The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and related notes thereto included elsewhere in this Report.
In addition to historical information, the following discussion contains forward-looking statements that are subject to certain risks and uncertainties, including those risks and uncertainties described in Item 1A of this Report. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to those risks and uncertainties. Overview
On July 1, 2010, pursuant to the terms of the Merger Agreement, by and among us, Symyx Merger Sub and Symyx , Symyx Merger Sub merged with and into Symyx, with Symyx surviving as our wholly owned subsidiary. Symyx's operating results are included in our consolidated financial statements and results of operations beginning July 1, 2010.
On May 19, 2011, we completed the Contur Acquisition, whereby Contur became our wholly owned subsidiary. Contur's operating results are included in our consolidated financial statements and results of operations beginning May 19, 2011.
On December 30, 2011, we completed the Velquest Acquisition, whereby VelQuest became our wholly owned subsidiary. VelQuest's operating results are included in our consolidated financial statements and results of operations beginning December 30, 2011.
On May 17, 2012, we acquired the HEOS software platform from Scynexis, Inc. The operating results of the HEOS platform are included in our consolidated financial statements and results of operations beginning May 17, 2012. On October 23, 2012, we completed the Aegis Acquisition, whereby Aegis became our wholly owned subsidiary. Aegis's operating results are included in our consolidated financial statements and results of operations beginning October 23, 2012.
On January 11, 2013, we completed the Vialis Acquisition. The information presented in this Report does not give effect to the Vialis Acquisition. Our Business
We develop and commercialize scientific informatics software products and services for industries and organizations that rely on scientific innovation to differentiate themselves in the marketplace. Historically, our products were primarily utilized by our customers' research organizations.
As a result of the Acquisitions, we increased the breadth and depth of our scientific product portfolio by extending our offerings beyond research and into development and manufacturing. In particular, the addition of the VelQuest suite of products gives us even greater capability downstream, extending our solutions into the quality assurance and quality control areas in large pharmaceutical companies. Aegis further expands our portfolio into downstream operations with new solutions for enterprise manufacturing process intelligence. In addition, we added systems integration capabilities with the Vialis Acquisition, which strengthened our position in the laboratory informatics software market and added capabilities in the downstream analytical development, quality control, and quality assurance and manufacturing areas.
The acquisition of the HEOS platform brought a cloud-based offering that enables more efficient and streamlined drug delivery collaborations, particularly with organizations leveraging contract research organizations and other groups for externalized R&D projects.
Collectively, our products and services are intended to optimize our customers' lab-to-commercialization value chains, from early research through development into manufacturing. Our software is used by our customers' scientists, biologists, chemists, engineers and information technology professionals to design, execute and manage scientific experiments in-silico or in the lab and to aggregate, mine, manage, analyze and interactively report on the scientific data from those experiments. Our solutions also enable the development process to scale more effectively and bring increased automation to the transition from development to manufacturing, manage quality control and quality assurance operations, and monitor process and product quality, thereby reducing compliance risk. The ability to integrate and access data from diverse data sources and to make that

