UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

OR

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

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NO. 0-28218

AFFYMETRIX, INC.

(Exact name of Registrant as specified in its charter)

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

Large accelerated filer x		Accelerated filer o

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

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 MAY 2, 2008: 69,415,813

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	March 31,			December 31,
	2008			2007
ASSETS:
Current assets:
Cash and cash equivalents	$	431,156		$	288,644
Restricted cash	4,000			—
Available-for-sale securities—short-term portion	158,842			205,718
Accounts receivable, net ($67 in 2008 and $389 in 2007 from Perlegen Sciences)	75,959			81,941
Inventories	51,787			42,912
Deferred tax assets—current portion	21,259			28,584
Notes receivable from employees-current portion	—			1,376
Prepaid expenses and other current assets	9,748			17,933
Total current assets	752,751			667,108
Available-for-sale securities—long-term portion	8,434			89,912
Property and equipment, net	129,786			143,884
Acquired technology rights, net	60,558			46,797
Goodwill	173,657			125,050
Deferred tax assets—long-term portion	34,069			18,426
Notes receivable from employees—long-term portion	133			487
Other assets	35,874			41,927
Total assets	$	1,195,262		$	1,133,591

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable and accrued liabilities	$	53,859		$	61,543
Deferred revenue—current portion	17,438			22,498
Total current liabilities	71,297			84,041
Deferred revenue—long-term portion	3,838			3,922
Other long-term liabilities	10,135			10,971
Convertible notes	436,250			436,250
Stockholders’ equity:
Common stock	694			692
Additional paid-in capital	735,097			704,189
Accumulated other comprehensive income	171			1,998
Accumulated deficit	(62,220		)	(108,472		)
Total stockholders’ equity	673,742			598,407
Total liabilities and stockholders’ equity	$	1,195,262		$	1,133,591

Note 1: The condensed consolidated balance sheet at December 31, 2007 has been derived from the audited consolidated financial statements at that date included in the Company’s Form 10-K for the fiscal year ended December 31, 2007.

See accompanying notes.

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended
	March 31,
	2008			2007
REVENUE:
Product sales ($791 in 2008 and $6,678 in 2007 from Perlegen Sciences)	$	62,806		$	64,485
Services	8,420			8,757
Royalties and other revenue	98,349			7,193
Total revenue	169,575			80,435
COSTS AND EXPENSES:
Cost of product sales ($442 in 2008 and $2,421 in 2007 from Perlegen Sciences)	25,977			22,145
Cost of services	5,678			6,406
Cost of royalties and other revenue	—			66
Research and development	18,768			19,227
Selling, general and administrative	34,733			35,858
Acquired in-process technology	800			—
Restructuring charges	13,910			5,371
Total costs and expenses	99,866			89,073
Income (loss) from operations	69,709			(8,638		)
Interest income and other, net	6,872			2,751
Interest expense	(3,589		)	(415		)
Income (loss) before income taxes	72,992			(6,302		)
Income tax (provision) benefit	(26,740		)	2,296
Net income (loss)	$	46,252		$	(4,006	)

Basic net income (loss) per common share	$	0.68		$	(0.06	)
Diluted net income (loss) per common share	$	0.58		$	(0.06	)

Shares used in computing basic net income (loss) per common share	68,504			67,905
Shares used in computing diluted net income (loss) per common share	83,001			67,905

See accompanying notes.

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

	Three Months Ended
	March 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	46,252		$	(4,006	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	6,996			5,871
Amortization of intangible assets	2,598			2,082
Charge for acquired in-process technology	800			—
Amortization of investment premiums, net	909			101
Stock-based compensation	2,622			2,725
Restructuring charges	(992		)	738
Realized (gain) loss on equity investments	(70		)	131
Realized gain on the sales of investments	(36		)	(97		)
Deferred tax assets	21,272			(68		)
Amortization of debt offering costs	526			190
Accretion of interest on notes receivable	(5		)	(20		)
Loss on disposal of equipment	12,529			6
Changes in operating assets and liabilities:
Restricted cash	(4,000		)	(8,113		)
Accounts receivable, net	9,014			12,297
Inventories	(1,682		)	(12,642		)
Prepaid expenses and other assets	9,796			1,789
Accounts payable and accrued liabilities	(18,846		)	(13,846		)
Deferred revenue	(5,144		)	6,790
Other long-term liabilities	(836		)	358
Net cash provided by (used in) operating activities	81,703			(5,714		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(3,759		)	(7,850		)
Purchases of available-for-sale securities	(133,682		)	(42,431		)
Proceeds from sales and maturities of available-for-sale securities	262,720			24,643
Acquisition of USB, net of cash acquired	(65,159		)	—
Purchase of non-marketable equity investments	—			(550		)
Net cash provided by (used in) investing activities	60,120			(26,188		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock	216			9,031
Net cash provided by financing activities	216			9,031
Effect of exchange rate changes on cash and cash equivalents	473			61
Net increase (decrease) in cash and cash equivalents	142,512			(22,810		)
Cash and cash equivalents at beginning of period	288,644			119,063
Cash and cash equivalents at end of period	$	431,156		$	96,253

See accompanying notes.

AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008
(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. and its wholly owned subsidiaries (“Affymetrix” or the “Company”). 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 for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on February 29, 2008.

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.

Reclassification

Certain prior year revenue and cost of sales amounts in the Company’s condensed consolidated statements of operations have been reclassified to conform to the current period presentation.

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, Revenue Arrangements with Multiple Deliverables, (“EITF 00-21”)

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 (a related party, see Note 9), 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 and transfer of title to the customer and fulfillment of any significant post-delivery obligations. Accruals are provided for anticipated warranty expenses at the time the associated revenue is recognized.

Services

Services revenue includes equipment service revenue; scientific services revenue, which includes associated consumables; and revenue from custom probe array design fees.

Revenue 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 license revenue; royalties earned from third party license agreements; milestones and royalties earned from collaborative product development and supply agreements; subscription fees earned under GeneChip® array access programs; and research revenue which mainly consists of amounts earned under government grants; and non-recurring intellectual property payments.

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

Royalty revenues are 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.

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

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.

Transactions with Distributors

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 collectability is reasonably assured. The Company’s agreements with distributors do not include rights of return.

Net Income (Loss) Per Share

Basic net income (loss) 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 income (loss) 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).

