**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

| **x** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31,2007**

 

**or**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the transition period from               to               **

 

**Commission File Number 000-50791**

** **

**SENOMYX,INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                     | **33-0843840**                       |
|------------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of incorporation   or organization) | (I.R.S. Employer Identification No.) |
|                                                             |                                 |
| **4767 Nexus Centre Drive   San Diego, California**              | **92121**                            |
| (Address of principal executive offices)                         | (Zip Code)                           |

 

**(858) 646-8300**

Registrant’s telephone number, including areacode

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title  of Each Class**                | ** ** | **Name  of Exchange on Which Registered** |
|-----------------------------------------|------------|-------------------------------------------|
| Common Stock, par value $.001 per share |       | The NASDAQ Stock Market LLC               |

 

Securities registered pursuant to Section 12(g) ofthe Act:

**None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.     Yes o   No x

 

Indicate by check if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.     Yes o   No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.  Yes  x  No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.   Large accelerated filer o          Accelerated filer x          Non-acceleratedfiler o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes  o No  x

 

As of June 30, 2007,the aggregate market value of the voting stock held by non–affiliates of theregistrant, computed by reference to the last sale price of such stock as ofsuch date on the NASDAQ Stock Market LLC, was approximately $351,844,000.Excludes an aggregate of 4,320,451 shares of common stock held by officers anddirectors and by each person known by the registrant to own 5% or more of theoutstanding common stock as of June 30, 2007. Exclusion of shares held byany of these persons should not be construed to indicate that such personpossesses the power, direct or indirect, to direct or cause the direction ofthe management or policies of the registrant, or that such person is controlledby or under common control with the registrant.

 

As of January 31, 2008,there were 30,506,900 shares of the registrant’s common stock outstanding.

 

**DOCUMENTS INCORPORATEDBY REFERENCE**

** **

Portions of the registrant’sdefinitive Proxy Statement for the 2008 Annual Meeting of Stockholders to befiled with the Securities and Exchange Commission pursuant to Regulation 14Anot later than 120 days after the end of the fiscal year covered by this Form 10-K,are incorporated by reference in Part III, Items 10-14 of this Form 10-K.

 

 

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**SENOMYX, INC.**

 

**Annual Report on Form 10-K**

**For the Fiscal Year Ended December 31, 2007**

 

**TABLE OF CONTENTS**

 
| ** **    | ** **                                                                                                          | **Page** |
|---------------|---------------------------------------------------------------------------------------------------------------------|----------|
| PART I   |                                                                                                                |     |
| Item 1.       | Business                                                                                                            | 3        |
| Item 1A.      | Risk Factors                                                                                                        | 25       |
| Item 1B.      | Unresolved  Staff Comments                                                                                          | 39       |
| Item 2.       | Properties                                                                                                          | 39       |
| Item 3.       | Legal  Proceedings                                                                                                  | 39       |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                                | 39       |
| PART II  |                                                                                                                |     |
| Item 5.       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 40       |
| Item 6.       | Selected  Financial Data                                                                                            | 42       |
| Item 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 43       |
| Item 7A. | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 56       |
| Item 8.       | Financial  Statements and Supplementary Data                                                                        | 57       |
| Item 9.       | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                               | 84       |
| Item 9A.      | Controls  and Procedures                                                                                            | 84       |
| Item 9B.      | Other  Information                                                                                                  | 85       |
| PART III |                                                                                                                |     |
| Item 10.      | Directors,  Executive Officers and Corporate Governance                                                             | 86       |
| Item 11.      | Executive  Compensation                                                                                             | 86       |
| Item 12.      | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                     | 86       |
| Item 13.      | Certain  Relationships and Related Transactions, and Director Independence                                          | 86       |
| Item 14. | Principal  Accountant Fees and Services                                                                             | 86       |
| PART IV  |                                                                                                                |     |
| Item 15.      | Exhibits  and Financial Statement Schedules                                                                         | 87       |
|          |                                                                                                                |     |
| Signatures    |                                                                                                                | 91       |

 

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**SPECIAL NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

 

*Thisannual report on Form 10-K contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. All statements included orincorporated by reference in this annual report on Form 10-K other thanstatements of historical fact, are forward-looking statements. You can identifythese and other forward-looking statements by the use of words such as “may,” “will,”“could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or thenegative of such terms, or other comparable terminology. Forward-lookingstatements also include the assumptions underlying or relating to suchstatements.*

 

*Our actualresults could differ materially from those anticipated in these forward-lookingstatements as a result of various factors, including those set forth belowunder the caption “Risk Factors” in Part I Item 1A and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” in Part IIItem 7 of  this annual report on Form 10-Kand elsewhere in this annual report on Form 10-K.  Readers are cautioned not to place unduereliance on forward-looking statements. The forward-looking statements speak only as of the date on which theyare made and we undertake no obligation to update such statements to reflectevents that occur or circumstances that exist after the date on which they aremade except as required by law.*

 

**PART I**

 

**Item 1.    *Business***

 

**Overview**

 

We are a leading companyfocused on using proprietary taste receptor-based assays and screeningtechnologies to discover and develop novel flavors, flavor enhancers and tastemodulators, which we refer to as flavor ingredients, for the packaged food,beverage and ingredient industries. We believe our flavor ingredients willenable packaged food, beverage and ingredient companies to improve thenutritional profile of their products while maintaining or enhancing taste andgenerating cost of goods savings.**We license ourflavor ingredients to our collaborators on an exclusive or co-exclusive basis,which we believe will provide these companies with a competitive advantage. Wehave product discovery and development collaborations with seven of the world’sleading packaged food, beverage and ingredient companies: Ajinomoto Co., Inc.(“Ajinomoto”), Cadbury Schweppes (“Cadbury”), Campbell Soup Company (“Campbell”),The Coca-Cola Company (“Coca-Cola”), Firmenich SA (“Firmenich”), Nestlé SA (“Nestlé”)and Solae LLC (“Solae”). We currently anticipate that we will derive all of ourrevenues from existing and future collaborations. Depending upon thecollaboration, our collaboration agreements provide for upfront fees, researchand development funding, reimbursement of certain regulatory costs, milestone paymentsbased upon our achievement of research or development goals and, in the eventof commercialization, commercialization milestones, minimum periodic royaltiesand royalties on sales of consumer products incorporating our flavoringredients. Senomyx’s current programs focus on the development of savory,sweet and salt flavor enhancers, high potency sweeteners, bitter blockers andcooling agents.

 

Flavor ingredients aresubstances that impart or modulate tastes or aromas in foods and beverages.Individuals experience the sensation of taste when flavor ingredients in foodand beverage products interact with taste receptors in the mouth. A tastereceptor functions either by physically binding to a flavor ingredient in aprocess analogous to the way a key fits into a lock or by acting as a channelto allow ions to flow directly into a taste cell. As a result of theseinteractions, signals are sent to the brain where a specific taste sensation isregistered. There are currently five recognized primary senses of taste: umami,which is the savory taste of glutamate, sweet, salt, bitter and sour. Inaddition, there are secondary taste sensations, such as cool, hot and fat.

 

We are currently pursuingthe discovery and development of flavor ingredients through six programsfocused on savory, sweet, salt, bitter and cooling taste areas.  The goals of our savory program are toenhance the taste of naturally occurring glutamate and enable the reduction orelimination of added monosodium glutamate, or MSG. The goals of our sweetenhancer program are to enhance the taste of 

 

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natural and artificialsweeteners and enable a significant reduction in added sweeteners. The goals ofour salt program are to enhance the taste of salt and enable a significantreduction in added salt. The goals of our bitter taste modulation program areto reduce or block bitter taste and to improve the overall tastecharacteristics of packaged foods, beverages, over the counter, or OTC, healthcare products and pharmaceutical products. The goals of our high potencysweetener program are to allow for the reduction of calories in packaged foodsand beverages and to enable our collaborators to use product labelingreferencing “natural flavors.”  The goalof our cool flavor program is to discover novel cooling compounds for a varietyof applications.

 

Our internet address iswww.senomyx.com. We post links on our website to the following filings as soonas reasonably practicable after they are electronically filed with or furnishedto the Securities and Exchange Commission, or SEC: annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and anyamendment to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended. All such filingsare available through our website free of charge. Our filings may also be readand copied at the SEC’s Public Reference Room at 100 F Street, NEWashington, DC 20549. Information on the operation of the Public Reference Room maybe obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains anInternet website that contains reports, proxy and information statements, andother information regarding issuers that file electronically with the SEC. Theaddress of that site is www.sec.gov.

 

**Industry Background**

 

***Packaged Food and Beverage Industry***

 

Packaged food and beverageproducts include carbonated and non-carbonated beverages, frozen foods, snackfoods, ice cream, pasta, canned soup, pet food and numerous other products.According to recent data from Euromonitor International, an independentresearch organization, worldwide sales of packaged food and beverage productsin 2006, excluding pet food, were approximately $1.4 trillion, of which $284billion was generated in the United States. These figures represent growthrates of approximately 5% and 3%, respectively, over 2001 amounts.  Based on these estimates, of the worldwidetotal, sales of packaged foods were approximately $1.1 trillion and sales ofnon-alcoholic beverages were approximately $330 billion.  Additionally, according to recent data fromEuromonitor, the worldwide sales of pet food products in 2006 wereapproximately $30 billion.  Based onrecent data from Euromonitor, Information Resources, Inc. and reports fromour collaborators, we estimate that our collaborators’ combined worldwide salesin 2006 of their products that fall within their exclusive or co-exclusiveproduct fields were over $55 billion. Our collaboration agreements for retailand food service sales provide that we will receive royalties of up to 4% onour collaborators’ sales of products containing our flavor ingredients.However, we do not anticipate that our collaborators will incorporate ourflavor ingredients into all of their products within their exclusive productfields.

 

Each of our flavoringredients addresses large, potentially overlapping markets. The followingtable sets forth the four primary taste areas on which we are focused and, foreach taste area, provides examples of product categories that could incorporateingredients in those taste areas, estimated worldwide sales and our estimatesof the worldwide sales for food and beverage products of our existingcollaborators in their exclusive or co-exclusive product fields.