information accessible throughout the scientific innovation value chain enables our customers to reduce costs, enhance productivity and more efficiently provide effective products to their customers that meet quality and compliance standards.
Today, we are the leading provider of scientific innovation lifecycle management software (SILM). Our customers include leaders from a variety of industries, including pharmaceutical, biotechnology, agricultural, energy, chemicals, aerospace, consumer packaged goods and industrial products, as well as various government and academic entities. We market our software products and services worldwide, principally through our direct sales force, augmented by the use of third party distributors. We are headquartered in San Diego, California and were incorporated in Delaware in 1993.
Description of Our Markets and Business
Our customers differentiate themselves through scientific innovation. As a result, innovation in the discovery, development and manufacturing of new products, compliance with applicable regulations, rapid, cost-effective commercialization of such products and the ability to protect the intellectual property therein is crucial to our customers' success. Therefore, they invest considerable resources in technologies that help identify productive new pathways for research projects, help develop new materials, increase the efficiency of discovery, development and manufacturing processes, and otherwise enable them to maximize the use of scientific data, information and knowledge. Our software solutions allow our customers to effectively design, plan and execute scientific experiments in a repeatable process and in compliance with regulations; leverage the vast amounts of information stored in both corporate databases and public data sources to optimize their processes and accelerate innovation; model, predict and analyze potential scientific outcomes; improve product and process understanding throughout development lifecycles; and access comprehensive, integrated and cross-referenced databases and reference works. The pharmaceutical and biotechnology industries are a very important part of our business. Our products have been widely adopted within the research functions of businesses in these industries, but less widely adopted by the development, quality assurance ("QA")/quality control ("QC") and manufacturing functions of such businesses. In addition, these markets present challenges due to industry consolidation, the maturity of these markets, patent expirations, reduction in the level of discovery research activity, increased competition, including competition from open source software, and outsourcing of research to other entities. The other industries to which we market our products, including energy, material, chemicals, agricultural, aerospace and consumer packaged goods, are earlier in the adoption curve for such scientific software products, which we view as both a challenge and an opportunity. Business Strategy
Scientific research and development organizations face several challenges that impact their ability to comply with applicable regulations, protect their intellectual property and rapidly and cost-effectively bring products to market. Scientific data is often found in disparate databases and research, development and manufacturing processes are disconnected, manually intensive, inefficient and repetitive. These challenges have made it incredibly difficult for organizations to manage their scientific innovation lifecycles in order to bring novel products to market faster, more efficiently and with lower compliance risk.
Our overall strategy is to deliver solutions that help organizations manage and optimize their scientific innovation lifecycles. Consequently, we are extending beyond our historically strong presence in research downstream into development and manufacturing, covering the entire lab-to-commercialization value chain; moving into new scientific domains, including biology; and expanding our presence outside of the pharmaceutical and biotech industries into other key industries such as food and beverage, fine and specialty chemicals, oil and gas and aerospace. We do this by addressing the core challenges faced by research and development and quality organizations, offering them an open enterprise-scale scientific software platform and a broad portfolio of scientific software applications leveraging our deep domain expertise in chemistry, biology and the materials sciences. We believe the combination of our enterprise platform and associated set of applications and services, such as electronic lab notebooks, the laboratory execution system ("LES"), process management informatics software, design modeling and simulation software, data management and informatics software, content and professional services, help optimize our customers' scientific innovation lifecycle.
We believe that the combination of our products with the products and domain expertise we gained as a result of the Acquisitions (most significantly the VelQuest product suite, and the Aegis process management informatics software) enables us to provide greater value to the development, QA/QC and manufacturing functions of our customers' organizations. Our plan is to continue to integrate and augment our offerings in order to further enhance the value of the products we acquired and the value of our products' collective portfolio to these organizations, thus enabling us to expand upon our presence in the research, development, quality control and quality assurance organizations of our existing customers. The VelQuest Acquisition extended

our software portfolio into pharmaceutical development, QA/QC, and manufacturing, offering significant productivity improvements, faster cycle times, lower operational costs and reduced compliance risks for regulated life sciences organizations. The Aegis Acquisition brought products that complement the Velquest product line by expanding our footprint in downstream operations with solutions for process intelligence. We also intend to continue to develop advanced analysis, scientific and reporting component collections in order to extend our platform's value to and use by our customers.
Our strategy also includes offering professional services to further tailor our enterprise platform to our customers' individual business needs, thereby increasing its utility and value. Because our enterprise platform is the underlying operating platform for many products in our broad portfolio, and integration with the applications obtained as part of the Acquisitions continues to be a development priority, we expect the use of these products to expand as the use of our platform grows, thus further increasing our sales and value to our customers. Our acquisition of Vialis, a leading systems integrator based in Liestal, Switzerland, added new services capabilities to our portfolio and further strengthened our position in the laboratory informatics software market Our enterprise platform is an open, scientifically aware platform. We partner with third party organizations and academic institutions which develop scientific software and services, and we enable and encourage these companies to develop applications that operate on our platform, further proliferating its utility and value to our customers.
We also focus on industries in markets where scientific innovation is a key differentiator, but the use of scientific software solutions has not been widely adopted. As we develop a greater presence in these markets, we believe our ability to attract additional customers will increase. Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We review our estimates on an on-going basis, including those related to income taxes and the valuation of goodwill, intangibles and other long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Our accounting policies are described in more detail in Note 1 to our consolidated financial statements included elsewhere in this Report. We have identified the following as the most critical accounting policies and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We generate revenue from the following primary sources:
• software licenses,

• post-contract customer support and maintenance services on licensed software (collectively referred to as "PCS"),

• content, and

• professional services.

Customer billings issued in connection with our revenue-generating activities are initially recorded as deferred revenue. We then recognize the revenue from these customer billings as set forth below and when all of the following criteria are met:

•            a fully executed written contract or purchase order has been
             obtained from the customer (i.e., persuasive evidence of an
             arrangement exists),


•            the contractual price of the product or services has been defined
             and agreed to in the contract or purchase order (i.e., price is
             fixed or determinable),


•            delivery of the product or service has occurred and no material
             uncertainties regarding customer acceptance of the delivered product
             or service exist, and

• collection of the purchase price from the customer is considered probable.

