otherwise become our competitors, which could harm our business.

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. Though 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 are also subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, potential hostilities and changes in diplomatic and trade relationships. 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.

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. We may seek to acquire additional insurance for clinical 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.

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

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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.

Our strategic equity investments may result in losses.

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

Future acquisitions may disrupt our business and distract our management.

We have previously engaged in acquisitions and may do so in the future in order to exploit technology or market opportunities. If we acquire another company, we may not be able to successfully integrate the acquired business into our existing business in a timely and non-disruptive manner, or at all. Furthermore, an acquisition may not produce the revenues, earnings or business synergies that we anticipate. If we fail to integrate the acquired business effectively, commercialize the acquired technology, or if key employees of that business leave, the anticipated benefits of the acquisition would be jeopardized. The time, capital management and other resources spent on an acquisition that fails to meet our expectations could cause our business and financial condition to be materially and adversely affected. For example, on October 21, 2005, we completed the acquisition of ParAllele BioScience, Inc. We may not realize the anticipated benefits of the acquisition because of integration and other challenges which include, among others, unanticipated incompatibility of corporate and administrative infrastructures, the ability to retain key employees, including key scientists, the diversion of management’s attention from ongoing business concerns, and the potential adverse reaction of customers to the merger or resulting changes to the combined company’s product and services offerings. In addition, acquisitions can involve substantial charges of stock based compensation that could adversely affect our results of operations.

The market price of our common stock has been volatile.

The market price of our common stock is volatile. To demonstrate this volatility, during the twelve-month period ending on September 30, 2006, the volume of our common stock traded on any given day ranged from 215,200 to 12,591,300 shares. Moreover, during that period, our common stock traded as low as $17.50 per share and as high as $52.44 per share.

Furthermore, volatility in the stock price of other companies has often 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.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit Number	Description of Document
3.1(1)	Restated Certification of Incorporation.
3.2(2)	Bylaws.
3.3(3)	Amendment No. 1 to the Bylaws dated as of April 25, 2001.
4.1(4)	Rights Agreement, dated October 15, 1998, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
4.2(5)	Amendment No. 1 to Rights Agreement, dated as of February 7, 2000, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
4.3(6)	Indenture, dated as of December 15, 2003, between Affymetrix, Inc. and The Bank of New York, as Trustee.
4.4(6)	Affymetrix, Inc. 0.75% Senior Convertible Notes due 2033 Registration Rights Agreement dated December 15, 2003.
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
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

(1)	Incorporated by reference to Registrant’s Form 8-K as filed on June 13, 2000 (File No. 000-28218).
(2)	Incorporated by reference to Appendix C of Registrant’s Definitive Proxy Statement on Schedule 14A as filed on April 29, 1998 (File No. 000-28218).
(3)	Incorporated by reference to Registrant’s Form 10-Q as filed on May 15, 2001 (File No. 000-28218).
(4)	Incorporated by reference to Registrant’s Form 8-A as filed on October 16, 1998 (File No. 000-28218).
(5)	Incorporated by reference to Registrant’s Form 8-A/A as filed on March 29, 2000 (File No. 000-28218).
(6)	Incorporated by reference to Registrant’s Form S-3 as filed on January 29, 2004 (File No. 333-112311).

38

SIGNATURES

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

	By:	/s/ GREGORY T. SCHIFFMAN
	Name:	Gregory T. Schiffman
	Title:	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
November 9, 2006

39

AFFYMETRIX, INC.
EXHIBIT INDEX
SEPTEMBER 30, 2006

Exhibit Number	Description of Document
3.1(1)	Restated Certification of Incorporation.
3.2(2)	Bylaws.
3.3(3)	Amendment No. 1 to the Bylaws dated as of April 25, 2001.
4.1(4)	Rights Agreement, dated October 15, 1998, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
4.2(5)	Amendment No. 1 to Rights Agreement, dated as of February 7, 2000, between Affymetrix, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
4.3(6)	Indenture, dated as of December 15, 2003, between Affymetrix, Inc. and The Bank of New York, as Trustee.
4.4(6)	Affymetrix, Inc. 0.75% Senior Convertible Notes due 2033 Registration Rights Agreement dated December 15, 2003.
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
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

(1)	Incorporated by reference to Registrant’s Form 8-K as filed on June 13, 2000 (File No. 000-28218).
(2)	Incorporated by reference to Appendix C of Registrant’s Definitive Proxy Statement on Schedule 14A as filed on April 29, 1998 (File No. 000-28218).
(3)	Incorporated by reference to Registrant’s Form 10-Q as filed on May 15, 2001 (File No. 000-28218).
(4)	Incorporated by reference to Registrant’s Form 8-A as filed on October 16, 1998 (File No. 000-28218).
(5)	Incorporated by reference to Registrant’s Form 8-A/A as filed on March 29, 2000 (File No. 000-28218).
(6)	Incorporated by reference to Registrant’s Form S-3 as filed on January 29, 2004 (File No. 333-112311).

40

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer
Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

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

1.I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2006 of Affymetrix, Inc.;

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

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

4.The registrant’s other certifying 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 quarterly 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 quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report, based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that has 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;

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal controls 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 controls over financial reporting.

Date: November 9, 2006	/s/ STEPHEN P.A. FODOR, PH.D.
	Name: Stephen P.A. Fodor, Ph.D.
	Title: Founder, Chairman and Chief Executive Officer

V

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer
Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

I, Gregory T. Schiffman, Executive Vice President and Chief Financial Officer, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2006 of Affymetrix, Inc.;

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

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

4.The registrant’s other certifying 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 quarterly 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 quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report, based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that has 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;

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal controls 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 controls over financial reporting.

Date: November 9, 2006	/s/ GREGORY T. SCHIFFMAN
	Name: Gregory T. Schiffman
	Title: Executive Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with this Quarterly Report on Form 10-Q for the period ended September 30, 2006 (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.

Stephen P.A. Fodor, Ph.D., the Founder, Chairman and Chief Executive Officer of Affymetrix, Inc. certifies that, to the best of such officer’s 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.

November 9, 2006	/s/ STEPHEN P.A. FODOR, PH.D.
	Name: Stephen P.A. Fodor, Ph.D.
	Title: Founder, Chairman and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with this Quarterly Report on Form 10-Q for the period ended September 30, 2006 (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.

Gregory T. Schiffman, Executive Vice President and Chief Financial Officer of Affymetrix, Inc. certifies that, to the best of such officer’s 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.

November 9, 2006	/s/ GREGORY T. SCHIFFMAN
	Name: Gregory T. Schiffman
	Title: Executive Vice President and Chief Financial Officer