 

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| **Taste Areas** | ** ** | **Example Product Categories**                                                                                                                                                | ** ** | **2006 Estimated   Worldwide Sales(1)** | ** **  | **2006 Estimated   Revenues Of   Existing   Collaborators   In Exclusive   Product Fields(2)** | ** ** |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|-------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                 |       |                                                                                                                                                                                    |       |                                                   |        |                                                                                                                                        |       |
| Savory               |       | Ready meals,  sauces, spreads, frozen foods, beverages, meal replacements, soups, pastas,  dried foods, snack foods, processed meats, processed cheeses and cracker  products           |       | $                                                      | 419 billion |                                                                                                                                        | $          | 19.7 billion |   |
|                 |       |                                                                                                                                                                                    |       |                                                   |        |                                                                                                                                        |       |
| Sweet                |       | Confectionaries,  cereal, ice cream, beverages, yogurt, dessert, spreads and bakery products                                                                                            |       | $                                                      | 523 billion |                                                                                                                                        | $          | 18.0 billion |   |
|                 |       |                                                                                                                                                                                    |       |                                                   |        |                                                                                                                                        |       |
| Salt                 |       | Product  categories are the same as those set forth for savory taste area plus canned  foods and bakery products                                                                        |       | $                                                      | 427 billion |                                                                                                                                        | $          | 9.4 billion |   |
|                 |       |                                                                                                                                                                                    |       |                                                   |        |                                                                                                                                        |       |
| Bitter               |       | Products  which contain bitter tastants, including confectionary, beverages, ice cream,  ready meals, canned foods and soups, and products which utilize certain  artificial sweeteners |       | $                                                      | 506 billion |                                                                                                                                        | $          | 7.8 billion |   |

 

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(1)          According to recent Euromonitor data for packaged food and beverages,excluding pharmaceutical and OTC health care applications.

 

(2)          Based on recent data from Euromonitor, Information Resources, Inc.and reports from our collaborators.

 

According to Hill Consulting Group’s “Cooling Agents”report, annual sales of current cooling compounds are in the range of $400million, and we estimate the opportunity for flavor systems incorporatingimproved cooling agents may be three to four times that size.

 

***Flavor and Ingredient Supply Industry***

 

Flavors and ingredientsupplies are used in a variety of packaged food, beverage and ingredientproducts throughout the world. Flavors and ingredient supplies can originatefrom either naturally occurring or chemically synthesized compounds. Flavorsinclude compounds which impart a taste such as strawberry, vanilla or coolwhile ingredient supplies include food additives such as MSG and hydrolyzed soyprotein.  Flavor ingredients may be soldas part of a flavor system or in combination with another ingredient topackaged food and beverage companies. A flavor system can be a combination orvariety of flavors and ingredients, such as strawberry flavor andsweeteners.  Flavor systems can also comein several forms such as powder or liquid, and may be specially processed toincrease the functionality of the flavor.

 

While some packaged food,beverage and ingredient companies have their own internal research anddevelopment programs, most have traditionally relied on purchases of flavoringredients from third parties. Historically, flavor ingredients have been soldon a commodity basis by independent manufacturers who make their productsbroadly available to packaged food, beverage and ingredient companies on anon-exclusive basis. This has limited the ability of packaged food, beverageand ingredient companies to use flavor ingredients to differentiate theirbrands from competitors.

 

Traditionally, flavor andingredient supply companies have discovered new flavor ingredients primarilyusing inefficient, non-automated and labor-intensive trial and error processesinvolving a limited 

 

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number of trained tastetesters. Using this approach, taste testers must physically taste each potentialflavor ingredient to assess the taste characteristics of the compound. Tastetesters can assess only a limited number of potential flavor ingredients at onetime due to the sensory fatigue that results from repeated tasting. As aresult, only a small fraction of the available universe of ingredients can betested economically.

 

Flavors and ingredient supplies are regulated underprovisions of the Food, Drug and Cosmetic Act (or FD&C Act) administered bythe Food and Drug Administration (or FDA). Flavor ingredients sold in countries and regions outside the UnitedStates are also subject to regulations imposed by national governments orregional regulatory authorities, as is the case in the European Union.  For further discussion of the regulatoryregime for flavor and ingredient supplies, please see the “Regulatory” sectionbelow.

 

***High Potency Sweetener Industry***

 

Highpotency sweeteners have many functions in the food and beverage industry andare used in a wide variety of consumer product categories.  High potency sweeteners are commonly found insoft drinks, juices, confectionaries, low calorie foods and chewing gum.

 

As is the case with flavorand ingredient supply companies, high potency sweetener companies havetypically discovered new high potency sweeteners primarily using inefficient,non-automated and labor-intensive trial and error processes involving a limitednumber of trained taste testers. In other instances, as with the discovery ofaspartame, high potency sweeteners have been discovered by accident.

 

Highpotency sweeteners are sold on a commodity basis by sweetener manufacturers andother third parties.  These sweetenersare broadly available to packaged food and beverage companies on anon-exclusive basis.  This has limitedthe ability of packaged food and beverage companies to use high potencysweeteners to differentiate their brands from competitors.  Another problem often faced by users of highpotency sweeteners are the negative aspects of their taste profiles such aslingering, delayed onset and bitterness.  These limitations of current high potency sweeteners require many foodand beverage manufacturers to blend high potency sweeteners together in asingle product to get the desired taste profile.

 

Whilemost flavor ingredients are regulated as Generally Recognized as Safe, or GRAS,substances under the provisions of the FD&C Act, in the United States, mosthigh potency sweeteners are currently regulated as food additives which mayrequire FDA approval prior to use in foods. (Please see the “Regulatory” section below for a more completedescription of the regulatory process.)

 

***Flavor Ingredients as a Source ofCompetitive Advantage***

 

The packaged food, beverageand ingredient industries are comprised of a number of large and highly competitivemarket segments. Small market share gains in specific large market segments cantranslate into significant additional revenue for packaged food, beverage andingredient companies. For example, according to recent Euromonitor data,estimated 2006 worldwide sales of soft drinks were approximately $280 billion.Thus, an increase of a tenth of a percentage point in overall worldwide marketshare would result in additional revenue of approximately $280 million.

 

As a result of these marketopportunities, packaged food, beverage and ingredient companies are constantlyseeking ways to differentiate their products, demand for which can be greatlyaffected by very small actual or perceived improvements in flavor or healthprofiles. Flavor ingredients can potentially provide an important way todifferentiate a particular product through enhanced taste, improvements innutritional profile or labeling, flavor ingredient exclusivity and cost ofgoods savings.

 

·                     *Taste.*  Product tasteis a critical competitive factor for packaged food, beverage and ingredientcompanies. These companies seek to use flavor ingredients to improve ormaintain taste while improving the nutritional profile of packaged food,beverage and ingredient products or reducing ingredient costs.

 

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·                  *Health Benefits.*  Packaged food, beverage andingredient companies are exploring ways to improve overall nutritional qualityof their products. It is widely accepted that poor diet contributes to adversehealth conditions such as cardiovascular disease, diabetes and obesity. Toaddress these concerns, many companies have introduced reduced calorie, reducedsodium and reduced fat content products to the market. Flavor ingredients withspecific desired characteristics provide an innovative way to reduce the levelsof ingredients that may contribute to these concerns without compromisingdesirable taste attributes.

 

·                  *Flavor Ingredient Exclusivity.* Failure of packaged food, beverage and ingredient companies todifferentiate their brands from their competition, including private labelproducts, may result in significant loss of market share, price pressure anderosion of profit margins. Packaged food, beverage and ingredient companiesspend millions of dollars creating brands and brand images to compete withother products. Many of these competitive products contain the same or similarflavor ingredients. The limited availability of proprietary flavor ingredientsmakes it difficult for manufacturers to differentiate their products based onflavor ingredients.

 

·                  *Cost of Goods Savings.*  Thepackaged food, beverage and ingredient industries purchase enormous quantitiesof raw materials to produce their products. According to the Food and Agriculture Division of the United Nations,estimated worldwide sugar production in 2006 was approximately 149.1 millionmetric tons, and consumption was over 149.9 million metric tons.  The market value of processed sugar producedworldwide is therefore in excess of $65 billion on an annual basis, based onUnited States spot prices in January 2008. Similarly, according to JapanScan, a Datamonitor Service, worldwidedemand for MSG was nearly 1.7 million metric tons in 2006 at a cost of $2.4billion. According to LMC International, worldwide demand for high-fructosecorn syrup for 2007 was approximately 12.9 million metric tons at a cost ofapproximately $6.7 billion.  Flavoringredients can potentially facilitate a reduction in the quantity of theseingredients used in packaged food, beverage and ingredient products, whichcould result in significant decreases in costs and associated increases inprofit margins.

 

**OurSolution**

 

We use our proprietary tastereceptor-based assays and screening technologies to discover and develop novelflavor ingredients. We have developed proprietary taste receptor-based assaysthat incorporate human taste receptors. We use these assays in ourhigh-throughput screening systems to rapidly and efficiently screen ourcompound libraries and identify large numbers of novel potential flavoringredients. We believe our approach improves the likelihood that ingredientswith the desired characteristics can be discovered and then optimized intonovel flavor ingredients.

 

We believe our approach willresult in the discovery and development of flavor ingredients that will providethe following valuable solutions to the following key challenges faced by thepackaged food, beverage and ingredient industries:

 

·                  *Maintaining and Improving Taste.*  Weare developing flavor ingredients to enable our current and future collaboratorsto improve or maintain taste while improving the nutritional profile ofpackaged food, beverage and ingredient products or reducing ingredient costs.

 

·                  *Reducing Sugar, Salt and MSG in Packaged Food,Beverage and Ingredient Products. *We are developing flavor ingredients toenable our current and future collaborators to significantly reduce the levelsof sugar, salt and MSG in packaged food, beverage and ingredient products whilemaintaining or improving taste. We believe reducing the levels of suchingredients will improve the nutritional profile of packaged food, beverage andingredient products.

 

·                  *Blocking Undesirable Tastes.*  Weare discovering flavor ingredients that we believe will be useful in blockingbitter and other unwanted tastes associated with certain packaged food,beverage, OTC health care products and pharmaceutical products.

