This Management's Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 should be read in conjunction with our financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q and 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, 2008.

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. Actual results or business conditions may differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, risks associated with our ability to offer new products and technologies; our capacity to identify and capitalize upon emerging market opportunities; market acceptance of our products versus those of our competitors; uncertainties related to cost and pricing of Affymetrix products; fluctuations in overall capital spending in the academic and biotechnology sectors; changes in government funding policies; our dependence on collaborative partners; the size and structure of our current sales, technology and technical support organizations; uncertainties relating to our suppliers and manufacturing processes; our ability to achieve and sustain higher levels of revenue, improved gross margins and reduced operating expenses; personnel retention; global credit and financial market conditions; uncertainties relating to Federal and Drug Administration ("FDA") and other regulatory approvals; risks relating to intellectual property of others and the uncertainties of patent protection and litigation; volatility of the market price of our common stock; and unpredictable fluctuations in quarterly revenues.

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. 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 academic research centers, government research laboratories, private foundation laboratories and clinical reference laboratories, as well as to pharmaceutical, biotechnology, agrichemical, diagnostics and consumer products companies 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 three of the key elements of our business strategy and our goals:

Expanding into new markets. We intend to generate top-line revenue growth by successfully commercializing our technologies and expanding our customer base, including by leveraging our established and newly acquired technologies to enter new markets. We believe that the genotyping market will continue to be one of the most attractive growth opportunities in life sciences and that new content packaged in versatile formats will drive growth. Other opportunities include emerging cytogenetic and copy number and our Drug Metabolizing Enzymes and Transporters product which we believe addresses a significant unmet need for our pharmaceutical partners. We see opportunities in applications that are downstream from genome-wide analysis, particularly in validation and routine testing.

Re-engineering our technology platform. We intend to combine automated instrumentation, powerful new biological assays, and new array designs and content to significantly expand our product line. The new GeneTitanTM System, our next generation mid-to-high end instrumentation platform enables significantly increased efficiency and throughput for researchers conducting array-based experiments. This fully automated solution enables higher data quality by removing or minimizing many of the sources of variation in the laboratory. In addition to our cartridge based formats, we are transitioning many of our legacy products to the new "peg" array format. We intend to provide ann expanded menu of gene expression and genotyping applications.

Improving operating leverage. Starting in February 2008, we implemented a restructuring plan in order to optimize our production capacity and cost structure to enable us to decrease our cost of manufacturing and operating expenses. We have substantially completed the move of our probe array manufacturing to our Singapore facility and our reagent manufacturing to our Cleveland facility, as well as the outsourcing of our instrument manufacturing operations.

Critical Accounting Policies & Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management has discussed the development, selection and disclosure of significant estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions.

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, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. There have been no significant changes during the nine months ended September 30, 2009 in our critical accounting policies and estimates compared to the disclosures in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Accounting and Financial Reporting Developments

In June 2009, the Financial Accounting Standards Board ("FASB") established the FASB Accounting Standards Codification ("FASB ASC") as the source of authoritative accounting principles recognized by the FASB. The FASB will issue new standards in the form of Accounting Standards Updates ("FASB ASUs"). FASB ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and therefore is effective for us in the third quarter of fiscal 2009. The issuance of FASB ASC does not change GAAP and therefore the adoption of FASB ASC only affects the specific references to GAAP literature in the notes to our consolidated financial statements.

In October 2009, the FASB issued FASB ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force." This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. The Company is currently assessing the impact on its consolidated results of operations and financial condition.

In August 2009, the FASB issued FASB ASU No. 2009-05, an update to ASC 820, Fair Value Measurements and Disclosures, which addressed the fair value measurements of liabilities when quoted prices in an active market for identical liabilities are not available. FASB ASU 2009-05 clarifies the concept that a fair value measurement should be based on hypothetical transfer at the measurement date, even for liabilities that are generally never transferred, but are settled directly with the creditor. Quoted prices of similar liability or of the liability when it is traded as an asset should also be considered when determining the liability's fair value. The provisions of FASB ASU 2009-05 are effective for the first reporting period beginning after the issuance of the FASB ASU and are not expected to have an effect on its consolidated results of operations and financial condition.

In June 2009, the FASB issued guidance which amends certain FASB ASC concepts related to consolidation of variable interest entities ("VIE"). Among other accounting and disclosure requirements, this guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. The primary beneficiary assessment must be performed on a continuous basis. It also requires additional disclosures about an entity's involvement with a VIE, restrictions on the VIE's assets and liabilities that are included in the reporting entity's consolidated balance sheet, significant risk exposures due to the entity's involvement with the VIE, and how its involvement with a VIE impacts the reporting entity's consolidated financial statements. The Company will adopt this guidance in its first annual and interim reporting periods beginning after November 15, 2009. The Company is currently evaluating the impact of its pending adoption on its consolidated results of operations and financial condition.

Results of Operations

The following discussion compares the historical results of operations for the three and nine months ended September 30, 2009 and 2008, respectively.

