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 June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 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, 2011.
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 "goals," "expectations," "beliefs," "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, our capacity to identify and capitalize upon emerging market opportunities; risks relating to our ability to acquire new businesses and technologies and successfully integrate and realize the anticipated strategic benefits and cost savings or other synergies thereof, including our acquisition of eBioscience, in a cost-effective manner while minimizing the disruption to our business; risks that eBioscience's future performance may not be consistent with its historical performance; risks relating to our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness; risks relating to our ability to develop and successfully commercialize new products and services; 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; risks relating to our ability to achieve and sustain higher levels of revenue, higher gross margins and reduced operating expenses; uncertainties relating to technological approaches; global credit and financial market conditions; personnel retention; uncertainties relating to the U.S. Food and Drug Administration ("FDA") and other regulatory approvals; competition; risks relating to intellectual property of others and the uncertainties of patent protection and litigation; volatility of the market price of our common stock; unpredictable fluctuations in quarterly revenues; and the risk factors disclosed under Part I, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011. 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, except as required by law.
OVERVIEW
We develop, manufacture and sell products and services for genetic analysis to the life science research and clinical healthcare markets. Researchers around the world use our technology to better understand the role that genes play in disease, the effectiveness and safety of therapies and many other biological factors that affect human well-being. We sell our products to some of the world's largest pharmaceutical, diagnostic and biotechnology companies, as well as leading academic, government and not-for-profit research institutions and more than 25,000 peer-reviewed papers have been published based on work using our products. Including eBioscience, we have about 1,200 employees worldwide and maintain sales and distribution operations across the United States, Europe, Asia and Latin America.
We offer a comprehensive line of products for two principal applications: gene expression and genotyping. Our product sales consist primarily of sales of instruments and related consumables. We have three instrument systems, GeneTitan®, GeneChip® and GeneAtlas™, that include instruments, consumables and software. Our GeneChip® instruments run arrays packaged in cartridges and our GeneTitan® and GeneAtlasTM instruments run arrays packaged in a peg format. We also offer a variety of assays for gene expression targeting low- to mid-plex markets that are downstream of our whole genome arrays and a range of reagent kits that are compatible with our platforms as well as the products of other vendors.
As further discussed below, through our acquisition of eBioscience, we are now able to complement our traditional businesses with a stronger offering of reagents for cell and protein analysis, and augment our foundation in molecular diagnostics, including our cytogenics offering. eBioscience develops, manufactures and markets reagents and antibodies that are fundamental for research application in immunology, oncology, cell biology and stem cell biology.

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TABLE OF CONTENTS We completed an internal reorganization of our operations into business units at the end of 2011, including Expression, Genetic Analysis and Clinical Applications, and Life Science Reagents. The business units are designed to create a high level of focus for identifying and executing on opportunities in our target markets.
Expression
Our Expression business unit develops and markets our gene expression products and services, including our in vitro transcription ("IVT") arrays and our QuantiGene line targeted at low-to-mid-plex markets. Expression revenue as a percentage of total revenue is expected to decline over time as demand for expression products used in the discovery and exploration markets decline. Accordingly, we reported declining sales of IVT arrays that historically has represented more than half of expression revenue in recent years. Our primary goal in our expression business is to stabilize revenue by adding new products to our array-based expression portfolio and rejuvenating our mid-plex cell and tissue assays. We have also expanded the use of our GeneAtlasTM instrument, a desk-top entry-level microarray system, by widening the range of arrays that can be run on it. Genetic Analysis and Clinical Applications Our Genetic Analysis and Clinical Applications business unit develops and markets our genotyping and cytogenetics products. Our Axiom genotyping platform and SNP 6.0 products are targeted at the genotyping markets in human research and the agricultural biotechnology industry. In mid 2011, we launched our new CytoScan™ HD array which is targeted specifically at the cytogenetics market. We intend to continue to invest in cytogenetics and Axiom products in 2012 to continue growing our revenues in this business unit. Life Science Reagents
Our Life Science Reagents business unit develops and markets reagents, enzymes, purification kits and biochemicals used by life science researchers, and is primarily targeted at the life science reagent markets. Corporate
Our Corporate business unit primarily derives revenue from royalty arrangements, as well as field revenue from services provided by us to customers. We expect royalty revenue to decrease over time as fewer royalty arrangements are entered into and patents expire.
Acquisition of eBioscience Holding Company, Inc. On June 25, 2012, we completed our acquisition of eBioscience Holding Company, Inc. ( "eBioscience"), a privately-held company based in San Diego, California engaged in the development, manufacture and sale of flow cytometry and immunoassay reagents for immunology and oncology research and diagnostics (the "Acquisition") pursuant to an Amended and Restated Agreement and Plan of Merger dated May 3, 2012 (the "Acquisition Agreement").
We believe the Acquisition is a good strategic fit for Affymetrix, allowing us to expand our addressable markets and continue to diversify our business beyond genomics discovery into cell and protein analysis. We believe eBioscience will enable us to further expand into downstream markets where validation and testing activity leverages the results of basic discovery research to achieve a more thorough understanding of disease states, and ultimately, new and/or improved diagnostics and therapeutics.
We intend to operate eBioscience as a separate business unit to minimize or avoid any disruption of services, while taking advantage of immediate opportunities to create efficiencies. We expect to achieve certain commercial synergies between the two companies, including cross-selling opportunities and complementary distribution channels, as well as realize benefits from certain research and development synergies.
The Acquisition purchase price totaled $315.1 million, plus $17.2 million in other fees and expenses incurred since the transaction began, including $8.5 million of underwriting and financing fees, and was financed through a combination of cash on hand, the liquidation of available-for-sale securities, proceeds from a term loan (the "Term Loan") of aggregate principal amount of $85.0 million provided under our Senior Secured Credit Facility (the "Senior Secured Credit Facility") and the issuance of $105.0 million principal amount of our 4.00% Convertible Senior Notes due 2019 (the "4.00% Notes").