 

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·                  *OvercomingDeficiencies in Certain Flavor Ingredients.*We are discovering flavor ingredients with lower costs and improvedproperties over existing ingredients including flavor and physical properties.

 

·                  *Identifying Natural Ingredients.*  Weare screening our library of natural samples isolated from plants and othernatural sources to discover new natural ingredients.

 

·                  *Obtaining Exclusive or Co-Exclusive Use ofProprietary Flavor Ingredients. *We are able to offer our current and futurecollaborators exclusive or co-exclusive use of our proprietary flavoringredients in defined packaged food, beverage and ingredient productcategories. We believe this approach will assist our collaborators indifferentiating their products from those of their competitors.

 

·                  *Reducing Cost of Goods. *We believe our proprietary flavor ingredients will enable our currentand future collaborators to reduce overall raw material ingredient costs,particularly for those products containing high levels of natural andartificial sweeteners and MSG.

 

**OurStrategy**

 

Our goal is to become theleader in discovering, developing and commercializing new and improved flavoringredients. Key elements of our strategy include:

 

·                  *Collaborating With Leading Packaged Food, Beverageand Ingredient Companies. *We are collaborating with leading packagedfood, beverage and ingredient companies to develop and commercialize ourproduct candidates. Our collaborators are responsible for marketing, sellingand distributing their products incorporating our flavor ingredients. Inaddition, our collaborators are responsible for all manufacturing costs of ourflavor ingredients.  As a result, weexpect to commercialize our flavor ingredients without incurring significant sales,marketing, manufacturing and distribution costs. We currently havecollaborations with Ajinomoto, Cadbury Schweppes, Campbell, Coca-Cola,Firmenich, Nestlé and Solae.

 

·                  *Developing Flavor Ingredients that are Eligible forFlavor and Extract Manufacturers Association, or FEMA, GRAS Determination. *Our primary focus is on the development of flavor ingredients that willqualify for a FEMA GRAS determination. Four ingredients developed as part of our savory program have receivedFEMA GRAS determination.  Upon the GRAS determination, our collaboratorscan begin to test market and commercialize products incorporating our flavoringredients. In the event that a particular flavor ingredient is not eligiblefor FEMA GRAS determination, we may dedicate our development efforts toalternative ingredients.

 

·                  *Pursuing Additional Collaborations and MarketOpportunities. *We seek to establish additionalcollaborations with leading packaged food, beverage and ingredient companies touse flavor ingredients developed through our existing programs for exclusive orco-exclusive use within new packaged food, beverage and ingredient productfields. We intend to receive from future collaborators up-front fees, researchand development funding, milestone payments, minimum periodic royalties androyalties on future sales of products incorporating these flavor ingredients.In addition, we plan to target fields in which our collaborators canincorporate more than one of our flavor ingredients into a particular product.

 

·                  *Expanding Our Product Candidate Pipeline. *We will continue to focus on the discovery and development ofadditional flavor ingredients based on additional taste receptors to addressnew taste areas. We believe potential new taste receptors include the fat tasteand hot taste receptors.  We also intendto improve the beneficial characteristics of our current product candidatesthrough the development of next-generation flavor ingredients. We will alsocontinue to consider applications of our current products and technologiesoutside of the packaged food, beverage and ingredient industries.

 

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·                  *Maintaining and Expanding Our TechnologyPosition. *We believe our proprietary tastereceptor-based technologies, including our receptor discovery, assaydevelopment and high-throughput screening technologies and natural andsynthetic compound libraries provide us and our collaborators with significantcompetitive advantages. We intend to continue to develop and acquireproprietary technologies and related intellectual property rights to expand andenhance our ability to discover and develop new proprietary flavor ingredients.

 

**OurDiscovery and Development Process**

 

The following diagramsummarizes our discovery and development process.

 

 

The key elements of ourDiscovery and Development process are:

 

·                  *Proprietary Taste Receptor-Based AssayDevelopment. *The first step in our discovery anddevelopment process is to develop proprietary assays based on human tastereceptors. Our assays are tests that measure interactions between the tastereceptors and potential flavor ingredients. To date we have developed assays totest for compounds that affect savory, sweet, salt, bitter and coolingtastes.  We are currently developing anew high-throughput assay to test for compounds that affect salt tastes.

 

·                  *High-Throughput Screening and Identification of LeadCompounds. *The next step in our discovery anddevelopment process is to use our proprietary taste receptor-based assays toidentify compounds that bind to human taste receptors, known as hits. We useautomated high-throughput screening to rapidly evaluate our libraries ofdiverse synthetic and natural compounds. A panel of taste testers then evaluates the taste effect of the mostpotent hits. Based on this evaluation, we designate hits that exhibit a positivetaste effect as proof-of-concept compounds. We then select the most promisingof those proof-of-concept compounds, which we call lead compounds, foroptimization.

 

·                  *Optimization of Lead Compounds and Selection ofProduct Candidates. *The next step in our discovery anddevelopment process is to chemically enhance, or optimize, our lead compoundsto allow lower amounts of the compound to be used in the finished product orimprove the enhancement effect to meet the taste attribute goals of ourcollaborators. Optimization may also be required to enhance the safety profileor to improve the physical properties of a compound so that it is stable undermanufacturing, storage and food preparation conditions. We refer to optimizedcompounds that provide desirable taste attributes in packaged food, beverageand ingredient product prototypes as product candidates.  When screening natural libraries,optimization involves selecting the appropriate source and developing the mostefficient process to obtain the active compound.

 

·                  *Safety Studies and Regulatory Approval of ProductCandidates. *The next step in our discovery anddevelopment process is to select one or more product candidates forcommercialization. We then evaluate the selected product candidate for safety.Following this evaluation, we submit the safety data along with the physicaland chemical properties of the product candidate and a description ofmanufacturing and conditions of intended use to the United States Flavor andExtract Manufacturers Association (“FEMA”). The FEMA review is conducted by the Expert Panel.  The conclusions of the Expert Panel regardinga flavor or flavor enhancer are provided directly to the FDA and published inthe journal Food Technology.  Fouringredients developed as part of our savory program have received FEMA GRASdetermination.  The process from selection for development until receiptof that determination took approximately 12 months.  Costs 

 

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associated with the FEMA GRAS process,including synthesis of material for regulatory studies, contract safety studiesand preparation of the application, were less than $1 million.  We expect that most of the flavor ingredientswe develop in the future will require a similar amount of time and cost.  However, the length of time may varydepending on the properties of the flavor ingredient.  In the United States, most high potencysweeteners are currently regulated as food additives which require FDA approvalprior to use in foods.  However, noUnited States regulation precludes high potency sweeteners from beingdetermined to be GRAS.  The safety datarequirements for food additives and GRAS substances are the same and dependupon the anticipated human exposure to the substance or consumption, and thelevel of concern for potential toxicity based on the structure of thesubstance.  If a food additive petitionis required, there is a range of potential studies which may have an estimatedcost of up to $7 million and may take up to four years to complete.  Furthermore, additional studies adding costand time to approval may be required depending on the results of the initialsafety studies.  Outside the UnitedStates, the food additive approval process is generally similar to the FDA foodadditive petition process.

 

·                  *Commercialization. *Following regulatoryapproval in a given country, foods and beverages containing our proprietaryflavor ingredients can be immediately commercialized.  Our collaboratorshave ultimate responsibility for commercialization of Senomyx flavoringredients in their end product offerings.  Prior to commercializationcollaborators complete extensive product formulation work on targeted products. Our collaborators validate final formulations for these products throughin-house sensory evaluation as well as external in market taste tests byconsumers.  Upon confirming consumer acceptance of these products, thecollaborators complete activities such as production of the Senomyx flavoringredients, packaging development and sales samples and materials, enablingthe actual market launches of the products.

 

**OurDiscovery and Development Programs**

 

We are currently pursuingthe discovery and development of flavor ingredients through six programsfocused on savory, sweet, salt, bitter and cooling taste areas.

 

***Savory Enhancer Program***

 

The goals of our savoryprogram are to enhance the taste of naturally occurring glutamate and enablethe reduction or elimination of added MSG and a related food additive, inosinemonophosphate, or IMP. Using SavoryScreenHT, our high-throughput savoryreceptor-based assay system, we identified two product candidates, S336 andS807, that enhance the savory taste of glutamate.  S336 is approximately three times more potentthan S807 in taste tests and exhibits greater water solubility compared toS807, which is more fat soluble. Other characteristics, such as heat stabilityand ease of manufacturing by a simple synthesis process, are similar for thetwo ingredients. Our collaborator evaluated S336 and S807 for savory tasteenhancement in product prototypes, and formally selected both S336 and S807 fordevelopment in May 2004.

 

Wecompleted the safety assessment studies for S336 and S807 and submittedapplications for GRAS determination to FEMA in December 2004.  In March 2005, the FEMA Expert Paneldetermined that S336 and S807 were GRAS. In addition, two other flavor enhancers, S263 and S976, which arerelated to S336, were also determined by FEMA to be GRAS.  A more detailed description of the FEMA GRASprocess is provided in *Item 1*, *Business – Regulatory Process*.  After we achieved FEMA GRAS status for thefour 

 

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savory ingredients, ourcollaborator initiated product development efforts to identify initialapplications, optimal concentrations and the development of new recipes.

 

During2007, the Chinese Ministry of Health granted official regulatory approval inChina for our savory flavor ingredients. Also in 2007, our savory flavor ingredients received a positive reviewby the Joint FAO/WHO Expert Committee on Food Additives, or JECFA.  The JECFA determination facilitates theacceptance or approval of flavors for use in food in many countries throughoutthe world.

 

*Commercialization by Collaborators*

 

Initialmarket launch by Nestlé of products including our savory enhancers occurred on June 5,2007.  Nestlé’s launch strategy is focused on countries where regulatoryapproval is in place, and targets products that contain high levels ofMSG.  A total of six new bouillon and culinary aid products, across fourcountries in the Pacific Rim and Latin America, including Brazil, were launchedin 2007.  It is expected that additional launches in the dehydrated,culinary and bouillon food categories will continue to occur on a rolling basisover time.  While initial launches have focused on new products, it isexpected that future launches will also include reformulated establishedproducts.