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

	Three Months Ended
	March 31,
	2008			2007
Numerator:
Net income (loss) - basic	$	46,252		$	(4,006	)
Add effect of dilutive securities:
Interest on convertible notes (inclusive of amortization of debt issuance costs)	2,116			—
Net income (loss) - diluted	$	48,368		$	(4,006	)

Denominator:
Weighted-average shares outstanding	69,313			68,211
Less: weighted-average shares of common stock subject to repurchase	(809		)	(306		)
Shares used in computing basic net income (loss) per common share	68,504			67,905
Add effect of dilutive securities:
Employee stock options	89			—
Common stock subject to repurchase	39			—
Convertible notes	14,369			—
Shares used in computing diluted net income (loss) per common share	83,001			67,905
Basic net income (loss) per common share	$	0.68		$	(0.06	)
Diluted net income (loss) per common share	$	0.58		$	(0.06	)

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

	March 31,
	2008	2007
Employee stock options	4,833	5,848
Restricted stock subject to repurchase	—	350
Convertible notes	—	3,870
Total	4,833	10,068

Restructuring

The Company has in recent years 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 the Company’s estimates, the amount of the restructuring charges could be materially impacted. For a full description of the Company’s restructuring actions, see Note 4.

Recent Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. It is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively.

In February 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. The objective of SFAS 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Under SFAS 159, an entity may elect to use fair value to measure eligible items including accounts receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, and issued debt. The Company has elected not to adopt the fair value option on existing eligible financial instruments as of January 1, 2008. However, because the SFAS 159 election is based on an instrument-by-instrument election at the time the Company first recognizes an eligible item or enters into an eligible firm commitment, the Company may decide to exercise the option on new items when business reason support doing so in the future. The adoption of FAS No. 159 did not have a significant impact on the Company’s consolidated results of operations and financial condition.

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”). In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

·		Level 1 - Quoted prices in active markets for identical assets or liabilities.

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

·		Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of SFAS 157 did not have a material effect on the Company’s financial position, results of operations, or cash flows.

NOTE 2—FAIR VALUE

In accordance with SFAS 157, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of March 31, 2008 (in thousands):

	Level 1		Level 2		Total
Non-U.S. equity securities	$	851	$	—	$	851
U.S. government obligations and agencies	—		391,165		391,165
U.S. corporate debt	—		83,206		83,206
Total	$	851	$	474,371	$	475,222

As of March 31, 2008, the Company had no financial assets or liabilities requiring Level 3 classification.

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 stock awards are generally time-based, vesting 25% on each annual anniversary of the grant date over four years. As of March 31, 2008, the Company had approximately 1.0 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.

The Company allocated stock-based compensation expense under SFAS No. 123R, Share-Based Payment, as follows (in thousands):

	Three Months Ended
	March 31,
	2008			2007
Costs of product sales	$	364		$	297
Research and development	523			562
Selling, general and administrative	1,735			1,866
Total stock-based compensation expense	2,622			2,725
Income tax benefit	(830		)	(703		)
Total stock-based compensation expense, net of tax	$	1,792		$	2,022

As of March 31, 2008, $31.2 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 2012. The weighted average term of the unrecognized stock-based compensation expense is 2.7 years.

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
	March 31,
	2008		2007
Risk free interest rate	2.5	%	4.5	%
Expected dividend yield	0.0	%	0.0	%
Expected volatility	42	%	42	%
Expected option term (in years)	4.5		4.5

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 is based on a blend of historical and market-based implied volatility. Using the assumptions above, the weighted average grant date fair value of options granted during the three months ended March 31, 2008 and 2007 was $7.37 and $10.91, respectively.

Activity under the Company’s stock plans for the three months ended March 31, 2008 is as follows (in thousands, except per share amounts):

			Weighted-Average		Weighted-Average
			Exercise Price		Remaining	Aggregate
	Shares		Per Share		Contractual Terms	Intrinsic Value
					(in years)
Outstanding at December 31, 2007	5,475		$	30.91
Grants	391		19.38
Exercises	(29	)	12.97
Forfeitures or expirations	(602	)	36.40
Outstanding at March 31, 2008	5,235		$	29.51	3.92	$	1,076

Exercisable at March 31, 2008	3,395		$	31.35	2.75	$	963

Vested and expected to vest at March 31, 2008	4,808		$	29.81	3.73	$	1,050

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 first quarter of 2008 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 March 31, 2008. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised is approximately $0.2 million and $4.1 million for the three months ended March 31, 2008 and 2007, respectively.

Restricted Stock

The following table summarizes the Company’s non-vested restricted stock activity for the three months ended March 31, 2008 (in thousands, except per share amounts):

			Weighted-Average
	Number of Shares		Grant Date Fair Value
Non-vested stock outstanding at December 31, 2007	724		$	25.53
Granted	224		$	19.30
Vested	(18	)	$	27.51
Forfeited	(54	)	$	26.28

Non-vested stock outstanding at March 31, 2008	876		$	23.78

The total fair value of shares vested is approximately $0.5 million and approximately twenty-five thousand dollars for the three months ended March 31, 2008 and 2007, respectively.

NOTE 4—RESTRUCTURING

Fiscal 2008 Restructuring Plan

On February 28, 2008, the Company committed to a restructuring plan (the “2008 Plan”) designed primarily to optimize its production capacity and cost structure and improve its future gross margins. The restructuring plan was approved as part of the Company’s ongoing efforts to reduce costs.

The restructuring plan involves moving the majority of the Company’s probe array manufacturing from its West Sacramento, California facility to its Singapore facility by the end of 2008. The Company estimates the total restructuring expenses to be incurred in connection with the 2008 Plan will be approximately $15.4 million. Of this total, approximately $2.9 million relates to employee severance and $12.5 million relates to non-cash charges associated with the abandonment of certain long-lived manufacturing assets. Depending on the rate at which the Company transfers its production capacity to Singapore, the Company may incur additional expenses associated with the reduction of capacity in the West Sacramento, California facility. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), the costs relating to employee severance and relocation are being accrued over the remaining service periods of the employees.

During the first quarter of 2008, the Company recognized approximately $1.4 million of expense related to employee termination benefits associated with the 2008 Plan and approximately $12.5 million of non-cash charges related to the abandonment of certain manufacturing assets. These expenses were presented as a component of the line item labeled “Restructuring charges” in the Company’s Consolidated Statements of Operations.