Software Licenses. We license software on a term and perpetual basis. When sold perpetually, our standard perpetual software licensing arrangements generally include twelve months of bundled PCS, while our standard term-based software licensing arrangements typically include PCS for the full duration of the term license. Because we do not have vendor-specific objective evidence ("VSOE") of the selling price of these undelivered elements, we recognize as revenue the entire fee for such perpetual and term-based licenses ratably over the term of the bundled PCS.
Renewal of PCS Under Perpetual Software Licenses. Our PCS includes the right to receive unspecified upgrades or enhancements and technical support. Fees from customer renewals of PCS related to previously purchased perpetual licenses are recognized ratably over the term of the PCS.
Content. Content is licensed on a term basis and provides customers with access to the licensed content over the term of the agreement. Revenue from these licensing arrangements is recognized ratably over the term of the agreement, which is typically twelve months and coincides with the term of the PCS and/or licensed software.
Professional Services. We provide certain services to our customers, including non-complex product training, installation, implementation and other professional services which are non-essential to the operation of the software. We also perform professional services for our customers designed to enhance the value of our software products by creating extensions to functionality to address a client's specific business needs. When sold separately, revenue from time and materials service engagements are generally recognized as the services are performed. Revenue from fixed fee service engagements are typically recognized as the services are performed using the percentage-of-completion method when we can reasonably estimate the level of effort required to complete our performance obligations under an arrangement and such performance obligations are provided on a best-efforts basis. For service arrangements that include provisions that create significant uncertainties (e.g. customer acceptance) or service deliverables wherein the level of effort to complete the services cannot be reasonably estimated, the associated revenue is recognized using the completed performance method.
Hosting Services. We are an application service provider ("ASP"), where we provide hosting services that allow customers access to software that resides on our servers. The ASP model typically includes an up-front fee and a monthly commitment from the customer that commences upon completion of the implementation through the remainder of the customer life. The up-front fee is the initial setup fee, or the implementation fee. The monthly commitment includes, but is not limited to, a fixed monthly fee or a transactional fee based on system usage that exceeds monthly minimums. We do not view the activities of signing the contract or providing initial setup services as discrete earnings events. Revenue is typically deferred until the date the customer commences use of our services, at which point the up-front fees are recognized ratably over the customer life of the customer arrangement. Multi-Element Arrangements. For multi-element arrangements that include software licenses, PCS, and non-essential installation and implementation services, the entire fee for such arrangements is recognized as revenue ratably over the term of the PCS or delivery of the services, whichever is longer. For multi-element arrangements that also include services that are essential to the operation of the software, the fee for such arrangements is generally deferred until the services essential to the operation of the software have been performed, at which point the entire fee for such arrangements is recognized as revenue ratably over the remaining term of the PCS or the delivery of the non-essential services, whichever is longer. We allocate the arrangement fee to the software-related elements and the non-software-related elements based upon the relative standard list price of the products and/or services that comprise each element, which is our best estimate of selling price. Royalty Income
We recognize royalty income based on reported sales by third party licensees of products containing the applicable licensed materials and intellectual property. Royalty revenue is recognized as these payments become due. Non-refundable royalties, for which there are no further performance obligations, are recognized when due under the terms of the applicable agreements. Royalty income is included in the royalty and other income, net line on the consolidated statements of operations.
Goodwill and Purchased Intangible Assets Our goodwill resulted from acquisitions in fiscal years 1999 through 2012. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually or as circumstances indicate that their value may no longer be recoverable. In accordance with ASC Topic 350, Intangibles-Goodwill and Other ("ASC Topic 350"), we review our goodwill and indefinite-lived intangible asset for impairment at least annually in our fiscal fourth quarter and more frequently if events or changes in circumstances occur that indicate a potential reduction in the fair value of our reporting unit and/or our indefinite-lived intangible asset below their respective carrying values. Examples of such events or circumstances include: a significant adverse change in legal factors or in the business climate, a significant decline in our stock price, a significant decline in our projected revenue or cash flows, an adverse action or assessment by a regulator, unanticipated