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TABLE OF CONTENTS During the three months ended June 30 2012, the contribution of the acquired eBioscience business to our total revenue was $1.4 million. The portion of total expenses and net income associated with the acquired eBioscience business, excluding purchase accounting adjustments, were not material to our results. Overview of the Second Quarter of 2012
In the second quarter of 2012, we reported $66.4 million in revenue, including $1.4 million from eBioscience, as compared to $64.7 million in the second quarter of 2011. The Company reported net income of approximately $30.9 million, or $0.43 per diluted share, in the second quarter of 2012 compared to a net loss of $3.7 million, or $0.05 per diluted share, in the same period of 2011. The second quarter of 2012 included certain non-recurring items: an income tax benefit related to the eBioscience acquisition of $44.7 million, acquisition-related non-recurring costs of $4.7 million, a share-based compensation charge of $8.3 million related to the acceleration of stock options held under eBioscience equity incentive plans, and the recovery of a $2.2 million note that was provided for in full during 2011.
Our primary goal in the second half of 2012 is to expand our revenue base by entering new markets, growing our customer base and successfully commercializing our established and acquired technologies, including from eBioscience. We continue shifting our focus to the validation, translational and routine testing markets which we believe are currently expanding at a higher compound annual growth rate than the discovery and exploration markets and will provide opportunities for more recurring revenue growth in the future. We seek to expand our product line with new products that combine automated instrumentation, powerful new biological assays, and new array designs and content.
CRITICAL ACCOUNTING POLICIES AND 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. Except as otherwise disclosed, during the three and six months ended June 30, 2012, there have been no significant changes 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, 2011.
RESULTS OF OPERATIONS
The following discussion compares the historical results of operations for the three and six months ended June 30, 2012 and 2011.

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REVENUE The components of revenue are as follows: Dollars in thousands Three Months Ended Dollar Percentage Six Months Ended Dollar Percentage June 30, change change June 30, change change 2012 2011 from 2011 from 2011 2012 2011 from 2011 from 2011 Consumables $ 54,691 $ 54,346 $ 345 1 % $ 108,479 $ 117,200 $ (8,721 ) (7 )% Instruments 3,814 3,798 16 0 8,517 8,407 110 1 Product sales 58,505 58,144 361 1 116,996 125,607 (8,611 ) (7 ) Services and other revenue 7,898 6,515 1,383 21 14,654 12,776 1,878 15 Total revenue $ 66,403 $ 64,659 $ 1,744 3 % $ 131,650 $ 138,383 $ (6,733 ) (5 )%