Product Sales (in thousands, except percentage amounts)

The components of product sales are as follows:

                        Three Months Ended          Dollar         Percentage         Nine Months Ended          Dollar         Percentage
                           September 30,            change        change from           September 30,            change        change from
                         2009          2008        from 2008          2008           2009          2008         from 2008          2008
Consumables           $   62,000     $ 59,804     $     2,196                4 %   $ 183,809     $ 187,420     $    (3,611 )             (2 ) %
Instruments                4,172        6,148          (1,976 )            (32 )      14,389        16,360          (1,971 )            (12 )
Total product sales   $   66,172     $ 65,952     $       220                0     $ 198,198     $ 203,780     $    (5,582 )             (3 )

Total product sales increased in the third quarter of 2009 as compared to 2008. Consumables, which include probe arrays and reagents, increased primarily due to an increase in volume of sales of reagents developed by Panomics, Inc., which we acquired in December 2008, partially offset by lower average sales price and lower volume of sales in our probe arrays. The increase in consumables was partially offset by a decrease in instruments primarily due to lower average sales prices and lower volume of sales in our Probe Array systems and GeneChip® Scanners during the quarter compared to prior year.

For the nine months ended September 30, 2009, total product sales decreased. Consumables decreased primarily due to lower average sales prices and lower volume of sales of our probe arrays and a negative impact from foreign currency, partially offset by an increase in the volume of sales of reagents developed by Panomics, Inc., which we acquired in December 2008. Instrument sales decreased primarily due to lower unit sales of our Probe Array systems and GeneChip® Scanners.

Services (in thousands, except percentage amounts):

Total services revenue increased in the third quarter, and for the first nine months, of 2009 as compared to 2008, primarily due to an increase of $3.8 million in our scientific services business associated with several genotyping projects, including the Wellcome Trust Case Control Consortium and the National Institutes of Health.

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

                        Three Months Ended          Dollar        Percentage            Nine Months Ended          Dollar        Percentage
                          September 30,             change       change from              September 30,            change       change from
                        2009           2008       from 2008          2008              2009          2008        from 2008          2008
Royalties and
other revenue        $    2,118      $  3,105     $     (987 )            (32 )  %   $   6,430     $ 104,338     $  (97,908 )            (94 ) %

Royalties and other revenue decreased in the third quarter as compared to 2008 primarily due to a decrease in grant funding of $1.1 million which was partially offset by an increase in royalty fees of $0.3 million. For the first nine months of 2009, the decrease, as compared to 2008, is primarily attributable to the recognition of a one-time, non-refundable perpetual license to specified patents for $90 million in 2008. This license was due to the settlement of intellectual property litigation and includes no continuing or future obligations for the Company.

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

                           Three Months Ended        Dollar/Point         Nine Months Ended         Dollar/Point
                             September 30,              change              September 30,              change
                           2009          2008          from 2008         2009          2008          from 2008
Total gross margin on
product sales           $   35,444     $  33,605     $       1,839     $ 103,151     $ 113,199     $      (10,048 )
Total gross margin on
services                     4,759           341             4,418        13,448         5,397              8,051

Product gross margin
as a percentage of
products sales                  54 %          51 %               3            52 %          56 %               (4 )
Service gross margin
as a percentage of
services                        48 %           6 %              43            40 %          23 %               17

The increase in product gross margin in the third quarter of 2009 as compared to 2008 is primarily due to lower product costs from factory consolidations and non recurring plant consolidations costs incurred in Q3'08 attributable to the restructuring activities from the closing of the West Sacramento facility which was completed in the second quarter of 2009. This increase was partially offset by lower average selling prices in the third quarter of 2009.

For the first nine months of 2009, the decrease in product gross margin as compared to 2008 is primarily due to a 5.5 point decrease associated with closing our West Sacramento facility partially offset by higher factory utilization of 1.0 points and lower product costs. The remaining margin differential was primarily driven by a shift in revenue mix to lower margin products and a decline in average selling price of our consumables.

The increase in services gross margin in the third quarter, and for the first nine months ended, of September 30, 2009 as compared to 2008 is primarily due to higher revenue and lower costs per sample due to favorable overhead utilization.

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

                       Three Months Ended          Dollar         Percentage           Nine Months Ended          Dollar         Percentage
                          September 30,            change        change from             September 30,            change         change from
                        2009          2008        from 2008          2008              2009          2008        from 2008          2008
Research and
development          $   18,764     $ 20,739     $    (1,975 )            (10 )  %   $  60,408     $ 59,098     $     1,310                 2 %

The decrease in research and development expenses in the third quarter of 2009 as compared to 2008 was primarily due to lower headcount and a decrease in spending for masks, chips and supplies.

The increase for the first nine months of 2009 as compared to 2008 was primarily due to higher headcount and increased spending in supplies associated with our acquisitions in the second half of 2008.

