UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

FOR THE TRANSITION PERIOD FROM          TO          .

COMMISSION FILE NO. 0-28218

AFFYMETRIX, INC.

(Exact name of Registrant as specified in its charter)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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):

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 AUGUST 3, 2012: 70,613,466

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AFFYMETRIX, INC.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AFFYMETRIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying Notes to the Condensed Consolidated Financial Statements

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AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying Notes to the Condensed Consolidated Financial Statements

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AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

See accompanying Notes to the Condensed Consolidated Financial Statements

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AFFYMETRIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying Notes to the Condensed Consolidated Financial Statements

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AFFYMETRIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(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 ("GAAP") 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 Balance Sheet as of June 30, 2012, the Condensed Consolidated Statements of Operations, Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011 and Cash Flows for the six months ended June 30, 2012 are unaudited. The Condensed Consolidated Balance Sheet as of December 31, 2011 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on February 28, 2012. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and the accompanying notes to those financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

There have been no material changes to the Company's significant accounting policies as compared to the significant accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 except as otherwise described below:

Business Combinations

The Company's condensed consolidated financial statements include the operations of an acquired business after the completion of the acquisition. The Company accounts for acquired businesses using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date, while transaction costs are expensed as incurred, except for any debt and equity issuance costs. The measurement of fair value of assets acquired and liabilities assumed requires significant judgment. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill.

Goodwill and Intangible Assets

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Goodwill and intangible assets with indefinite lives are not subject to amortization, but are tested for impairment on an annual basis during the fourth quarter or whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable. The Company first conducts an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it then conducts a two-step test for impairment of goodwill. In the first step, the Company compares the fair value of its reporting units to their carrying values. If the fair values of the reporting units exceed the carrying value of the net assets, goodwill is not considered impaired and no further analysis is required. If the carrying values of the net assets exceed the fair values of the reporting units, then the second step of the impairment test must be performed in order to determine the implied fair value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value, then an impairment loss equal to the difference would be recorded. For 2012, the Company will perform its annual goodwill impairment test during the fourth quarter of 2012, unless other indicators arise that would require analysis prior to the fourth quarter. No indicators have arisen as of June 30, 2012.

NOTE 2-ACQUISITION

Purchase price

The Acquisition Date purchase price totaled $315.1 million of which $8.3 million was accounted for as share-based compensation expense while the remaining $306.8 million was allocated to the net assets acquired from eBioscience. The $8.3 million share-based compensation expense resulted from the accelerated vesting of certain eBioscience employee options immediately prior to the Acquisition and has been recognized in the accompanying Condensed Consolidated Statement of Operations under Selling, general and administrative expenses for the three months ended June 30, 2012. The Acquisition was financed through a combination of cash on hand, the liquidation of available-for-sale securities, proceeds from third-party financing (the "Term Loan") and the issuance of 4.00% Convertible Senior Notes (the "4.00% Notes"). Refer to Note 9. "Long-Term Debt Obligations" for further information.

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

Fair values of assets acquired and liabilities assumed

The determination of the fair values of the assets acquired and liabilities assumed has been prepared on a provisional basis and changes to that determination may occur as additional information becomes available. The following table summarizes the provisional fair values of assets acquired, liabilities assumed and goodwill (in thousands):

The inventories acquired include a step-up in basis of approximately $30.4 million, which represents the fair value of the inventory less a reasonable profit margin on costs to complete and sell. The $30.4 million step-up in basis will be recognized as the inventory is sold, which is expected to be over approximately twelve months. As noted earlier, the fair value of the acquired inventories is provisional pending completion of the final valuation of these assets.

Intangibles

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

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

Purchased intangible assets are finite-lived intangible assets and are being amortized over their estimated useful lives. License fees represent licenses to technology covered by patents owned by third parties and are being amortized over their contractual terms.

Deferred tax liabilities

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

Goodwill

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

Liabilities

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

Transaction costs

Share-based compensation costs

The share-based compensation expense of $8.3 million recognized for the accelerated vesting of certain eBioscience options immediately vested prior to the Acquisition was recognized in the accompanying Condensed Consolidated Statement of Operations as Selling, general and administrative expense in the three and six month periods ended June 30, 2012.

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Pro Forma Financial Information (Unaudited)

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

 

NOTE 3-FAIR VALUE

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.

A fair value hierarchy was established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are as follows:

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 in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities 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; or

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.

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Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 (in thousands):

The Company's Level 2 input assumptions are determined based on review of third-party sources.

The fair value of the Company's foreign currency derivative assets and liabilities is determined based on the estimated consideration the Company would pay or receive to terminate these agreements on the reporting date. The foreign currency derivative assets and liabilities are located in other current assets and accrued liabilities, respectively, in the Condensed Consolidated Balance Sheets.