Total product sales increased $0.4 million in the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 primarily due to the partial period revenue from eBioscience of $1.4 million. Excluding eBioscience revenue, product sales were down $1.0 million resulting from lower overall chip sales volumes.
Total product sales decreased in the six months ended June 30, 2012 as compared to the same period in 2011 primarily due to decreased consumable sales resulting from lower overall chip and reagent sales volumes.
Services and other revenue increased for the three and six months ended June 30, 2012 primarily due to higher scientific services revenue and a one-time royalty payment that was received in the second quarter of 2012. The following table summarizes revenue per business unit:

Dollars in thousands Three Months Ended Dollar Percentage Six Months Ended Dollar Percentage June 30, change change June 30, change change 2012 2011 from 2011 from 2011 2012 2011 from 2011 from 2011 ) ) Expression $ 29,808 $ 32,507 $ (2,699 ) (8 % $ 62,122 $ 72,878 $ (10,756 ) (15 % Genetic analysis and clinical applications 20,140 17,227 2,913 17 38,970 35,482 3,488 10 Life science reagents 7,998 8,691 (693 ) (8 ) 16,199 17,540 (1,341 ) (8 ) Corporate 7,081 6,234 847 14 12,983 12,483 500 4 eBioscience 1,376 - 1,376 100 1,376 - 1,376 100 ) Total product sales $ 66,403 $ 64,659 $ 1,744 3 % $ 131,650 $ 138,383 $ (6,733 ) (5 % Percentage of revenue Three Months Ended Six Months Ended June 30, June 30, 2012 2011 2012 2011 Expression 45 % 50 % 47 % 53 % Genetic analysis and clinical applications 30 27 30 25 Life science reagents 12 13 12 13 Corporate 11 10 10 9 eBioscience 2 - 1 - Total product sales 100 % 100 % 100 % 100 %

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TABLE OF CONTENTS Expression During the three months ended June 30, 2012, Expression revenue decreased by $2.7 million primarily due to a decline in Genechip revenue of $2.8 million, which was driven by a lower average selling prices of our in vitro transcription (IVT) arrays, partially offset by an increase in volume. The decline in Expression revenue was partially offset by higher revenue of $0.6 million reported on our QuantiGene line products.
The decrease of $10.8 million in Expression revenue for the six months ended June 30, 2012 also was primarily driven by a decline in sales of $10.0 million of our IVT arrays, partially offset by an increase in average selling prices. Additionally, revenue from Expression instruments declined by $1.6 million due to lower average selling price. These decreases were partially offset by higher revenue of $1.0 million reported on our QuantiGene line products. Genetic Analysis and Clinical Applications Genetic Analysis and Clinical Applications revenue increased for the three months ended June 30, 2012 as compared to the same period in 2011, primarily due to a $7.1 million increase in revenue on our CytoGenetics products, partially offset by a decline in sales of our SNP 6.0 arrays. Revenue from clinical applications as a percentage of Genetic Analysis and Clinical Applications continued to increase. For the six months ended June 30, 2012, revenue also increased over the prior year period primarily due to increased revenue from clinical applications of $11.3 million as well as instrument sales of $2.0 million, partially offset by a decline in sales of our SNP 6.0 arrays of $7.4 million.
Life Science Reagents For the three and six months ended June 30, 2012, Life Science Reagents revenue decreased due to lower volume of sales. Corporate Corporate revenue increased during the three months ended June 30, 2012, driven primarily by a one-time royalty payment received of $0.8 million. We also recognized $0.7 million as revenue from gains from designated cash flow hedges compared to none during the same period in 2011.
For the six months ended June 30, 2012, Corporate revenue increased by $0.5 million due to the one-time royalty payment of $0.8 million and a realized gain of $1.2 million from designated cash flow hedges. These gains were partially offset by a decrease in revenue from service agreements of $1.4 million.

GROSS MARGIN Dollars in thousands Three Months Ended Dollar/Point Six Months Ended Dollar/Point June 30, change from June 30, change from 2012 2011 2011 2012 2011 2011 Total gross margin on product sales $ 34,142 $ 35,777 $ (1,635 ) $ 69,068 $ 79,341 $ (10,273 ) Total gross margin on services and other revenue 4,579 3,089 1,490 4,968 3,141 1,827 Product gross margin as a percentage of products sales 58 % 62 % (3 ) 59 % 63 % (4 ) Service and other revenue gross margin as a percentage of services and other revenue 58 % 47 % 11 34 % 25 % 9

Product gross margin decreased primarily due to lower volume of sales and product mix during the three and six months ended June 30, 2012 as compared to the same period in 2011. The decrease was partially offset by lower excess and obsolescence costs for products with finite lives and favorable cost absorption. Service gross margin increased in the three and six months ended June 30, 2012, as compared to the same period in 2011 primarily due to increased scientific service activity.