The activity in the accrued restructuring balances related to the 2008 Plan described above for the three months ended March 31, 2008 was as follows (in thousands):

													As of
													March 31, 2008
	Balance as of										Balance as of		Total		Total
	December 31,		2008		Cash			Non-Cash			March 31,		costs		expected
	2007		Charges		Payments			Settlements			2008		to date		costs
Employee severance and relocation benefits	$	—	$	1,412	$	(740	)	$	(179	)	$	493	$	1,412	$	2,900
Abandonment of certain long-lived manufacturing assets	—		12,498		—			(12,498		)	—		12,498		12,500
Total restructuring costs	$	—	$	13,910	$	(740	)	$	(12,677	)	$	493	$	13,910	$	15,400

Fiscal 2007 Restructuring Plan

In July 2007, the Company announced that it was consolidating an administrative facility located in Sunnyvale, California into its main campus in Santa Clara, California during the fourth quarter of 2007 (the “2007 Plan”). Additionally, in August and December 2007, the Company terminated certain employees in the research and development and selling, general and administrative functions. The Company estimates that the total restructuring expenses to be incurred in connection with the 2007 Plan will be approximately $6.2 million. Of this total, the Company estimates that approximately $3.0 million relates to employee severance and approximately $3.0 million relates to contract termination and $0.2 million of other costs associated with vacating the leased Sunnyvale, California facility. The Sunnyvale, California facility was vacated during the fourth quarter of 2007. The estimated cash outlays to be incurred in connection with these restructuring activities are estimated to be approximately $6.2 million. In accordance with SFAS No. 146, the costs relating to employee severance are being accrued over the remaining service periods of the employees.

During the first quarter of 2008 and 2007, the Company did not recognize any expense associated with the 2007 Plan.

The activity in the accrued restructuring balances related to the 2007 Plan described above for the three months ended March 31, 2008 was as follows (in thousands):

												As of
												March 31, 2008
	Balance as of									Balance as of		Total		Total
	December 31,		2008		Cash			Non-Cash		March 31,		costs		expected
	2007		Charges		Payments			Settlements		2008		to date		costs
Employee severance and relocation benefits	$	1,295	$	—	$	(605	)	$	—	$	690	$	2,887	$	3,000
Contract termination costs	1,122		—		(278		)	—		844		1,216		3,000
Other restructuring costs	—		—		—			—		—		114		200
Total restructuring costs	$	2,417	$	—	$	(883	)	$	—	$	1,534	$	4,217	$	6,200

Fiscal 2006 Restructuring Plan

In the third quarter of 2006, the Company initiated a restructuring plan (the “2006 Plan”) to better align certain of its expenses with the Company’s current business outlook. The Company’s primary focus of the 2006 Plan was in the general and administrative functions and included rationalizing its facilities. In August 2006, 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 consolidated the Bedford facility’s instrument manufacturing operations with its probe array manufacturing facility in West Sacramento, California. The Company’s instrumentation development capabilities were consolidated with its principal research and development facilities located in Santa Clara, California. Implementation of the 2006 Plan began in the fourth quarter of 2006 and continued into the first half of 2007 and eliminated or transferred certain positions. The closure of the Bedford, Massachusetts facility was substantially completed by the third quarter of fiscal 2007.

The Company estimates that the total restructuring expenses to be incurred in connection with the 2006 Plan will be approximately $25.3 million. Of this total, the Company estimates that $20.2 million relates to employee severance and relocation benefits, $2.9 million relates to contract termination costs associated with vacating the leased Bedford facility, net of estimated sublease income of $6.7 million, and approximately $2.2 million relates to other restructuring costs such as fixed asset write-downs and equipment and inventory relocation costs. The Company incurred restructuring expenses beginning in the third quarter of 2006 and continued incurring related expenses through the third quarter of 2007. Cash outlays incurred in connection with these restructuring activities are estimated to be approximately $15.6 million. In accordance with SFAS 146, the costs relating to employee severance and relocation were accrued over the remaining service periods of the employees.

During the first quarter of 2008, the Company did not recognize any expense associated with the 2006 Plan. During the first quarter of 2007, the Company recognized approximately $5.4 million of expense related to the plan which was presented in a single line item labeled Restructuring charges in the Company’s Statement of Operations, of which approximately $4.8 million related to employee termination benefit costs and approximately $0.6 million related to facility exit costs.

The activity in the accrued restructuring balances related to the 2006 Plan described above for the three months ended March 31, 2008 was as follows (in thousands):

												As of March 31, 2008
	Balance as of									Balance as of		Total		Total
	December 31,		2008		Cash			Non-Cash		March 31,		costs		expected
	2007		Charges		Payments			Settlements		2008		to date		costs
Employee severance and relocation benefits	$	140	$	—	$	(94	)	$	—	$	46	$	20,197	$	20,200
Contract termination costs	1,761		—		(507		)	—		1,254		2,391		2,900
Other restructuring costs	—		—		—			—		—		1,988		2,200
Total restructuring costs	$	1,901	$	—	$	(601	)	$	—	$	1,300	$	24,576	$	25,300

NOTE 5—ACQUISITION

On January 30, 2008, the Company acquired 100% of the outstanding shares of USB Corporation (“USB”), a privately held Cleveland, Ohio-based company that develops, manufactures and markets an extensive line of molecular biology and biochemical reagent products. The acquisition will enable the Company to accelerate the development and commercialization of new genetic analysis solutions and increase the value of its current product portfolio.

Affymetrix accounted for the merger under the purchase method of accounting in accordance with the provisions of SFAS 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 USB have been included in Affymetrix’ consolidated financial statements since January 31, 2008.

Purchase Price

The total purchase price of the USB acquisition was $72.9 million and includes the following components (in thousands):

Merger consideration paid in cash	$	70,895
Direct acquisition costs	1,958
Total purchase price	$	72,853

Purchase Price Allocation

The following table allocates the purchase price based on the fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

Tangible assets, net	$	7,146
Amortizable intangible assets	16,300
Goodwill	48,607
In-process technology	800
Total	$	72,853

Intangible Assets and Goodwill

A valuation of the purchased intangible assets was undertaken by Affymetrix’ management in its determination of the estimated fair value of such assets. The $6.1 million value assigned to developed technology and patents and core technology is included in acquired technology rights on the Company’s Consolidated Balance Sheet and will be amortized to cost of product sales over the estimated useful lives of these assets, generally four to five years. Affymetrix recorded amortization expense of approximately $0.2 million for the three months ended March 31, 2008 related to these acquired patents and technology. The $10.2 million value assigned to customer contracts and trade names and trademarks will be amortized to selling, general and administrative expenses over the estimated useful lives of these assets, generally four to eight years. Affymetrix recorded amortization expense of approximately $0.3 million for the three months ended March 31, 2008 related to customer contracts and trade names and trademarks. Goodwill of $48.6 million was recorded as the excess of the purchase price over the net assets acquired. Goodwill will not be amortized, but will be assessed for impairment on an annual basis or when an indication of potential impairment exists.