 

Asecond collaborator for the savory enhancer program continues preparation forpotential future launches of products containing Senomyx’s savoryingredients.  Currently, we expect thesecond collaborator’s market launch of products containing our savoryingredients to occur in late 2008.

 

Concurrently, we are workingto obtain global regulatory approvals in support of new business developmentactivities and commercialization strategies for subsequent product launches ofour savory flavor enhancers in additional countries.

 

***Sweet Enhancer Program***

 

Thegoals of our sweet enhancer program are to enhance the taste of natural andartificial sweeteners and enable a significant reduction in added sweeteners.Senomyx has identified S2383, a novel enhancer of the high-intensity sweetenersucralose, and S5742, a new sucrose, or plain sugar, enhancer.  Taste tests demonstrated that S2383 enabledup to a 75% reduction of sucralose in simple product prototypes, yet maintainedthe same sweet intensity without any off-tastes.  Based on the properties of S2383, we havemoved S2383 into the development phase. This includes conducting productdevelopment work and safety studies to support regulatory filings. Recentprogress includes successful initial safety studies and ongoing productapplication work.  We expect to completethis work and achieve GRAS status in late 2008.

 

Thesucrose enhancer S5742 allowed an approximately 40% reduction of sucrose intaste tests with simple product prototypes. In addition to this significant degree of enhancement, S5742 has keybeneficial taste characteristics that allowed the taste of sucrose to beunaffected in these tests.  S5742 andrelated sucrose enhancers are being optimized to lower the compoundconcentration used to achieve this or a greater degree of enhancement. Additionalwork is ongoing to identify enhancers of fructose and other natural andartificial sweeteners.

 

***Salt Enhancer Program***

 

**The goal ofthe salt enhancer program is to identify flavor ingredients that allow asignificant reduction of sodium in foods and beverages yet maintain the saltytaste desirable to consumers.  Programactivities have been focused on discovery of the primary receptor responsiblefor human salt taste.  Senomyx hasidentified and evaluated approximately 15,000 proteins found in taste buds andestablished detailed criteria to determine which of the proteins functions asthe receptor that responds to sodium chloride (salt).  The Company believes that one of theproteins, SNMX-29, which met all of our criteria, is the primary receptor responsiblefor salt taste perception.  Senomyx hasbegun development of a high-throughput screening assay based on SNMX-29 thatwill be used to screen our extensive libraries to provide further verificationthat SNMX-29 is the human salt taste receptor and, importantly, to identifypotential enhancers of salt taste.**

 

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***Bitter Blocker Program***

 

The goals of our bitter blocker program are toidentify compounds that modulate or eliminate the bitter taste and to improvethe overall taste characteristics of certain packaged food, beverage andingredient products, OTC health care products and pharmaceutical products.  This involves the identification of tastereceptors that respond to bitter ingredients known to be present in a varietyof food and beverage ingredients, followed by the use of these receptors todiscover bitter taste blockers.  In 2007,we continued to make progress identifying taste receptors that respond tobitter ingredients known to be present in a variety of food and beverages,followed by the use of these receptors to discover bitter taste blockers.  In particular, we identified S5105, whichprovided a statistically significant reduction in the bitterness of severalvariations of a collaborator’s product and other product prototypes in proof-of-concepttaste tests.  S5105 is now beingoptimized to increase its potency.

 

In addition, work with another collaborator’sproducts has led to our discovery of taste receptors associated with the bittertaste of hydrolyzed soy protein.  Assaysusing these receptors have been adapted for high throughput screening and wehave initiated screening to identify compounds that block the bitterness of soyproducts.

 

***High Potency Sweetener Program***

 

The goals of our highpotency sweetener program are to discover and develop novel no- or low-calorienatural high potency sweeteners and to improve upon the taste and physicalproperties of currently marketed high potency sweeteners.  In 2007, we acquired libraries of natural productscontaining over 250,000 samples. Since each sample likely contains multiplecompounds, we are effectively testing over 1.5 million natural compounds fortheir ability to activate the sweet taste receptor. Primary screening of thesesamples has been completed. “Hits” have been identified and are being furtheranalyzed to identify the active compounds. Several compounds have beensubjected to taste tests. We are continuing to evaluate these and other samplesfrom our natural libraries for their ability to provide a sweet taste. The highpotency sweetener program is progressing in parallel with our active effortstoward the discovery and development of sweet taste enhancers.

 

***Cooling Flavor Program***

 

In the fourth quarter of2007, we initiated a new scientific program for the discovery and developmentof cooling agents. The goal of our cool flavor program is to discover novelcooling compounds for a variety of applications.  Previously, we developed a proprietaryhigh-throughput screening assay using the receptor associated with cool andmenthol taste sensations. This assay has been validated through theidentification of several compounds that provided a cooling taste and appearedsignificantly more potent than menthol, WS-3 and other commonly used coolingagents in a threshold taste test for cooling. Having initiated our newcollaboration with Firmenich, we have initiated screening our extensive libraryof compounds to discover novel cooling flavors that meet the needs of Firmenich’scustomers.

 

**ProductDiscovery and Development Collaborations**

 

We pursue collaborationswith leaders in the packaged food, beverage and ingredient market. Under eachof our current product discovery and development collaboration agreements, wehave agreed to conduct research and develop flavor ingredients in one or morespecified taste areas, such as savory, sweet, salt, bitter or cool. Each ofthese collaborations is focused on one or more specific product fields, such asnon-alcoholic beverages, wet soups or frozen foods. We have product discoveryand development collaborations with Ajinomoto, Cadbury Schweppes, Campbell,Coca-Cola, Firmenich, Nestlé and Solae.

 

All of our currentcollaboration agreements provide for research and development funding, milestonepayments upon achievement of pre-defined research or development targets, costreimbursement and royalty payments based upon future product sales in the eventthe collaborator commercializes a product incorporating our flavor ingredients.Certain of our current collaboration agreements also provide for upfront feesand minimum periodic royalties.  Theresearch and development funding under each of these 

 

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agreements is paid according toa fixed payment schedule. Each of these collaborations provides us with aportion of the funding we require to pursue the discovery and development offlavor ingredients for the applicable program. Under each of these agreements,we are primarily responsible for the discovery and development phases and anyassociated expenses, while our collaborator is primarily responsible forselecting the consumer products that may incorporate our flavor ingredients.Our collaborator is also responsible for manufacturing, marketing, selling anddistributing any of these consumer products, and any associated expenses. Undermost of our agreements, we are primarily responsible for the regulatoryapproval phase and a portion of the associated expenses.  We believe our collaborations will allow usto benefit from our collaborators’ well-established brand recognition, globalmarket presence, established sales and distribution channels and otherindustry-specific expertise. Each of our collaborations is governed by a jointsteering committee, consisting of an equal number of representatives of thecollaborator and us. The steering committees provide strategic direction andestablish performance criteria for the research, development andcommercialization of our flavor ingredients. All decisions of the steeringcommittees must be unanimous.

 

Each of our collaborationagreements provides that we will conduct research and development on flavoringredients for use within clearly defined packaged food, beverage andingredient product fields on an exclusive or co-exclusive basis for thecollaborator during the collaborative period specified in each of theagreements. Our current product discovery and development collaborators are notprohibited from entering into research and development collaboration agreementswith third parties in any product field. Under the terms of each agreement, wewill retain rights to flavor ingredients that we discover during thecollaboration for use with the collaborator, or for our use or with othercollaborators outside of the defined product field. We will also retain rightsto any flavor ingredients that we discover after the respective collaborativeperiod. In addition, in the case of certain of our agreements, if thecollaborator terminates the agreement or fails after a reasonable timefollowing regulatory approval or GRAS determination to incorporate one or moreof our flavor ingredients into a product, it will no longer be entitled to use,and we will have the right to license, the flavor ingredients to other packagedfood, beverage and ingredient companies for use in any product field.

 

Each of our agreementsterminates when we are no longer entitled to royalty payments under theagreement. In addition, each agreement may be terminated earlier by mutualagreement or by either party in the event of a breach by the other party of itsobligations under the agreement.  Ourinitial agreement with Ajinomoto allows Ajinomoto to terminate the agreementwithout cause provided that it pay additional specified research funding if itterminates the agreement prior to March 23, 2009.  Our most recent agreement with Ajinomotogives Ajinomoto the right to terminate the agreement without cause providedthat it pay additional specified research funding if it terminates theagreement prior to October 5, 2009. Cadbury Schweppes may terminate its agreement without cause upon 90 dayswritten notice.  Campbell may onlyterminate its agreement without cause upon 60 days written notice, providedthat it pay a specified termination fee if it terminates the agreement prior toMarch 28, 2009. Our agreement with Coca-Cola permits Coca-Cola toterminate the agreement upon specified major corporate events.  The collaborative period may be terminated byCoca-Cola upon 60 days written notice upon payment of a specified earlyconclusion fee. In the event of early conclusion, Coca-Cola will no longer beentitled to use, and we will have the right to license, any flavors or flavorenhancers discovered prior to such early conclusion to third parties for use inany product field, provided that Coca-Cola would retain non-exclusive rights inthe field of non-alcoholic beverages with the exception of dry powderedbeverages.  Our agreement with Firmenichpermits Firmenich to terminate the agreement without cause upon 90 days writtennotice on any anniversary of the effective date of the agreement provided thatit pay additional specified research funding if it terminates prior to December 14,2010.  Our initial agreement with Nestlégives Nestlé the right to terminate the agreement without cause, provided thatit pay additional specified research funding if it terminates the agreementprior to April 18, 2008.  Our mostrecent agreement with Nestlé gives Nestlé the right to terminate the agreementwithout cause on or after April 26, 2008 upon 90 days written notice,provided that it pay a specified termination fee if it terminates the agreementafter April 26, 2008 but prior to the end of the collaborativeperiod.  Our agreement with Solae allowsSolae to terminate the agreement without cause on April 23, 2008 upon 60days’ prior notice, or subsequent to April 23, 2008 upon 90 days’ priornotice, provided Solae pay additional specified research funding if Solaeterminates the agreement prior to April 23, 2010.