competition, a loss of key personnel, or the presence of other indicators that would indicate a reduction in the fair value of a reporting unit. Our goodwill is considered to be impaired if we determine that the carrying value of the reporting unit to which the goodwill has been assigned exceeds management's estimate of its fair value. Based on the guidance provided by ASC Topic 350 and ASC Topic 280, Segment Reporting, ("ASC Topic 280") management has determined that our company consists of one reporting unit given the similarities in economic characteristics between our operations and the common nature of our products, services and customers. Because we have only one reporting unit, and because we are publicly traded, we determine the fair value of the reporting unit based on our market capitalization as we believe this represents the best evidence of fair value. In the fourth quarter of fiscal year 2012, we completed our annual goodwill impairment test for the fiscal year ended December 31, 2012 and concluded that our goodwill was not impaired. Our conclusion that goodwill was not impaired was based on a comparison of our net assets as of December 31, 2012 to our market capitalization.
Because we determine the fair value of our reporting unit based on our market capitalization, our future reviews of goodwill for impairment may be impacted by changes in the price of our common stock. For example, a significant decline in the price of our common stock may cause the fair value of our goodwill to fall below its carrying value. Therefore, we cannot assure you that when we complete our future reviews of goodwill for impairment a material impairment charge will not be recorded.
Valuation of Indefinite-Lived Intangible Asset In connection with our acquisition of SciTegic in September 2004, we acquired the SciTegic trade name which was determined to be indefinitely lived. In accordance with ASC Topic 350, we review our indefinite-lived intangible asset for impairment at least annually in our fiscal fourth quarter and more frequently if events or changes in circumstances occur that indicate a potential reduction in the fair value of the asset below its carrying value. Examples of such events or circumstances include: a significant adverse change in legal factors or in the business climate, a significant decline in our stock price, a significant decline in our projected revenue or cash flows, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, or the presence of other indicators that would indicate a reduction in the fair value of an asset.
Our indefinite-lived intangible asset is considered to be impaired if we determine that the carrying value of the asset exceeds its estimated fair value. In the quarter ended December 31, 2012 we completed our annual indefinite-lived intangible asset impairment test and concluded that our indefinite-lived intangible asset was not impaired. We estimated the fair value of our indefinite-lived intangible asset utilizing a discounted cash flow analysis which considers the estimated future customer orders for our scientific informatics platform product line and the associated direct and incremental selling, marketing and development costs. Key assumptions included in the discounted cash flow analysis include projections of future customer order growth for our scientific informatics platform product line and developing an appropriate discount rate.
We cannot assure you that the underlying assumptions used to forecast the cash flows will materialize as estimated. For example, if our projections of future customer order growth do not materialize, the fair value of our indefinite-lived intangible asset may fall below its carrying value. Therefore, we cannot assure you that when we complete our future reviews of our indefinite-lived intangible asset for impairment that a material impairment charge will not be recorded. Impairment of Long-Lived Assets
We review long-lived assets to be held and used, including acquired intangible assets subject to amortization and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the market price of an asset or asset group, a significant adverse change in the extent or manner in which an asset or asset group is being used, the loss of legal ownership or title to the asset, significant negative industry or economic trends or the presence of other indicators that would indicate that the carrying amount of an asset or asset group is not recoverable.

A long-lived asset is considered to be impaired if the estimated undiscounted future cash flows resulting from the use of the asset and its eventual disposition are not sufficient to recover the carrying value of the asset. In order to estimate an asset's undiscounted future cash flows, we utilize our internal forecast of our future operating results and cash flows, our strategic business plans and anticipated future economic and market conditions. There are inherent estimates and assumptions underlying this information and management's judgment is required in the application of this information to the determination of an asset's undiscounted future cash flows. No assurance can be given that the underlying estimates and assumptions utilized in our determination of an asset's undiscounted future cash flows will materialize as anticipated.

Valuation of Marketable Securities
We invest in various types of securities, including obligations of U.S. government sponsored enterprises, commercial paper, certificates of deposits, corporate and municipal debt. In accordance with the accounting standard for fair value measurements, we classify our investments as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices that are observable for the asset or liability, either directly or indirectly. Fair values determined by Level 2 inputs utilize data points that are observable, and have active markets, for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. Fair values determined by Level 3 inputs utilize model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable. As noted in note "6. Fair Value Measurements" in Part II, Item 8 of this Form 10-K, a majority of our security holdings have been classified as Level 2. We assess our marketable securities for impairment under the guidance provided by ASC Topic 320, Investments-Debt and Equity Securities. Accordingly, we review the fair value of our marketable securities at least quarterly to determine if declines in the fair value of individual securities are other-than-temporary in nature. If we believe the decline in the fair value of an individual security is other-than-temporary, we write-down the carrying value of the security to its estimated fair value, with a corresponding charge against income. To determine if a decline in the fair value of an investment is other-than-temporary, we . . .