As of June 30, 2012 and December 31, 2011, the Company had no financial assets or liabilities measured on a recurring basis requiring Level 3 classification, including those that have unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets and liabilities.

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NOTE 4-FINANCIAL INSTRUMENTS

Investments in Debt and Equity Securities

The fair values of the Company's available-for-sale securities are based on quoted market prices and are included in cash and cash equivalents, available-for-sale securities-short-term and available-for-sale securities-long-term on the accompanying Condensed Consolidated Balance Sheets based on each respective security's maturity.

As described in further detail in Note 2. "Acquisition", during the three months ended June 30, 2012, the Company liquidated the majority of its available-for-sale securities as part of the Acquisition. The available-for-sale securities were sold for total cash consideration of $52.0 million and the resulting net gain on sale of $0.5 million was recognized in Interest income and other, net in the accompanying Condensed Consolidated Statements of Operations.

The following is a summary of available-for-sale securities as of June 30, 2012 (in thousands):

The following is a summary of available-for-sale securities as of December 31, 2011 (in thousands):

Contractual maturities of available-for-sale securities as of June 30, 2012 and December 31, 2011 are as follows (in thousands):

The Company recognized no significant net realized gains and losses during the three months and six months ended June 30, 2011. Realized gains and losses are included in Interest income and other, net in the accompanying Condensed Consolidated Statements of Operations.

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Derivative Financial Instruments

The Company derives a portion of its revenues in foreign currencies, predominantly in Europe and Japan, as part of its ongoing business operations. In addition, a portion of its assets are held in the nonfunctional currencies of its subsidiaries. The Company enters into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. The Company's foreign currency forward contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. The Company's accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company recognizes derivatives on its Condensed Consolidated Balance Sheets at fair value. The effective portions of designated cash flow hedges are recorded in other comprehensive income ("OCI") until the hedged item is recognized in earnings. As of June 30, 2012, the Company's existing foreign currency forward exchange contracts mature within 12 months. The deferred amount related to the Company's derivatives currently recorded in OCI and expected to be recognized into earnings over the next 12 months is a net gain of $0.6 million. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in OCI associated with such derivative instruments are reclassified immediately into operations through other income and expense. Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as hedges of other transactions. The Company did not recognize any net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three and six months ended June 30, 2012 and 2011.

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As of June 30, 2012 and December 31, 2011, the total notional values of the Company's foreign currency forward contracts that mature within 12 months were as follows (in thousands):

The Company did not have any contracts that were not designated or qualifying as hedges as of June 30, 2012 and December 31, 2011.

As a result of the use of derivative instruments, the Company is exposed to the risk that the counterparties may be unable to meet the terms of the agreements. To mitigate the risk, only contracts with carefully selected highly-rated major financial institutions are entered into. In the event of non-performance by these counterparties, the asset position carrying values of the financial instruments represent the maximum amount of loss that can be incurred; however, no losses as a result of counterparty defaults are expected. The Company does not require and is not required to pledge collateral for these financial instruments. The Company does not enter into foreign currency forward contracts for trading or speculative purposes and is not party to any leveraged derivative instruments.

The following table shows the Company's foreign currency derivatives measured at fair value as reflected on the accompanying Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (in thousands):

The following table shows the effect, net of tax, of the Company's derivative instruments on the accompanying Condensed Consolidated Statements of Operations and OCI for the three and six months ended June 30, 2012 and 2011 (in thousands):

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(1)	Net change in the fair value of the effective portion classified in OCI

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 GeneAtlas^TM 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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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 GeneAtlas^TM 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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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:

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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

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

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

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

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 was recognized in 2012. In addition, currency losses decreased by $0.7 million primarily due to the strengthening of the U.S. dollar against other foreign currencies and the net results of our hedging activities. These increases were partially offset by a decrease in interest income of $0.7 million due to the sale of available-for-sale securities described above.

We continue to monitor the liquidity and financing activities of strategic non-marketable investments to determine if any impairment exists. It is uncertain whether or not we will realize any long-term benefits associated with these strategic investments.

INTEREST EXPENSE

Interest expense decreased during the three and six months ended June 30, 2012 as compared to the same periods in 2011 due to the repurchase of $91.6 million in aggregate principal amount of our 3.50% Notes in the first quarter of 2012. This decrease was partially offset by the acceleration of debt issuance costs totaling $0.3 million associated with the 3.50% Notes. Going forward, we expect interest expense will increase due to our increased debt obligations incurred in connection with the Acquisition.

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INCOME TAX PROVISION