 

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***Ajinomoto***

 

In March 2006, we entered into a collaborativeresearch, development, commercialization and license agreement with Ajinomotofor the discovery and commercialization of novel flavor ingredients on anexclusive basis in the soup, sauce and culinary aids, and noodle productcategories, and on a co-exclusive basis in the bouillon product category withinJapan and other Asian markets.  Under theterms of the initial collaboration, Ajinomoto agreed to pay us an upfrontlicense fee and research and development funding for up to three years. In addition, we are eligible to receive milestone payments upon achievement ofspecific product discovery and development goals.  In April 2007, we amended the agreementto expand Ajinomoto’s rights into North America.  Under the terms of the April amendment,Ajinomoto agreed to pay us an upfront license fee and we are eligible toreceive an additional milestone payment upon achievement of a specificgoal.  In August 2007, we furtheramended the agreement to expand Ajinomoto’s rights into additional productcategories and geographies that were not previously licensed by us.  Under the terms of the August amendment,Ajinomoto has agreed to pay us an upfront license fee.  Through December 31, 2007, we havereceived $15.6 million in upfront fees and research and development funding andone milestone payment of $500,000.  Ifall milestones are achieved, and including the $16.1 million in upfront fees,research and development funding and milestone payments made through December 31,2007, we may be entitled to up to $18.1 million in upfront fees, research anddevelopment funding and milestone payments. In addition to the upfront fees, research and development funding andmilestone payment, we have received a minimum periodic royalty payment.  This minimum periodic royalty payment isnon-refundable.  Under the terms of thecontract, Ajinomoto will provide us a sales report and we will record any additionalcalculated royalties as royalties from product sales.  There is no guarantee that we will receiveany further milestone payments or royalties under these collaborations.

 

InOctober 2006, we entered into a second collaborative research,commercialization and license agreement with Ajinomoto for the discovery andcommercialization of specified natural flavor ingredients.  Under theterms of the agreement, Ajinomoto has agreed to pay us research funding for upto three years based on research progress during the collaborativeperiod.  In addition, we are eligible to receive payments upon achievementof specific milestones.  Through December 31,2007 we have received $563,000 in research and development funding.  If all milestones are achieved, and includingthe $563,000 in research and development funding paid through December 31,2007, we may be entitled to up to $2.3 million in research and developmentfunding and milestone payments.  Inaddition we are entitled to receive minimum periodic royalties and, uponcommercialization, royalty payments based on sales of products containingflavor ingredients developed under the agreement.  We cannot assure you that we will receive anyfuture milestone payments or royalties under this collaboration.

 

***Cadbury Schweppes***

 

In July 2005, weentered into a collaborative research and license agreement with Cadbury AdamsUSA, LLC, a Cadbury Schweppes company, for the discovery and commercializationof new flavor ingredients in the gum confectionary area.  In July 2007 we extended thecollaborative period for an additional twelve months, through July 2008.  Under the terms of the collaboration, CadburySchweppes has agreed to pay us research funding for up to three years based onresearch progress during the collaborative period. We are also eligible toreceive milestone payments upon our achievement of specific product discoveryand development goals. Through December 31, 2007, we have received $1.9million in research funding. If all milestones are achieved, and including the$1.9 million in research funding paid through December 31, 2007, we may beentitled to up to $3.7 million in research funding and milestone payments. Inaddition, in the event of commercialization, we are entitled to receiveroyalties based on sales of products containing new flavor ingredientsdeveloped under the agreement. We cannot assure you that we will receive anyfuture milestone payments or royalties under this collaboration.

 

***Campbell Soup Company***

 

In March 2001, weentered into a collaboration agreement with Campbell, a global manufacturer andmarketer of consumer food products, to work for a three-year collaborativeperiod to discover specified

 

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flavors and flavor enhancersin the packaged food, beverage and ingredient product fields of soups,including frozen soups. We later amended the agreement to add the product fieldof specified savory beverages in consideration for additional research anddevelopment payments and potential milestone and royalty payments.  In February 2006, we extended thecollaborative period until the earlier of March 2009 or submission for aGRAS determination, subject to earlier termination under specifiedcircumstances.

 

Under the terms of thecollaboration, Campbell has agreed to pay to us certain research anddevelopment funding. We are also eligible to receive a milestone payment uponour achievement of a specific product development goal. Through December 31,2007, we have received $10.3 million in research and development funding. Ifall milestones are achieved, and including the $10.3 million in research anddevelopment funding paid through December 31, 2007, we may be entitled toup to $12.5 million in research and development funding and milestone payments.In addition, in the event of commercialization, we are entitled to receive royaltieson future net sales of products containing a discovered flavor or flavorenhancer from the date of introduction of each product in each country until 17years thereafter or until the expiration of relevant patents in such country,whichever is earlier. We cannot assure you that we will receive any futuremilestone payments or royalties under this collaboration.

 

***The Coca-Cola Company***

 

In April 2002, weentered into a collaboration agreement with Coca-Cola, the world’s largestbeverage company, to work for a three-year collaborative period with Coca-Colafor the discovery and development of specified new flavors and flavor enhancersin the product field of soft drinks and other non-alcoholic beverages. Inaddition, we will work with Coca-Cola on a co-exclusive basis for the discoveryand development of flavor enhancers in a specified food, beverage andingredient product field. In April 2004, we amended the agreement toextend the collaborative period until April 2008.

 

Under the agreement,Coca-Cola has agreed to pay certain research and development funding over thecollaborative period. We are also eligible to receive milestone payments uponour achievement of specific product discovery and development goals. Through December 31,2007, we have received $11.5 million in research and development funding. Ifall milestones are achieved, and including the $11.5 million in research anddevelopment funding paid through December 31, 2007, we may be entitled toup to $14.8 million. In addition, in the event of commercialization, we areentitled to receive royalties on future sales of products containing adiscovered flavor or flavor enhancer until the expiration of relevant patents.We cannot assure you that we will receive any future milestone payments or royaltiesunder this collaboration.

 

***Firmenich***

 

***In December 2007,we entered into a collaboration agreement with Firmenich, a global leader inproviding food ingredients and flavor systems to major consumer companies foruse in their brands, to work for a three-year collaborative period to discoverand develop novel compounds that may be used by Firmenich on an exclusive basisworldwide as ingredients that impart a cool taste in flavor systems.***

 

***Under theagreement, Firmenich has agreed to pay research fees and specified paymentsupon the achievement of milestones.  Uponcommercialization, we will be entitled to royalties.  Through December 31, 2007, we have notreceived any research fees.  If allmilestones are achieved, we may be entitled to up to $3.5 million.  In addition, in the event of regulatoryapproval of a discovered compound, we are entitled to minimum periodicroyalties and in the event of commercialization, we are entitled to receiveroyalties on future sales of products containing a discovered flavor or flavorenhancer until the expiration of relevant patents. We cannot assure you that wewill receive any future milestone payments or royalties under thiscollaboration.***

 

***Nestlé SA***

 

In April 2002, weentered into an initial collaboration agreement with Nestlé, the world’slargest food company, to work for a three-year collaborative period to discoverspecified flavors and flavor enhancers in the food and beverage product fieldsof dehydrated and culinary food, frozen food and wet soup.  In April 

 

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2005,we amended theagreement to provide for a three-year extension of the collaborative researchphase.  In March 2006, we furtheramended the agreement to include commercialization of novel flavors and flavorenhancers in the pet food category on a worldwide, co-exclusive basis.  In addition to the expansion, the Nestléagreement has been amended to allow us to reacquire rights to certain of ourflavor ingredients in certain geographic regions. As a result of thisamendment, Nestlé now has rights to flavor ingredients in Europe, Asia, Israel,Oceania, Africa, the Middle East and Latin America in specified productcategories within the dehydrated and culinary food, frozen food, and/or wetsoup product categories, as well as worldwide rights for the pet food category,while we have reacquired certain rights in North America and other geographicregions in specified product categories.

 

Under the terms of thecollaboration agreement, Nestlé has agreed to pay to us certain research anddevelopment funding over six years, subject to earlier termination underspecified circumstances. We are also eligible to receive milestone paymentsupon our achievement by certain dates of specific product discovery anddevelopment goals. Through December 31, 2007, we have received $11.2million in research and development funding, reimbursement of certainregulatory expenses of $339,000 and four milestone payments of $375,000 each.If all milestones are achieved, and including all research and developmentfunding paid or payable, we may be entitled to up to $14.8 million under theinitial collaboration.  In addition, inthe event of commercialization, we are entitled to receive royalties on futurenet sales of products containing a discovered flavor or flavor enhancer fromthe date of introduction of each product in each country until the expirationof relevant patents. We cannot assure you that we will receive any furthermilestone payments or royalties under this collaboration.

 

In October 2004, weentered into a second product discovery and development collaboration agreementwith Nestlé to work for a five-year collaborative period focusing on thediscovery and commercialization of specified novel flavor ingredients in thecoffee and coffee whiteners field.  Underthe terms of the agreement, Nestlé has agreed to pay us certain research anddevelopment funding over five years, subject to extension or earliertermination under specified circumstances. This collaborative period has been subsequently extended to afive-and-one-half year collaborative period, subject to further extension orearlier termination under specified circumstances.  We are also eligible to receive milestonepayments upon achievement of specific product discovery and developmentgoals.  Through December 31, 2007,we have received $5.4 million in research and development funding.  If all milestones are achieved, and includingall research and development funding paid or payable, we may be entitled to upto $15.8 million under the second collaboration.  In addition, in the event ofcommercialization, we are entitled to receive royalties on future net sales ofproducts containing a discovered flavor ingredient from the date of introductionof each product in each country until the expiration of relevant patents. Wecannot assure you that we will receive any milestone payments or royaltiesunder this collaboration.

 

***Solae, LLC***

 

In April 2007, weentered into a collaboration agreement with Solae, the leading supplier of soyprotein for food-based products, for the discovery and exclusive worldwidecommercialization of novel flavor ingredients for soy proteins.  Under the terms of the agreement, Solae hasagreed to pay us research fees for up to three years.   We are also eligible to receive milestonepayments upon achievement of specific product discovery and developmentgoals.  Through December 31, 2007,we have received $621,000 in research and development funding. If allmilestones are achieved, and including all research and development fundingpaid or payable, we may be entitled to up to $5.2 million under thecollaboration agreement. In addition, in the event of commercialization, we areentitled to receive royalty payments based on sales of products containing flavoringredients developed under the agreement. We cannot assure you that we will receive any milestone payments orroyalties under this collaboration.