In-process Technology

Management determined the estimated fair value of certain research and development programs in-process at the acquisition date that had not yet reached technological feasibility and had no alternative future use. These projects primarily included certain molecular biology projects. The fair values of these projects were determined using the Income Approach whereby management estimated each project’s related future net cash flows between 2008 and 2014 and discounted them to their present value using a risk adjusted discount rate of 21%. This discount rate is based on our estimated weighted average cost of capital adjusted upward for the risks associated with the projects acquired. The projected cash flows from the acquired projects were based on estimates of revenues and operating profits related to the projects considering the stage of development of each potential product acquired, the time and resources needed to complete the development and approval of each product, the life of each potential commercialized product and the inherent difficulties and uncertainties in developing products and services based on complex genetic technologies and biochemical processes. The Company expects cash flows from these projects to begin in 2009 and is not anticipating any material changes to its historical pricing, expense levels or gross margins related to these products.

Escrow Agreement

Pursuant to the terms of the USB merger agreement, the Company withheld from the merger consideration $4.0 million and delivered those funds to an escrow account which shall be released to the USB shareholders upon achievement of certain revenue targets in fiscal 2008. Quarterly, the Company must review the revenue targets and to the extent they are achieved, all or a portion of the escrow funds shall be disbursed to the USB shareholders consistent with the terms of the merger agreement. If the prescribed revenue targets are not achieved, some or all of the escrow funds shall be released from restriction. As funds are disbursed to the USB shareholders, the Company will reflect these payments as additional goodwill and will reduce restricted cash. Any funds remaining in escrow at the end of the fiscal year 2008 which are not payable to the USB shareholders and are released from restriction will be reclassified to cash and cash equivalents. As of March 31, 2008, no funds had been disbursed from the escrow account nor released from restriction. Accordingly, $4.0 million is presented as restricted cash in the Company’s Condensed Consolidated Balance Sheet at March 31, 2008.

NOTE 6—INVENTORIES

Inventories consist of the following (in thousands):

	March 31		December 31,
	2008		2007
Raw materials	$	20,254	$	20,507
Work-in-process	10,471		11,297
Finished goods	21,062		11,108
Total	$	51,787	$	42,912

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 approximately $41.6 million and $39.0 million at March 31, 2008 and December 31, 2007, respectively.

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

	Amortization
For the Year Ending December 31,	Expense
2008, remainder thereof	$	8,570
2009	10,565
2010	9,795
2011	9,399
2012	7,636
Thereafter	14,593
Total	$	60,558

NOTE 8—COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended
	March 31,
	2008			2007
Net income (loss)	$	46,252		$	(4,006	)
Foreign currency translation adjustment	473			61
Unrealized (loss) gain on debt securities	(2,300		)	804
Comprehensive income (loss)	$	44,425		$	(3,141	)

NOTE 9—RELATED PARTY TRANSACTIONS

Perlegen Sciences, Inc.

As of March 31, 2008, the Company, and certain of its affiliates, including the Company’s chief executive officer and members of the board of directors, held approximately 22% 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.

The Company formed Perlegen in October 2000 as a wholly-owned subsidiary and spun it off in March 2001 in a $100 million private equity financing. The Company acquired its initial ownership interest in Perlegen in an arrangement which provides Perlegen rights to use certain of the Company’s intellectual property in its development efforts, and also provides the Company rights to use and commercialize certain data generated by Perlegen in the array field.

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 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, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 as amended (“FIN 46”), 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.

NOTE 10—COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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 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

In 2006, three shareholders of the Company 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, one on August 30, 2006 and the other on September 13, 2006, and were subsequently consolidated. The third lawsuit was filed in the Superior Court of the State of California on October 20, 2006. The substance of the allegations in these cases is similar, and includes claims against the individual defendants for breach of fiduciary duties, unjust enrichment, and violations of federal securities laws, Generally Accepted Accounting Principles, Section 162(m) of the Internal Revenue Code, and certain state laws in each case in connection with the allegedly backdated options. The plaintiffs seek monetary and equitable relief on behalf of the Company, including damages and disgorgement from the individual defendants, changes in the Company’s corporate governance and internal control procedures, and an award of attorneys’ fees and costs. As previously disclosed in the Company’s Form 10-K/A’s 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. On March 31, 2008, the federal district court presiding over the two consolidated cases issued an order granting in part and denying in part the motion of the Company and the individual defendants to dismiss the amended consolidated shareholder derivative complaint. The court allowed the plaintiffs leave to

amend, and the plaintiffs filed a second amended consolidated shareholder derivative complaint on April 18, 2008. The case in California Superior Court is currently stayed pending resolution of the consolidated federal cases. 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 has responded to the request for information and is 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 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 the Company’s competitors, have filed oppositions against several of the Company’s European patents in the European Patent Office and requested reexamination of several of the Company’s patents by the United States Patent & Trademark Office. These 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 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, in the incurrence of significant costs and the consumption of substantial managerial resources.

NOTE 11—INCOME TAXES

The provision for income tax for the first quarter of 2008 was approximately $26.7 million. The income tax provision differs from the amount computed by applying the 35% U.S. federal statutory rate to the consolidated income before income taxes due various factors, including the tax impact of non-U.S. operations, state taxes, and state research and development tax credits. The Company believes realization of their deferred tax assets as of March 31, 2008 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.

As of March 31, 2008, there have been no material changes to the total amount of unrecognized tax benefits.

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 March 31, 2008 and for the three-month periods ended March 31, 2008 and 2007 should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2007.

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.

Overview

We are engaged in the development, manufacture, sale and service of consumables and systems for genetic analysis in the life sciences and clinical healthcare markets and are recognized as a market leader in creating breakthrough tools that are advancing our understanding of the molecular basis of life. 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 and Europe. We also sell our products through life science

supply specialists acting as authorized distributors in Latin America, India, the Middle East and Asia Pacific regions, including China. The following overview describes a few of the key elements of our business strategy and our goals:

Increase top-line revenue growth. We intend to grow our top-line revenue through the successful commercialization of our technologies and expansion of our customer base, including leveraging our technologies into new markets. We also believe that the genotyping market will continue to be one of the most attractive growth opportunities in life sciences and that new content and new clinical applications will drive growth for years to come. These opportunities include our new cytogenetic applications and our new Drug Metabolizing Enzymes and Transporters (DMET) product which we believe addresses a significant unmet need for our pharmaceutical partners. We anticipate that these products and technologies will stimulate our business in 2008 and beyond. In addition, our revenues in the first quarter of 2008 include a non-recurring $90 million intellectual property payment received in January 2008.

While continued innovation is essential to create new opportunities, we are also pursuing additional paths to grow the business including our acquisition of USB Corporation on January 30, 2008 for approximately $73 million in cash. This acquisition is expected to significantly accelerate next-generation enzymology and reagents that will be used with the sequencing applications that we have in development.