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

                       Three Months Ended          Dollar         Percentage         Nine Months Ended          Dollar         Percentage
                          September 30,            change         change from          September 30,            change         change from
                        2009          2008        from 2008          2008            2009          2008        from 2008          2008
Selling, general
and administrative   $   30,608     $ 28,409     $     2,199                 8 %   $  96,276     $ 92,782     $     3,494                 4 %

The increase in selling, general and administrative expenses in the third quarter of 2009 as compared to 2008 was primarily due to increases of $0.8 million in compensation and benefits expense and $1.7 million in legal expenses. These increases were partially offset by decreases in facilities, utilities and rent expenses of $0.3 million as a result of site consolidation efforts and staff-related expenses of $0.4 million.

For the first nine months of 2009, selling, general and administrative expenses increased as compared to 2008, primarily due to increases of $1.0 million in stock-based compensation and $6.1 million in legal expenses, partially offset by decreases of $1.3 million in consulting and purchased services, $0.7 million in compensation and benefits expense and $1.0 million in staff-related expenses.

Restructuring charges (in thousands, except percentage amounts):

Three Months Ended Dollar Percentage Nine Months Ended Dollar Percentage September 30, change change from September 30, change change from 2009 2008 from 2008 2008 2009 2008 from 2008 2008 Restructuring charges $ (296 ) $ 14,571 $ (14,867 ) (102 ) % $ 1,897 $ 29,379 $ (27,482 ) (94 ) %

In February 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 plan involved the closure of our West Sacramento manufacturing facility after which all of our products will be manufactured at our Singapore and Ohio facilities, as well as by third parties. We substantially completed the closure of the West Sacramento facility in the second quarter of 2009.

During the three months ended September 30, 2009, a restructuring benefit of $0.3 million was recognized as certain employee termination benefits were not paid out as had previously been estimated. This is compared to the three months ended September 30, 2008 in which we recognized $14.6 million in restructuring charges, which were primarily related to the abandonment and impairment of certain manufacturing assets in connection with the 2008 Plan. These expenses are presented as a component of "Restructuring charges" in our Consolidated Statements of Operations.

During the nine months ended September 30, 2009, we recognized a total of $2.5 million in restructuring expenses, primarily related to employee termination benefits, partially offset by approximately $0.6 million in restructuring credit related to the 2006 and 2008 restructuring plans, compared to $29.4 million in 2008, of which $25.8 million is related to non-cash charges associated with the abandonment of certain long-lived assets. These expenses are presented as a component of "Restructuring charges" in our Consolidated Statements of Operations.

We estimate the total restructuring expenses to be incurred in connection with the 2008 Plan will be approximately $45.1 million. Of this total, approximately $8.4 million relates to employee severance and $36.7 million relates to non-cash charges associated with the abandonment and impairment of certain long-lived manufacturing assets. The costs relating to employee severance and relocation are being recognized as expense over the remaining service periods of the employees. Through September 30, 2009, we have recognized total restructuring costs of $45.0 million.

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

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

                        Three Months Ended          Dollar         Percentage           Nine Months Ended          Dollar         Percentage
                           September 30,            change        change from             September 30,            change        change from
                        2009           2008        from 2008          2008              2009          2008        from 2008          2008
Interest income       $     910      $  3,442     $    (2,532 )            (74 )  %   $   3,538     $ 11,739     $    (8,201 )            (70 ) %
Realized (loss)
gain on equity
investments, net            135          (491 )           626              127             (946 )   $  1,219          (2,165 )           (178 )
Currency (loss)
gain, net                  (344 )      (1,268 )           924               73           (2,177 )   $ (2,154 )           (23 )             (1 )
Other                        73           (11 )            84              764              875     $     26             849            3,265
Total interest
income and other,
net                   $     774      $  1,672     $      (898 )            (54 )      $   1,290     $ 10,830     $    (9,540 )            (88 )

Interest income and other, net decreased in the third quarter, and for the first nine months, of 2009 as compared to 2008 primarily due to decreased interest income resulting from lower average cash balances and lower rates of return.

Interest Expense (in thousands, except percentage amounts):

Interest expense decreased in the third quarter, and for the first nine months, of 2009 as compared to 2008, primarily due to the lower aggregate principal balance of the senior convertible notes resulting from our repurchases of $119.9 million in aggregate principal amount of our 0.75% senior convertible notes due 2033 in December 2008 and $69.1 million in aggregate principal amount of our 3.50% senior convertible notes due 2038 during the second quarter of 2009.

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

                        Three Months Ended          Dollar         Percentage           Nine Months Ended          Dollar        Percentage
                          September 30,             change        change from             September 30,            change       change from
                       2009            2008        from 2008          2008              2009         2008        from 2008          2008
Income tax
(provision)
benefit              $    (408 )     $  1,802     $     2,210             (123 )  %   $ (1,310 )   $ (25,093 )   $  (23,783 )            (95 ) %

The provision for income tax increased approximately $2.2 million in the third . . .