 

**OurTechnology**

 

We have discovered orin-licensed many of the key receptors that mediate taste in mammals. Havingisolated human taste receptors, we have created proprietary tastereceptor-based assay systems that provide a biochemical or electronic readoutwhen a test compound affects the receptor. To enable faster compound discovery,we integrated our proprietary taste receptor-based screening assays into arobot-controlled

 

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automated system that usesplates containing an array of individual wells, each of which can screen adifferent compound. Our receptor-based discovery and development process hasenabled us to improve our ability to find novel flavor ingredients over thetraditional use of simple taste tests.

 

***Receptor Discovery andAssay Development Technology***

 

There are currently fiverecognized primary senses of taste: umami (which is the savory taste ofglutamate), sweet, salt, bitter and sour. In addition, there are secondarytaste sensations such as cool, hot and fat. Scientists generally believe that each of these taste sensations isrecognized by a distinct taste receptor or family of taste receptors in themouth or on the tongue. A taste receptor functions either by physically bindingto a flavor ingredient in a process analogous to the way a key fits into a lockor by acting as a channel to allow ions to flow directly into a taste cell. Thebrain recognizes tastes by determining which of the numerous receptors in themouth have been contacted by a given flavor ingredient. Savory, sweet andbitter taste ingredients bind to taste receptors specific to each taste on thesurface of taste bud cells. In contrast, the taste of salt and the sour tasteare thought to be recognized by taste channels that allow the passage ofparticular ions into the taste bud cells. The tastes of cooling and heating are mediated by receptors found incertain nerves.

 

The current status in thedevelopment of proprietary taste receptor-based assay systems for human tastereceptors is as follows:

 

·                  *Savory Receptor. *Glutamate is anatural component of foods, including tomatoes, mushrooms, parmesan cheese, andmeats. It is often added to foods in the form of MSG to provide a savoryflavor. The human savory receptor is composed of two proteins called hT1R1 andhT1R3. The T1R proteins are members of the G protein-coupled receptor, or GPCR,family and are expressed on the surface of certain taste bud cells. We createdSavoryScreenHT, a proprietary high-throughput savory taste receptor-based assaysystem and demonstrated that it responded to MSG and inosine monophosphate, orIMP. We screened over 200,000 compounds in SavoryScreenHT and identified anumber of savory enhancers, including S807, S336, S263 and S976, which weredetermined to be GRAS in March 2005.

 

·                  *Sweet Receptor. *The human sweetreceptor is composed of two proteins called hT1R2 and hT1R3. The hT1R3 proteinis shared in common with the savory receptor. Like the savory receptor, thesweet receptor is also a member of the GPCR family and is expressed on thesurface of certain taste bud cells. We created SweetScreenHT, a proprietaryhigh-throughput sweet taste receptor-based assay system, and demonstrated thatit responded to many different sweet-tasting compounds including carbohydratesweeteners and artificial sweeteners.  Wehave screened over 300,000 compounds in SweetScreenHT identified novelcompounds that enhance the sweet taste of sucralose and sucrose. Our sucraloseenhancer, S2383, is in the development phase. Our sucrose enhancers, includingour current top compound S0739, are undergoing optimization to generate adevelopment candidate. We are also using SweetScreenHT to identify naturalcompounds that could potentially function as high potency sweeteners forno-calorie or low-calorie foods and beverages.

 

·                  *Bitter Receptors.* There are 25 bitter receptors in humans.  These are also members of the GPCR proteinfamily.  Work from model systems showedthat the 25 bitter receptors are likely present together in the same tastecell.  The bitter receptors are believedto have evolved as a defense mechanism to warn of and prevent the ingestion ofpoisonous substances.  It is thought thateach bitter receptor recognizes a different set of bitter-tasting compounds.  We have characterized bitter ligands for mostof the 25 T2R receptors and we are using these receptors in specificBitterScreenHT cell-based assays to discover bitter taste blockers.

 

·                  *Salt Receptor.* Untilnow, the primary receptor responsible for salt taste perception had not beenidentified by Senomyx or in the scientific literature. Over the past year,Senomyx identified and evaluated approximately 15,000 proteins found in tastebuds and established detailed criteria to determine which of these functions asthe receptor that responds to sodium chloride (salt).  The

 

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Company believes that one of the proteins,SNMX-29, met all of our criteria and is the primary receptor responsible forsalt taste perception.  Senomyx has begun development of a high-throughputscreening assay based on SNMX-29 that will be used to screen our extensivelibraries to provide further verification that SNMX-29 is the human salt tastereceptor and, importantly, to identify potential enhancers of salt taste.

 

·                  *Cool Receptor. *The protein TRPM8 is an ion channel that is activated by both cooltemperature and cooling agents such as menthol and WS-3. We developed theCoolScreenHT assay, a high-throughput screening assay using the human TRPM8protein, and we validated the assay using a set of known cooling agents.Furthermore, we screened a library and identified novel compounds thatexhibited cooling taste effects.

 

***Screening Technologies andCompound Libraries***

 

We have developed oracquired access to expansive libraries of potential flavor ingredientscurrently comprised of over 500,000 natural samples and synthetic compounds. Weintend to continue to acquire or develop additional compounds and naturalsamples to add to our libraries.  We havedesigned and selected our libraries to comprise compounds that we believe arelikely to lead to safe and economical for use in packaged food and beverageproducts. We are using our BitterScreenHT, CoolScreenHT and SweetScreenHT assaysystems to screen the compounds in our libraries for their effects on specifictaste receptors. These systems use many of the same technologies thatpharmaceutical companies use to discover medicines. Our assay systems are muchmore sensitive than the human tongue, and can therefore be used to discovernovel flavor ingredients that could not be identified using taste tests.  We also use these systems to assist us inoptimizing our lead compounds by rapidly and iteratively testing the potency ofthe flavor ingredients generated in the optimization process as the leadcompound progresses to become a product candidate.

 

**RegulatoryProcess**

 

Flavoring substances,including flavor ingredients intended for use in foods and beverages in theUnited States, are regulated under provisions of the FD&C Act administeredby the FDA. Flavor ingredients sold in countries and regions outside of theUnited States are also subject to regulations imposed by national governmentsor regional regulatory authorities, as is the case in the European Union.  These regulations are subject to frequentrevisions and interpretation.

 

***Regulation of Flavor Ingredients in theUnited States***

 

In the United States, flavoringredients are regulated by the FDA as approved food additives, or as GRASingredients under the FD&C Act. The Food Additive Amendments of 1958prompted the flavor industry to establish in 1960 the FEMA Expert Panel.  FEMA has administered the GRAS program forflavors on behalf of the industry for over 40 years.  Other possible routes to approval of aflavor-modifying compound would be a GRAS self-determination (independent ofFEMA) with or without FDA notification, or a food additive petition to the FDA.Our goal is that the flavor ingredients, including flavor ingredients we maydiscover will be subject to one of the regulatory review processes describedbelow.

 

***GRAS Review Process.***    Flavor ingredients thatqualify for the GRAS review process are generally intended to be consumed insmall quantities and have data supporting their safety under conditions ofintended use. An expert panel, convened to undertake a GRAS review, determineswhether an ingredient is generally recognized as safe under the conditions ofits intended use. These experts are qualified by scientific training andexperience to evaluate the safety of chemicals used in food and may declarecertain ingredients as having been adequately shown through scientificprocedures to be generally recognized as safe under the conditions of theirintended use. Under the GRAS process, manufacturers are required to obtainsafety data from the scientific literature or through the conduct of safetystudies, determine the estimated daily intake of the flavor ingredient perperson and submit a report to the GRAS review panel describing the physical,chemical, safety, and metabolic properties of the flavor ingredient. The entireGRAS determination process, including the safety and metabolic studies,application preparation and 

 

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GRASpanel review, can take up to two years or longer. However, if there are priorsafety data on the ingredient or an ingredient with a related structure, thenfewer safety studies may be required for the GRAS review and the GRAS reviewprocess can be considerably shorter than two years.

 

The most common types ofGRAS review are:

 

·                  *FEMA Expert Panel. *The FEMA Expert Panelis an independent panel of experts for which FEMA provides administrative assistance.  The FEMA Expert Panel, which may be used byFEMA members and certain other parties, meets up to three times per year. Theconclusions of the Expert Panel regarding a flavor or flavor enhancer areprovided directly to the FDA and published in the journal Food Technology. Toour knowledge, the FDA has not challenged the FEMA Expert Panel’s conclusionthat the use of a flavoring substance is GRAS. In 2007, the FEMA Expert Panelpublished its findings on 175 new ingredients determined to be GRAS for specificflavor applications. We joined FEMA as an associate member in 2003.  We became a full active member of FEMA in2006.  Four of our savory ingredientswere determined to be GRAS by the FEMA Expert Panel in 2005.

 

·                  *Specifically Convened Independent Panel. *An independent, qualified panel of experts in pertinent scientificdisciplines may be formed by the manufacturer to evaluate the safety of aspecific compound for GRAS status. This process is known as a “selfdetermination of GRAS status.”  The basisfor the GRAS self determination is not required to be submitted to theFDA.  However, the FDA may requestinformation on ingredients that have been self determined to be GRAS, or theinformation may be provided voluntarily.

 

***Benefits of the FEMA GRAS Process***

 

There are three key benefitsof the FEMA GRAS review process:

 

·                  *Rapid Time for Commercialization. *Four ingredients developed as part of our savory program have receivedFEMA GRAS determination.  The process from selection for development untilreceipt of that determination took approximately 12 months.  We expect that future flavor ingredients wedevelop will take a similar amount of time. However, the length of time may vary depending on the properties of theflavor ingredient.  This is much shorterthan the typical amount of time to obtain FDA approval under the food additivepetition process applicable to other food ingredients. Once the compound isdetermined to be FEMA GRAS, it can be immediately commercialized in the UnitedStates and several other countries that recognize the FEMA GRAS status. Asdescribed above, the initial phase of commercialization may include compoundmanufacturing, incorporation of the flavor ingredient into products, and thecommercialization of products in consumer test markets.