Improve operating efficiency. Our goal is to generate continual improvement in gross margin throughout 2008. In February 2008, we implemented a restructuring plan (the “2008 Plan”) designed primarily to optimize our production capacity and cost structure and improve our future gross margins. We intend to move, by the end of 2008, the majority of our probe array manufacturing from our West Sacramento, California facility to our Singapore facility. In connection with this plan, we have incurred approximately $1.4 million of expense related to employee termination benefits associated with the 2008 Plan and approximately $12.5 million of non-cash charges related to the abandonment of certain manufacturing assets. We expect to incur additional charges in 2008 associated with the reduction of our manufacturing capacity. Additionally, we will continue to work on identifying additional opportunities to improve our cost structure to help ensure our expenses remain in line with our revenue growth.

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 unaudited 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 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.

Income 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 asserts 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, unrecognized tax benefits, 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 deferred tax assets or liabilities, future level of research and development spending, nondeductible expenses, changes in overall levels and geographical mix of pretax earnings, and ultimate outcomes of income tax audits.

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 No. 5, Accounting for Contingencies. Any reserves recorded may change in the future due to new developments in each matter.

Accounting for Stock-Based Compensation

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 three months of 2008, we recognized employee stock-based compensation of approximately $0.3 million in cost of product sales, approximately $0.5 million in research and development expense and approximately $1.7 million in selling, general and administrative expenses. As of March 31, 2008, approximately $31.2 million of total unrecognized stock-based compensation expense related to non-vested awards is expected to be to be recognized over the respective vesting terms of each award through 2012. The weighted average term of the unrecognized stock-based compensation expense is 2.7 years.

During the three months ended March 31, 2007, we recognized employee stock-based compensation of $0.3 million in cost of product sales, $0.6 million in research and development expense and $1.9 million in selling, general and administrative expenses options recognized under SFAS 123R.

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 to the Condensed Consolidated Financial Statements in Item 1.

Results of Operations

The following discussion compares the historical results of operations for the three months ended March 31, 2008 and 2007, respectively.

Product Sales

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

	Three Months Ended				Dollar			Percentage
	March 31,				change from			change from
	2008		2007		2007			2007
Consumables	$	58,756	$	56,005	$	2,751		5	%
Instruments	4,050		8,480		(4,430		)	(52	)
Total product sales	$	62,806	$	64,485	$	(1,679	)	(3	)

Total product sales decreased in the first quarter of 2008 as compared to 2007. Consumables, which include probe arrays and reagents, increased primarily due to revenue associated with our acquisition of USB Corporation on January 30, 2008 which was partially offset by a decrease in the average selling price of certain of our consumable products. Instrument sales declined primarily due to a decrease in unit sales of our GeneChip^® Scanners.

Consumable sales, which includes probe arrays and reagents, for the three months ended March 31, 2008 and 2007 include $0.8 million and $6.7 million, respectively, of revenue from Perlegen Sciences Inc., a related party.

Services (in thousands, except percentage amounts):

	Three Months Ended				Dollar			Percentage
	March 31,				change from			change from
	2008		2007		2007			2007
Services	$	8,420	$	8,757	$	(337	)	(4	)%

Total services revenue decreased in the first quarter of 2008 as compared to 2007 primarily due to a decrease of $0.9 million in our genotyping services business because of the variable timing of projects. This decrease was partially offset by an increase of $0.6 million in instrument service revenue.

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

	Three Months Ended				Dollar		Percentage
	March 31,				change from		change from
	2008		2007		2007		2007
Royalties and other revenue	$	98,349	$	7,193	$	91,156	1,267	%

Royalties and other revenue increased in the first quarter of 2008 as compared to 2007 primarily due to the recognition of a non-recurring $90 million intellectual property payment received in January 2008.

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

	Three Months Ended						Dollar/Point
	March 31,						change from
	2008			2007			2007
Total gross margin on product sales	$	36,829		$	42,340		$	(5,511	)
Total gross margin on services	2,742			2,351			391

Product gross margin as a percentage of product sales	59		%	66		%	(7		)
Service gross margin as a percentage of services	33		%	27		%	6

The decrease in product gross margin in the first quarter of 2008 as compared to 2007 is primarily due to higher costs for array manufacturing due to lower factory utilization as we built less arrays in the first quarter of 2008 and added manufacturing capacity in the second quarter of 2007 and a decrease in the average selling price of certain of our consumable products. These decreases were partially offset by a mix shift to our higher margin consumable products and a decline in reserves related to expired arrays and instrument obsolescence.

Gross margin on product sales for the three months ended March 31, 2008 and 2007 includes $0.4 million and $4.3 million, respectively, of gross margin from Perlegen Sciences Inc., a related party.

The increase in services gross margin in the first quarter of 2008 as compared to 2007 was primarily due to an increase in the average selling prices of our genotyping services business.

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

	Three Months Ended				Dollar			Percentage
	March 31,				change from			change from
	2008		2007		2007			2007
Research and development	$	18,768	$	19,227	$	(459	)	(2	)%

The decrease in research and development expenses was primarily due to a $1.1 million decrease in total compensation and benefits due to a reduction in headcount. This decrease was offset by an increase of $0.6 million in consulting and purchased services spending for certain projects and grants.

While our research and development costs have declined in the near term, 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.

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

	Three Months Ended				Dollar			Percentage
	March 31,				change from			change from
	2008		2007		2007			2007
Selling, general and administrative	$	34,733	$	35,858	$	(1,125	)	(3	)%

The decrease in selling, general and administrative expenses was primarily due to a $1.7 million decrease in legal expenses due to lower spending on general legal, contracts and patent litigation, principally due to the settlement of the Illumina litigation in January 2008, and a $1.3 million decrease in recruiting fees and general selling expenses. This decrease was offset by growth of $1.5 million in total compensation and benefits primarily due to an increase in headcount related to our acquisition of USB Corporation on January 30, 2008.

Acquired-in-process technology (in thousands, except percentage amounts):

	Three Months Ended				Dollar		Percentage
	March 31,				change from		change from
	2008		2007		2007		2007
Acquired in-process technology	$	800	$	—	$	800	100	%

During the first quarter of 2008, we recorded a charge of approximately $0.8 million to acquired in-process technology upon the January 30, 2008 completion of our acquisition of USB Corporation (“USB”), a privately held Cleveland, Ohio-based company that develops, manufactures and markets an extensive line of molecular biology and biochemical reagent products. We believe the acquisition will enable us to accelerate the development and commercialization of new genetic analysis solutions and increase the value of our current product portfolio. We determined the estimated fair value of certain research and development programs in-process at the acquisition date that had not yet reached technological feasibility and had no alternative future use. These projects primarily included certain molecular biology projects. The fair values of these projects were determined using the Income Approach whereby we estimated each project’s related future net cash flows between 2008 and 2014 and discounted them to their present value using a risk adjusted discount rate of 21%. This discount rate is based on our estimated weighted average cost of capital adjusted upward for the risks associated with the projects acquired. The projected cash flows from the acquired projects were based on estimates of revenues and operating profits related to the projects considering the stage of development of each potential product acquired, the time and resources needed to complete the development and approval of each product, the life of each potential commercialized product and the inherent difficulties and uncertainties in developing products and services based on complex genetic technologies and biochemical processes. We expect cash flows from these projects to begin in 2009 and are not anticipating any material changes to our historical pricing, expense levels or gross margins related to these products.