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RESEARCH AND DEVELOPMENT EXPENSES Dollars in thousands Three Months Ended Dollar Percentage Six Months Ended Dollar Percentage June 30, change change June 30, change change

2012 2011 from 2011 from 2011 2012 2011 from 2011 from 2011 Research and ) ) development $ 13,588 $ 15,298 $ (1,710 ) (11 % $ 26,919 $ 31,566 $ (4,647 ) (15 %

The decrease in research and development expenses for the three and six months ended June 30, 2012 as compared to the three and six months ended June 30, 2011 was primarily due to savings in headcount-related expenses totaling $1.9 million and $2.9 million, respectively, due to lower headcount and lower variable compensation costs of $0.1 million and $0.8 million, respectively. These decreases were partially offset by increases in spending on supplies related to various projects of $0.6 million and $0.3 million, respectively, and consulting and purchased services of $0.3 million and $0.4 million, respectively, during the three and six months ended June 30, 2012 as compared to the same periods in 2011.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Dollars in thousands Three Months Ended Dollar Percentage Six Months Ended Dollar Percentage June 30, change change June 30, change change 2012 2011 from 2011 from 2011 2012 2011 from 2011 from 2011 Selling, general and administrative $ 40,526 $ 26,675 $ 13,851 52 % $ 68,450 $ 53,887 $ 14,563 27 %

The increase in selling, general and administrative expenses in the three and six months ended June 30, 2012 as compared to the three and six months ended June 30, 2011 was primarily due to increased costs incurred in association with our acquisition of eBioscience of $4.7 million and $5.8 million, respectively, as well as an $8.3 million share-based compensation charge recorded at the Acquisition Date due to the acceleration of the eBioscience stock options. These increases during the three and six months ended June 30, 2012 were partially offset by lower headcount-related expenses totaling $1.5 million and $0.6 million, respectively, due to lower headcount and reduced spending on supplies of $0.2 million and $0.7 million, respectively, as a result of the timing of spending on various projects.
Variable compensation costs increased by $0.2 million for the three months ended June 30, 2012 but decreased overall by $0.8 million during the six months ended June 30, 2012.

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INTEREST INCOME AND OTHER, NET Dollars in thousands Three Months Ended Dollar Percentage Six Months Ended Dollar Percentage June 30, change change June 30, change change 2012 2011 from 2011 from 2011 2012 2011 from 2011 from 2011 ) ) Interest income $ 282 $ 639 $ (357 ) (56 % $ 579 $ 1,277 $ (698 ) (55 % Realized income (loss) on equity investments, net 477 (15 ) 492 3,280 522 (1,072 ) 1,594 149 Currency loss, net (751 ) (407 ) (344 ) (85 ) (1,069 ) (1,779 ) 710 40 Other 2,268 282 1,986 704 2,270 179 2,091 1,168 Total interest income and other, net $ 2,276 $ 499 $ 1,777 356 % $ 2,302 $ (1,395 ) $ 3,697 265 %

The change in interest income and other, net in the three months ended June 30, 2012 as compared to the same period in 2011 was primarily due to the receipt in cash of $2.2 million including accrued interest of a notes receivable that was previously fully reserved. Realized gains on sales of equity investments also increased by $0.5 million as a result of sales of available-for-sale securities to fund the Acquisition. These increases were partially offset by a decrease in interest income of $0.4 million due to a lower balance of available-for-sale securities in 2012 that were sold in connection with both the Acquisition and the repurchase of $91.6 million in aggregate principal amount of our 3.50% Senior Convertible Notes (the "3.50% Notes") in the first quarter of 2012. During the six months ended June 30, 2012, interest income and other, net increased primarily due to the receipt of $2.2 million for the notes receivable that was previously fully reserved for and the gain on sale of available-for-sale securities described above, as well as an expense of $1.2 million that was recorded during the first quarter of 2011 related to our non-marketable investment in a limited partnership fund whereas no such charge . . .