 

·                  *Low Development Costs. *The total costs for the FEMA GRAS process, including synthesis ofmaterial for regulatory studies, contract safety studies and preparation of theFEMA GRAS application is generally under $1 million per compound.

 

·                  *Facilitated Approval in Other Countries. *Approval of flavors for use outside of the United States varies widelyby country. According to FEMA, seven countries, including Brazil, New Zealandand Australia, recognize ingredients on the FEMA GRAS list.  An additionalset of countries recognize ingredients on the FEMA GRAS list “in principle”.These include Canada, Philippines and Turkey. Approval in these countries mayrequire specific applications to the food safety authority of the individualcountries but usually not additional safety testing.

 

***Food Additive Petition Process.***   Food ingredients for which the GRAS process is not available may beevaluated as food additives. Food additives require FDA approval prior to usein foods. An ingredient may be ineligible for GRAS determination, and may beconsidered a food additive, because there is insufficient general knowledge orfor a variety of other reasons, including conditions of intended use resultingin high dietary exposure or the ingredient’s safety profile. If the ingredientis considered a food additive, a food additive petition must be filed andapproved by the FDA. Food additive petitions contain 

 

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informationon the chemical nature of the ingredient, the manufacturing process,information on use in food, estimates of human exposure from use of thecompound in food and all known information related to the safety of theingredient.  The FDA reviews the petition content, requests additionalinformation if necessary, publishes a proposed rule for use in food,reviews comments on the proposed rule and publishes a final rule, if theuse is determined to be acceptable.  Thesafety data requirements for food additives are the same as for GRASsubstances.  We estimate that a foodadditive petition could cost up to $7 million and may take up to four years tocomplete.  Furthermore, additionalstudies adding cost and time to approval may be required depending on theresults of the initial safety studies. Examples of ingredients that have gone through a food additive petitionprocess include the artificial sweeteners aspartame, acesulfame K andsucralose. It may be necessary for any high potency sweeteners that we discoveror develop to follow this regulatory route.

 

**LicenseArrangements**

 

We have licensed rights fromseveral companies and academic institutions, including the following:

 

***University of California***

 

  In March 2000, we entered into a licenseagreement with the University of California under which we obtained exclusiverights to certain technologies held by the University of California that areinvolved in the biology of taste, including specified receptors in two tastereceptor families, T1Rs and T2Rs. The license may be converted to anon-exclusive license, or terminated, by the University of California if wefail to meet specified milestones relating to the discovery of specifiedproducts and the sale of specified products and services. Our exclusive rightsare also subject to rights granted by the University of California to theUnited States Government and a private medical foundation. In October 2006,we entered into an amended and restated agreement with the University ofCalifornia to include certain additional related technologies.  The agreement, as originally drafted and asamended and restated, required a license issue fee, payable in installmentsthrough 2005, and calls for annual maintenance fees commencing in 2006 orroyalties or service revenues on sales of any products developed usingtechnologies licensed under the agreement. Royalties will accrue in eachcountry for as long as there exists a valid patent claim covering a productdeveloped under the agreement.  Theagreement will remain in effect until the expiration of the last to expirepatent licensed under the agreement. We may terminate the agreement at anytime, without cause, upon notice to the University of California. TheUniversity of California may terminate the agreement upon a breach of ourobligations under the agreement.

 

**Competition**

 

Our goal is to be the leaderin discovering novel flavor ingredients for use in a wide range of packagedfood, beverage and ingredient products. Other companies are possibly pursuingsimilar technologies and the commercialization of products and services relevantto flavor ingredients. Although we are not aware of any other companies thathave the scope of proprietary technologies and processes that we have developedin our field, there are a number of competitors who possess capabilitiesrelevant to the flavor ingredient field.

 

In particular, we facesubstantial competition from companies pursuing the commercialization ofproducts and services relevant to taste using more traditional methods for thediscovery of flavor ingredients, or for the reduction of salt, sugar, MSG orbitter taste. These competitors include leading flavor companies, such asFirmenich, Givaudan SA, International Flavors & Fragrances Inc.,Symrise and Takasago. These companies provide flavors and other products, suchas oils, extracts and distillates, to consumer products companies for use in awide variety of products including foods, beverages, confectionaries, dairyproducts and pharmaceuticals. Competitors currently developing or marketinghigh potency sweeteners include Ajinomoto, Cargill, Nutrasweet and Tate &Lyle. Competitors currently developing or marketing menthol or cooling agentsinclude Jindal Drugs, Mentha & Allied, Sharp Menthol, Symrise,Takasago and Millenium Specialty Chemicals.  We currently compete and willcontinue to compete in the future with these companies in collaborating withand selling flavor products and technologies to manufacturers of packaged food,beverage and ingredient products. Many of these

 

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companieshave substantially greater capital resources, research and developmentresources and experience, manufacturing capabilities, regulatory expertise,sales and marketing resources, established relationships with consumer productscompanies and production facilities.

 

We may in the future facecompetition from life sciences and other technology companies and othercommercial enterprises. These entities engage as we do in biotechnology,biology or chemistry and could apply this technology to the discovery and developmentof flavor ingredients. We are aware of one other company, Redpoint Bio, that isinvolved in research on sweetness potentiators, salt substitutes and bitterblockers, specifically AMP.  While we donot believe that any of these collaborations is competitive with our productdiscovery and development efforts, we cannot guarantee that products developedas a result of our competitors’ existing or future collaborations will notcompete with our flavor ingredients.

 

Universities and public andprivate research institutions are also potential competitors. While theseorganizations primarily have educational objectives, they may developproprietary technologies related to the sense of taste or secure patentprotection that we may need for the development of our technologies andproducts. We may attempt to license these proprietary technologies, but theselicenses may not be available to us on acceptable terms, if at all.

 

Methods for reducing sodiuminclude the use of potassium chloride in combination with flavors and maskingagents.  Although savory flavorenhancers, such as IMP, are commercially available, they are not very potent,are not patent protected and are sold as a commodity. The blocking of bittertaste is typically accomplished by attempting to mask the bitter taste with asweetener or another flavor ingredient. Although AMP has received GRAS determination, we do not believe thiscompound has been widely adopted into packaged food, beverage and ingredient products.  Existing cooling agents, such as menthol andWS3, are currently in use.   However, ourcompetitors, either alone or with their collaborative partners, may succeed indeveloping technologies or discovering flavor ingredients that are similar orpreferable in the areas of, among others, effectiveness, safety, cost and easeof commercialization, and our competitors may obtain intellectual propertyprotection or commercialize such products sooner than we do. Developments byothers may render our product candidates or our technologies obsolete. Inaddition, our current product discovery and development collaborators are notprohibited from entering into research and development agreements with thirdparties in any particular field.

 

**Patentsand Proprietary Rights**

 

We will be able to protectour proprietary rights from unauthorized use by third parties only to theextent that our proprietary rights are described by valid and enforceablepatents or are effectively maintained as trade secrets. Accordingly, we arepursuing and will continue to pursue patent protection for our proprietarytechnologies. As of December 31, 2007 we are the owner or the exclusivelicensee of 63 issued United States patents, 117 pending United States patentapplications, 50 issued foreign patents and 254 pending foreign applicationscovering various aspects of our proprietary technology. Our issued patents haveterms that expire in 2014 through 2024.

 

Our policy is to file patentapplications and to protect technologies, inventions and improvements toinventions that are commercially important to the development of our business.For example, we may seek patent protection for receptors and nucleic acidsequences encoding receptors that are involved in taste and the use of suchreceptors to identify ingredients that modulate taste. We also rely ontrademarks to protect our proprietary technology. Generally, United Statespatents have a term of 17 years from the date of issue or 20 years from theearliest claimed priority date, whichever is later, for patents issued fromapplications filed with the United States Patent and Trademark Office prior to June 8,1995 or 20 years from the application filing date or earlier claimed prioritydate in the case of patents issued from applications filed on or after June 8,1995. Patents in most other countries have a term of 20 years from the date offiling the patent application. Our success depends significantly upon ourability to develop ingredients and technologies that are protected by ourintellectual property and that do not infringe any competitor patents. Weintend to continue to file patent applications as we discover and develop newflavor ingredients and technologies.

 

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Seeking and obtainingpatents may provide some degree of protection for our intellectual property.However, our patent positions are highly uncertain and may involve complexlegal and factual questions. No consistent standard regarding the allowabilityand enforceability of claims in many of the pending patent applications hasemerged to date. As a result, we cannot predict the breadth of claims that willultimately be allowed in our patent applications, if any, including those wein-licensed or how we may be able to enforce our patent claims against ourcompetitors. In addition, we may not have been the first to file patentapplications for or to invent inventions relating to the technologies uponwhich we rely, which would preclude us from obtaining issued patents on therelevant inventions. We are aware of other companies and academic institutionswhich have been performing research and have applied for patents in the area ofmammalian taste. In particular, other companies and academic institutions andinventor applicants  have announced thatthey have identified taste receptors, published data on taste receptor sequenceinformation or have filed patent applications on receptors and their use,including Ajinomoto, the California Institute of Technology, Dendreon, DukeUniversity, the German Institute of Human Nutrition, Givaudan SA, MonellChemical Senses, Mount Sinai School of Medicine, Novartis, Pfizer, RedpointBio, The Scripps Research Institute, Sloan Kettering, the University ofCalifornia,  Virginia CommonwealthUniversity and Wiessenbach. If any of these companies or academic institutionsor inventor applicants are successful in obtaining broad patent claims, suchpatents could potentially block our ability to use various aspects of ourdiscovery and development process and might prevent us from developing or commercializingnewly discovered flavor ingredients or otherwise conducting our business.

 

We also rely in part ontrade secret protection for our confidential and proprietary information andprocess. Our policy is to execute confidentiality agreements with our employeesand consultants upon the commencement of an employment or consultingrelationship. These agreements generally require that all confidentialinformation developed by the individual or made known to the individual by usduring the course of their employment shall be our exclusive property. However,there can be no assurance that we will be able to effectively enforce theseagreements or that the subject proprietary information will not be disclosed.