Restructuring charges (in thousands, except percentage amounts):

	Three Months Ended				Dollar		Percentage
	March 31,				change from		change from
	2008		2007		2007		2007
Restructuring	$	13,910	$	5,371	$	8,539	159	%

On February 28, 2008, we committed to a restructuring plan (the “2008 Plan”) designed primarily to optimize our production capacity and cost structure and improve our future gross margins. The restructuring plan was approved as part of our ongoing efforts to reduce costs.

The restructuring plan involves moving the majority of our probe array manufacturing from our West Sacramento, California facility to our Singapore facility by the end of 2008. We estimate the total restructuring expenses to be incurred in connection with the 2008 Plan will be approximately $15.4 million. Of this total, approximately $2.9 million relates to employee severance and $12.5 million relates to non-cash charges associated with the abandonment of certain long-lived manufacturing assets. Depending on the rate at which we transfer our production capacity to Singapore, we may incur additional expenses associated with the reduction of capacity in the West Sacramento, California facility. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), the costs relating to employee severance and relocation are being accrued over the remaining service periods of the employees.

During the first quarter of 2008, we recognized approximately $1.4 million of expense related to employee termination benefits associated with the 2008 Plan and approximately $12.5 million of non-cash charges related to the abandonment of certain manufacturing assets.

In July 2007, we announced we were consolidating an administrative facility located in Sunnyvale, California into our main campus in Santa Clara, California during the fourth quarter of 2007 (the “2007 Plan”). Additionally, in August and December 2007, we terminated certain employees in the research and development and selling, general and administrative functions. We estimated that the total restructuring expenses to be incurred in connection with the 2007 Plan will be approximately $6.2 million. Of this total, we estimate that approximately $3.0 million relates to employee severance and approximately $3.0 million relates to contract termination and $0.2 million of other costs associated with vacating the leased Kifer facility. The Kifer facility was vacated during the fourth quarter of 2007. The estimated cash outlays to be incurred in connection with these restructuring activities are estimated to be approximately $6.2 million.

During the first quarter of 2008 and 2007, we did not recognize any expense associated with the 2007 Plan.

In the third quarter of 2006, we initiated a restructuring plan (the “2006 Plan”) to better align certain of our expenses with our current business outlook. The primary focus of the 2006 Plan was in the general and administrative functions and included rationalizing our facilities. In August 2006, 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 consolidated the Bedford facility’s instrument manufacturing operations with our probe array manufacturing facility in West Sacramento, California. Our instrumentation development capabilities were consolidated with our principal research and development facilities located in Santa Clara, California. Implementation of the 2006 Plan began in the fourth quarter of 2006 and continued into the first half of 2007 and eliminated or transferred certain positions. The closure of the Bedford, Massachusetts facility was substantially completed by the third quarter of fiscal 2007.

We estimate that the total restructuring expenses to be incurred in connection with the 2006 Plan will be approximately $25.3 million. Of this total, we estimate that $20.2 million relates to employee severance and relocation benefits, $2.9 million relates to contract termination costs associated with vacating the leased Bedford facility, net of estimated sublease income of $6.7 million, and approximately $2.2 million relates to other restructuring costs such as fixed asset write-downs and equipment and inventory relocation costs. We incurred restructuring expenses beginning in the third quarter of 2006 and continued incurring related expenses through the third quarter of 2007. Cash outlays incurred in connection with these restructuring activities are estimated to be approximately $15.6 million.

During the first quarter of 2008, we did not recognize any expense associated with the 2006 Plan. During the first quarter of 2007, we recognized approximately $5.4 million of expense related to the plan of which approximately $4.8 million related to employee termination benefit costs and approximately $0.6 million related to facility exit costs.

Interest Income and Other, Net

The components of interest income and other, net, are as follows (in thousands, except percentage amounts):

	Three Months Ended					Dollar		Percentage
	March 31,					change from		change from
	2008		2007			2007		2007
Interest income	$	4,861	$	2,754		$	2,107	77	%
Realized gain (loss) on equity investments, net	70		(131		)	201		153
Currency gains (losses), net	260		(61		)	321		526
Other	1,681		189			1,492		789
Total interest income and other, net	$	6,872	$	2,751		$	4,121	150

Interest income and other, net increased for the first quarter of 2008 by $4.1 million as compared to the same period in 2007 primarily due to an increase in our cash and marketable securities balances and the recognition of a $1.6 million gain on the sale of an equity investment.

Interest Expense (in thousands, except percentage amounts):

	Three Months Ended				Dollar		Percentage
	March 31,				change from		change from
	2008		2007		2007		2007
Interest expense	$	3,589	$	415	$	3,174	765	%

Interest expense increased in first quarter of 2008 as compared to 2007 as we recognized interest expense on our $316.3 million 3.50% senior convertible notes issued in November 2007.

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

	Three Months Ended					Dollar		Percentage
	March 31,					change from		change from
	2008		2007			2007		2007
Income tax provision (benefit)	$	26,740	$	(2,296	)	$	29,036	1,265	%

The provision for income tax increased approximately $29.0 million in the first quarter of 2008 as compared to the same period in 2007. The increase was due to an increase in profitability. In the first quarter of 2008, the income tax provision differs from the amount computed by applying the 35% U.S. federal statutory rate to the consolidated income before income taxes due to various factors, including the tax impact of non-U.S. operations, state taxes, and state research and development tax credits. We believe realization of our deferred tax assets as of March 31, 2008 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.

As of March 31, 2008, there have been no material changes to our total amount of unrecognized tax benefits.

Liquidity and Capital Resources

Cashflow (in thousands):

	Three Months Ended
	March 31,
	2008		2007
Net cash provided by (used in) operating activities	$	81,703	$	(5,714	)
Net cash provided by (used in) investing activities	60,120		(26,188		)
Net cash provided by financing activities	216		9,031
Effect of foreign currency translation on cash and cash equivalents	473		61
Net increase (decrease) in cash and cash equivalents	$	142,512	$	(22,810	)

Net Cash Provided by (Used in) Operating Activities

Cash provided by (used in) operating activities is net income (loss) adjusted for certain non-cash items and changes in operating assets and liabilities. Cash provided by operating activities in the first quarter of 2008 was primarily comprised of a net income of $46.3 million, which included a non-recurring $90 million intellectual property payment, and a loss on disposal of equipment of $12.5 million. Significant changes in assets and liabilities are as follows:

Our total accounts receivable, including Perlegen, was $76.0 million at March 31, 2008, a decrease of $6.0 million from December 31, 2007. The decrease is primarily due to lower sales of consumables and instruments in the first quarter of 2008 as compared to the fourth quarter of 2007.

