Forgive Affymetrix ( AFFX) for feeling a bit defensive.

The company that pioneered the technology to put widely used genetic information on silicon chips to screen molecules for possible therapeutic use is now facing growing competition from young upstarts and established companies alike. Company officials, accustomed to being treated like biotech royalty, aren't enjoying the experience.

The Bad News

The list of competitors lining up to grab a chunk of the fast-growing $500 million microarray market seems to grow weekly. In addition to giants like Corning ( GLW) and Motorola ( MOT), Affymetrix faces competition from newly floated companies like Illumina ( ILMN). And just last week, Japan's giant Mitsubishi Rayon said it had developed a low-cost method to manufacture DNA chips without infringing on Affymetrix patents.

Increasingly, Affymetrix is finding itself in court defending its patents, a costly and time-consuming (although not uncommon) aspect of business that drains management time and offers an unpredictable outcome. Legal combatants include Hyseq ( HYSQ), a company led by Amgen ( AMGN) founder George Rathmann, along with industry giants like Incyte Genomics ( INCY) and PE Biosystems ( PEB).

"Affymetrix has huge litigation costs and a lot of investors have stayed on the sidelines until it's settled out," says a major New York investment bank's biotech analyst, who asked to remain anonymous.

While most investors agree that Affymetrix has developed industry-leading technology and amply rewarded stockholders over time, worries about competition have cut its stock price in half over two months, to around $50. Resolving DNA chip-production problems and reaffirming that it would meet analysts' revenue projections this year did little to boost the flagging stock, though on Wednesday it did rise $4.88, or 11%, to $51.

Compounding the competition worries is news that Glaxo Wellcome ( GLX) may be preparing to sell its 22% stake in the Santa Clara, Calif., company, as it did with Canada's BioChem Pharma ( BCHE) in recent years. A spokesman for Glaxo would say only that its strategy is eventually to exit biotech investments.

Affymetrix CFO Edward Hurwitz wouldn't deny that competition is raising the stakes for the producers of the DNA chips and related high-tech tools increasingly used by drugmakers and research scientists. But the combative former stock analyst told a standing-room-only crowd of several hundred investors at a UBS Warburg life sciences company conference Wednesday that the interlopers have a lot to prove.

"There's been a lot of questions lately about competition," he said. "Next time people say they are moving into the microarray market, ask to see the data."

The Good News

With that, Hurwitz produced a barrage of statistics aimed at reassuring investors, asserting that Affymetrix technology is now used by most of the world's major pharmaceutical companies and more than 100 research institutions worldwide. Meanwhile, Affymetrix's ability to put gene segments on chips is growing by quantum leaps. The company, he said, expects to produce chips with 25,000 to 100,000 genes included on each, up from the current 13,000.

To bolster its range of offerings, Affymetrix announced this week that it would create a new company called Perlegen to focus on variations in human genes, using about $100 million in third-party financing. On Monday, it said it would buy Neomorphic, a private genomics company, for about $70 million in stock.

With some 250 high-tech companies presenting their wares at the UBS Warburg conference, some investors might be forgiven for feeling a bit confused. For instance, Eric Lander, the world-renowned genetic researcher from the Massachusetts Institute of Technology who played a pivotal role in the mapping of the human genome, told conferees Tuesday that the number of human genes is now thought to be less than 40,000. Previous estimates put the number anywhere from 100,000 to 300,000.

But then, who's counting? Genetic research, all agree, is still in the Wild West days: Hype abounds as companies hawk their prospects to money managers looking for the next big thing.

For instance, Roy Whitfield, CEO of Incyte, a leading genetics database company, said it had made "all of its customers raving fans and they are coming back for more." Later, Whitfield soberly said "the challenge for investors is sorting through all this hype." Presumably, however, he wasn't alluding to his own address.