Our inventory balance was $51.8 million at March 31, 2008, an increase of $8.9 million from December 31, 2007. The increase is primarily due to the buildup of consumables in advance of anticipated demand and the acquisition of USB’s inventory on January 30, 2008.

Our prepaid expenses and other assets balance was $9.7 million at March 31, 2008, a decrease of $8.2 million from December 31, 2007. The decrease is primarily related to the receipt of a non-recurring license fee in our other non-trade receivables.

Our deferred tax assets balance was $55.3 million at March 31, 2008 an increase of $8.3 million primarily due to a temporary timing difference associated with the abandonment of certain long-lived manufacturing assets.

Our accounts payable and accrued liabilities balance was $53.9 million at March 31, 2008, a decrease of $7.7 million from December 31, 2007. The decrease is primarily due to the payout of variable compensation.

Our deferred revenue balance was $21.3 million at March 31, 2008, a decrease of $5.1 million from December 31, 2007. The decrease is primarily due to the payment of a non-recurring license fee.

Net Cash Provided by (Used in) Investing Activities

Our investing activities, other than purchases, sales and maturities of available-for-sale securities, primarily consist of capital expenditures, strategic investments and purchased technology rights.

Cash used for capital expenditures was $3.8 million and $7.9 million in the first quarter 2008 and 2007, respectively. Our capital expenditures in 2008 primarily related to the completion of our manufacturing expansion and the capitalization of cost related to our new enterprise resource planning system.

In January 2008, we paid approximately $65.2 million, net of cash acquired, for the acquisition of USB Corporation, a privately held Cleveland, Ohio based-company that develops, manufactures and markets an extensive line of molecular biology and biochemical reagent products.

Net Cash Provided by Financing Activities

Our financing activities consist of stock option exercise activity under our employee stock plan. Cash provided by the issuance of stock under our employee stock plan was $0.2 million and $9.0 million in the first quarter of 2008 and 2007, 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 for the year ended December 31, 2007.

On December 15, 2008, 2013, 2018, 2023 and 2028 the security holders have the option to require us to repurchase our $120.0 million 0.75% Notes at a price equal to 100% of the principal amount of the 0.75% Notes plus accrued and unpaid interest. Additionally, on or after December 15, 2008, we have the option of redeeming for cash at 100% of the principal amount all or part of the then outstanding 0.75% Notes plus accrued but unpaid interest.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk

We derive a portion of our revenues in foreign currencies, predominantly in Europe and Japan. In addition, a portion of our assets are held in nonfunctional currencies of our subsidiaries. We use currency forward contracts to manage a portion of the currency exposures created from our activities denominated in foreign currencies. Our hedging program is designed to reduce, but does not entirely eliminate, the impact of currency exchange rate movements.

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 for the year ended December 31, 2007.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures.

Affymetrix’s management carried out an evaluation, as required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as of the end of our last fiscal quarter. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q, such that the information relating to Affymetrix and its consolidated subsidiaries required to be disclosed in our Exchange Act reports filed with the SEC (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to Affymetrix’s management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

Affymetrix’s management carried out an evaluation, as required by Rule 13a-15(d) of the Exchange Act, with the participation of our Chief Executive Officer and our Chief Financial Officer, of changes in Affymetrix’s internal control over financial reporting. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that 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.

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.

We may not maintain profitability.

Although we were profitable for the year ended December 31, 2007, we incurred losses each year from our inception through the year ended December 31, 2002 and also for the year ended December 31, 2006. As a result, we had an accumulated deficit of approximately $62.2 million at March 31, 2008. We expect to continue experiencing fluctuations in our operating results and cannot assure sustained profitability.

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 do so. 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 or product mix. Additionally, license revenue may also be unpredictable and may fluctuate due to the timing of payments of non-recurring licensing fees. Because our expenses are largely fixed in the short to medium term, any material shortfall in 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:

· competition

· 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 that affect our customers;

· decreased spending by our target customers in our products for any reason;

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

· 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.

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 experience fluctuations in demand for our products or make improvements in our technological capabilities that may impact our manufacturing capacity requirements.

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

For example, we have in the past, and may in the future, adjust our capacity based on business requirements, which may include the rationalization of our facilities, including the abandonment of long-lived manufacturing assets and additional charges related to a reduction in capacity. In February 2008, we implemented a restructuring plan in order to optimize our production capacity and cost structure to enable us to increase our future gross margins. We intend to move, by the end of 2008, the majority of our probe array manufacturing from our West Sacramento, California facility to our Singapore facility.

We may lose customers or experience lost sales if we are unable to manufacture or experience delays in the manufacture of our products, or if we are unable to 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 experience delays in the manufacture of our products or fail to ensure their proper performance or quality.

We developed a new probe array manufacturing facility in Singapore. Manufacturing and product quality issues may arise at the new Singapore facility as we increase production rates 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 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’ 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. We cannot assure you that we will be able to maintain our technological advantages over emerging technologies in the future. 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 continual 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 less competitive, 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.

We may not realize the expected benefits of our initiatives to reduce costs across our operations.

We are pursuing and may continue to pursue a number of initiatives to reduce costs across our operations. These initiatives include workforce reductions in certain areas and the rationalization of our facilities. We consolidated our Bedford, Massachusetts based instrumentation manufacturing and development facility with our manufacturing facility in West Sacramento, California. Implementation of the workforce severance and relocation elements of the Bedford facility closure continued through fiscal 2007. In 2007, we implemented workforce reductions in certain areas in Santa Clara, California. In February 2008, we implemented a restructuring plan in order to optimize our production capacity and cost structure to enable us to increase our future gross margins. We intend to move, by the end of 2008, the majority of our probe array manufacturing from our West Sacramento, California facility to our Singapore facility. We anticipate that we will incur some level of restructuring charges through the end of 2008 as we continue to implement these initiatives.

We may not realize the expected benefits of our current and future initiatives to reduce costs. As a result of these initiatives, we expect to incur restructuring or other charges and we may experience disruptions in our operations, a loss of key personnel and difficulties in delivering products in a timely manner.

Future acquisitions may disrupt our business and distract our management.

We have engaged in acquisitions, including our acquisition of USB Corporation in 2008 and ParAllele BioScience, Inc. in 2005. We will continue to evaluate future acquisitions that we believe to be of strategic importance. Future acquisitions could involve our use of a material portion of our existing cash balance and could limit other potential uses of our cash. If we incur indebtedness in connection with our acquisitions, we may significantly increase our interest expense, leverage and debt service requirements. To the extent we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders would be diluted.

We may not be able to successfully integrate an acquired business into our existing business or an acquired product into our existing product offerings in a timely and non-disruptive manner, or at all, and we could fail to commercialize an acquired technology. Furthermore, an acquisition may not produce the revenues, cost savings, earnings or business synergies that we anticipate. Our due diligence process could fail to identify problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues with the associated intellectual property, product quality or accounting practices. Other challenges could include unanticipated incompatibility of corporate cultures, an inability to retain key employees, including key scientists, the diversion of management’s attention from ongoing business concerns, and the potential adverse reaction of customers or other business partners to an acquisition or resulting changes to the combined company’s product and services offerings. Pre-existing liabilities that we assume in connection with an acquisition could be materially larger than we anticipate. We may face litigation or other claims in connection with an acquisition, or we may inherit claims or litigation risk as a result of an acquisition. If a past or future acquisition fails to meet our expectations, we may need to recognize a goodwill impairment charge. The final valuation of purchased assets and liabilities could impact our future operating results, including our gross margins.

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. If we are unable to hire, train and retain a sufficient number of qualified employees, we will not be able to expand our business or our business could be adversely affected.

We also rely on our scientific advisors and consultants to assist us in formulating our research, development and commercialization strategy. All of these individuals are engaged by other employers and have commitments to other entities that may limit their availability to us.

We expect to face increasing competition.

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

For example, companies such as Agilent Technologies, Applied Biosystems 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 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.

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

There have been new accounting pronouncements that may have an impact on our future financial position and results of operations. For instance, 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 recognizes 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 measures 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. We adopted FIN 48 effective January 1, 2007. See Note 15 to the Condensed Consolidated Financial Statements in Item 8 of Part II for further details.

Our effective tax rate may vary significantly.

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

Certain jurisdictions have lower tax rates, and the amount of earnings in these jurisdictions may fluctuate. If we do not have profitable operations in these jurisdictions, our tax rate could be adversely impacted. Changes in tax laws and regulatory requirements in the countries in which we operate could have a material impact on our tax provision. To the extent that we are unable to continue to reinvest a substantial portion of our profits in our foreign operations, we may be subject to additional effective income tax rate increases in the future. Tax authorities may challenge the allocation of profits between our subsidiaries and we may not prevail in any such challenge. If we were not to prevail, we could be subject to higher tax rates or double tax.

We rely on our ability to project future taxable income to assess the likelihood that our net deferred tax asset 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 any valuation allowance to be recorded against our net deferred tax assets. Changes in the amount of valuation allowance required may adversely impact our financial results of operations.

Other factors that could affect our effective tax rate include levels of research and development spending and nondeductible expenses such as stock based compensation or merger related expenditures, and ultimate outcomes of income tax audits.

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 enabling informed disease management options in the treatment of disease.

The clinical applications of GeneChip® technologies for diagnosing and enabling informed disease management options in 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 enabling informed disease management options in the treatment of disease, there can be no certainty of the technical or commercial success our technologies will achieve in such markets.

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 required approvals.

Our planned upgrade to our information systems could disrupt our internal operations, which could harm our revenues and increase our expenses.

We are in the process of upgrading our enterprise resource accounting information system. We plan to integrate a substantial portion of our business and finance activities into the upgraded system during the first quarter of fiscal year 2008. Due to the size and complexity of our business, the conversion process will be very challenging. Any disruptions and problems that occur during the system conversion could adversely impact our ability to conduct our business, including taking customer orders, manufacturing and shipping our products, billing and collecting customer receivables and reporting our operating results. Even if we do succeed, the implementation may be more costly than we anticipated.

We may not successfully obtain or retain 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 is 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.

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 payer 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 we cannot assure you 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 you 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 choose to pursue litigation or interferences against those that have infringed on our patents, or used them without authorization, due to the associated expense and time commitment of monitoring these activities.

If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our results of operations. Legal actions to enforce our patent rights can be expensive and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could also result in the invalidation of our patents or a finding that they are unenforceable. In addition, we have incurred and may in future periods incur substantial costs in litigation to defend against patent suits brought by third parties. 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 Note 10 to the Condensed Consolidated Financial Statements in Item 1, Commitments and Contingencies of this Form 10-Q].

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. We routinely receive notices claiming 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. Relying on our 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

· some of our agreements have expired and 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 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 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.

The market price of our common stock has been volatile.

The market price of our common stock is volatile. From April 1, 2007 through May 2, 2008, the volume of our common stock traded from 255,600 to 25,474,600 shares. Moreover, during that period, our common stock traded as low as $10.68 per share and as high as $31.60 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.

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.

During 2006, we 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 restated our consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 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 have been, and 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 and we have received notice from the IRS that it is conducting an employment tax audit for the 2005 and 2006 tax years. 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.

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

Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. Our short-term investments consist primarily of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. While as of the date of this filing, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents or short-term investments since March 31, 2008, no assurance can be given that further deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or short-term investments or our ability to meet our financing objectives.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number		Description of Document
10.31(1)		Settlement and Release Agreement dated January 9, 2008 between the Company and Illumina, Inc.
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 10-K as filed on February 29, 2008 (File No. 000-28218)

PART I. FINANCIAL INFORMATION			3

	Item 1.	Financial Statements (Unaudited)	3

		Condensed Consolidated Balance Sheets at March 31, 2008 and December 31, 2007	3

		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007	4

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

	Item 4.	Controls and Procedures	28

PART II. OTHER INFORMATION			28

	Item 1.	Legal Proceedings	28

	Item 1A.	Risk Factors	29

	Item 5.	Other Information	38

	Item 6.	Exhibits	38

SIGNATURES			39

	By:	/s/ JOHN C. BATTY
	Name:	John C. Batty
	Title:	Executive Vice President and Chief Financial Officer

May 12, 2008

Date: May 12, 2008	/s/ STEPHEN P.A. FODOR, PH.D.
	Name: Stephen P.A. Fodor, Ph.D.
	Title: Founder, Chairman and Chief Executive Officer

Date: May 12, 2008	/s/ JOHN C. BATTY
	Name: John C. Batty
	Title: Executive Vice President and Chief Financial Officer

Date: May 12, 2008	/s/ STEPHEN P.A. FODOR, PH.D.
	Name: Stephen P.A. Fodor, Ph.D.
	Title: Founder, Chairman and Chief Executive Officer