 

We are not a party to anylitigation, opposition, interference, or other potentially adverse ex parte orinter-party governmental or non-governmental proceeding with regard to ourpatent and trademark positions. However, if we become involved in litigation,interference proceedings, oppositions or other intellectual propertyproceedings, for example as a result of an alleged infringement, or athird-party alleging an earlier date of invention, we may have to spendsignificant amounts of money and time and, in the event of an adverse ruling,we could be subject to liability for damages, invalidation of our intellectualproperty and injunctive relief that could prevent us from using technologies ordeveloping products, any of which could have a significant adverse effect onour business financial condition and results of operation. In addition, anyclaims relating to the infringement of third-party proprietary rights, orearlier date of invention, even if not meritorious, could result in costlylitigation, lengthy governmental proceedings, divert management’s attention andresources and require us to enter royalty or license agreements which are notadvantageous if available at all.

 

**Sales and Marketing**

 

While we do not currentlyintend to establish internal sales and marketing capabilities, we are developingthe capability to enable us to work closely with our collaborators and theirsuppliers in the incorporation of our flavor ingredients into theirproducts.  Under our currentcollaboration agreements, our collaborators are responsible for sales, marketing,and distribution of any packaged food or beverage product incorporating ourflavor ingredients. As a result, we expect to commercialize our flavoringredients without incurring significant sales, marketing and distributioncosts. Our seven current collaborators, Ajinomoto, Cadbury Schweppes, Campbell,Coca-Cola, Firmenich, Nestlé and Solae, are recognized leaders in the sales,marketing and distribution of packaged food, beverage and ingredient products.

 

**Manufacturing**

 

We intend to utilize thirdparties to manufacture our flavor ingredients. Under five of our existingproduct discovery and development collaborations, our collaborator may, in itssole discretion, manufacture 

 

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itself or through a thirdparty manufacturer the flavor ingredients it licenses from us. The remainingfour collaborations require the collaborator to identify with us a mutuallyagreed upon third party to manufacture the flavor ingredients it licenses fromus.  In some of these agreements, wemaintain either the first right of negotiation or an option to manufacturebased on provisions within the agreement.

 

There are a number ofreliable third party contract manufacturers available to produce our flavoringredients. Our current product candidates are relatively simple structuresmaking them easy and inexpensive to produce. We do not anticipate any capacityissues because of our low volume requirements and the number of reliable andavailable manufacturers.

 

**Employees**

 

As of December 31,2007, we had 118 full-time employees, including 31 with Ph.D. degrees. Of ourfull-time workforce, 91 employees are engaged in research and development and27 are engaged in business development, finance and administration. We alsoretain outside consultants. None of our employees are covered by collectivebargaining arrangements, and our management considers its relationships withour employees to be good.

 

**ExecutiveOfficers**

 

The following table setsforth certain information concerning our executive officers and their ages asof December 31, 2007:

 

| **Name**              | ** ** | **Age** | ** ** | **Position**                                                                               |
|-----------------------|------------|---------|------------|--------------------------------------------------------------------------------------------|
| Kent Snyder           |       | 54      |       | President, Chief Executive Officer and Director                                            |
| Mark J. Zoller, Ph.D. |       | 54      |       | Executive Vice President of Discovery & Development and  Chief Scientific Officer |
| John Poyhonen         |       | 47      |       | Senior Vice President, Chief Financial and Business Officer                                |
| Sharon Wicker         |       | 52      |       | Senior Vice President of Commercial Development and Chief Strategy  Officer                |
| David Berger (1)      |       | 38      |       | Vice President, General Counsel and Corporate Secretary                                    |

 

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(1)   Mr. Berger joined Senomyx January 7, 2008.

 

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** **

**Kent Snyder**, President and Chief Executive Officer,joined us in June 2003 and has served as a member of our board ofdirectors since that time. Prior to joining us, from October 2001 to June 2003,Mr. Snyder was retired. From July 1991 to October 2001, Mr. Snyderheld various marketing and sales management positions with AgouronPharmaceuticals, Inc., a Pfizer company. Mr. Snyder was President ofGlobal Commercial Operations at Agouron. Prior to holding the position ofPresident of Global Commercial operations, Mr. Snyder served as SeniorVice President of Commercial Affairs and Vice President of BusinessDevelopment.  Mr. Snyder is adirector of Santarus, Inc., a publicly-held biopharmaceutical company, andVentiRx Pharmaceuticals, Inc., a privately-held biopharmaceuticalcompany.  Mr. Snyder received hisB.S. from the University of Kansas and his M.B.A. from Rockhurst College.

 

**Mark J.Zoller, Ph.D**., joinedus in March 2000 as Vice President of Research and was promoted toExecutive Vice President of Discovery and Development and Chief ScientificOfficer in January 2006, which position he still holds. From May 1992to December 1999, Dr. Zoller held a number of scientific managementpositions at ARIAD Pharmaceuticals, most recently as Senior Vice President,Genomics and Scientific Director of the Hoechst-ARIAD Genomics Center, which inDecember 1999 was acquired by Aventis Pharmaceuticals. Dr. Zollerreceived his B.A. in Chemistry from Pomona College and his Ph.D. in Chemistryfrom the University of California, San Diego.

 

**JohnPoyhonen**, Senior VicePresident and Chief Financial and Business Officer, joined us in October 2003as Vice President and Chief Business Officer and was promoted in April 2004to Vice President, Chief Financial and Business Officer.  In January 2006, he was promoted toSenior Vice President, Chief Financial and Business Officer.  From 1996 until October 2003, Mr. Poyhonenserved in various sales and marketing positions for Agouron Pharmaceuticals, aPfizer company, most recently as Vice President of National Sales. Prior toholding this position, Mr. Poyhonen served as Vice President of Marketingand Vice President of National Accounts. Mr. Poyhonen is a director ofArdea Biosciences, Inc., a publicly-held biopharmaceutical company.  Mr. Poyhonen received his B.A. inMarketing from Michigan State University and his M.B.A. from the University ofKansas.

 

**SharonWicker,**Senior Vice President of Commercial Development and Chief StrategyOfficer, joined us in April 2006. From 2003 to 2006, Ms. Wicker held various strategic marketingpositions, most recently as President, Flavor Business Unit at A.M. ToddCompany.  From 1999 to 2003, Ms. Wickerserved as Vice President of Frozen Meals for Heinz North America.  From 1994 to 1999 Ms. Wicker served asVice President and General Manager of the Meals Strategic Business Unit ofConAgra.  From 1984 to 1994 Ms. Wickerheld a variety of marketing and general management positions for General Mills,including assignments as Brand Manager for Cheerios and Betty Crocker desserts.Ms. Wicker received her BS in Food Science and Nutrition from ColoradoState University and her M.B.A. from Michigan State University.

 

**DavidBerger,**Vice President, General Counsel and Corporate Secretary, joined us in January 2008.From early 2003 through 2007 Mr. Berger was responsible for all commercialaspects of legal affairs at Biosite Incorporated, most recently as VicePresident, Legal Affairs.  Prior tojoining Biosite, he was an attorney at Cooley Godward Kronish LLP.  Mr. Berger received his J.D. at StanfordLaw School and was granted a B.A. in Economics at the University of California,Berkeley.

 

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**Item1A.  Risk Factors**

 

*You shouldconsider carefully the following information about the risks described below,together with the other information contained in this annual report on Form 10-Kand in our other public filings, in evaluating our business. If any of thefollowing risks actually occurs, our business, financial condition, results ofoperations and future growth prospects would likely be materially and adverselyaffected.  In these circumstances, the market price of our common stockwould likely decline.*

 

**Risks Related To OurBusiness**

 

***We are dependent on our product discoveryand development collaborators for all of our revenue and we are dependent onour current and any future product discovery and development collaborators todevelop and commercialize any flavor ingredients we may discover.***

 

A key element of our strategy is to commercializeour flavor ingredients through product discovery and developmentcollaborations. To date, substantially all of our revenue has been derivedsolely from research and development payments, milestone payments and costreimbursement payments received under our collaborations. Substantially all ofour revenue in the foreseeable future will result from these types of paymentsfrom these collaborations until such time, if ever, that we earn materialroyalties on future sales of consumer products incorporating our flavoringredients.

 

Our agreement, as amended, with Campbell providesfor research and development funding until March 2009 and gives Campbellthe right to terminate the agreement earlier without cause, provided that itpay a specified termination fee if it terminates the agreement prior to March 28,2009. Our agreement with Coca-Cola provides for research and developmentfunding until April 2008 and gives Coca-Cola the right to conclude thecollaborative program earlier for any reason upon payment to us of an earlyconclusion fee.  Our initial agreementwith Nestlé (as amended in April 2005) provides for research anddevelopment funding through April 2008 and gives Nestlé the right toterminate the agreement earlier without cause, provided that it pay additionalspecified research funding if it terminates the agreement prior to April 18,2008.  Our most recent agreement withNestlé regarding the discovery and commercialization of novel flavoringredients in the coffee and coffee whitener fields provides for research anddevelopment funding through April 2011 and gives Nestlé the right toterminate the agreement earlier without cause on or after April 26, 2008,provided that it pay additional specified research funding if it terminates theagreement after April 26, 2008 but prior to April 26, 2011.  Ouragreement with Cadbury provides for research and development funding through July 2008and gives Cadbury the right to terminate the agreement earlier without causeupon 90 days’ written notice.  Ourinitial agreement with Ajinomoto provides for research and development fundingthrough March 2009 and gives Ajinomoto the right to terminate the agreementwithout cause provided that it pay additional specified research funding if itterminates the agreement prior to March 23, 2009.  Our most recent agreement with Ajinomotoprovides for research and development funding through October 2009 andgives Ajinomoto the right to terminate the agreement without cause providedthat it pay additional specified research funding if it terminates theagreement prior to October 5, 2009.  Our agreement with Solae provides for research and development fundingthrough April 2010, and gives Solae the right to terminate the agreementwithout cause on April 23, 2008 upon 60 days’ prior notice, or subsequentto April 23, 2008 upon 90 days’ prior notice provided it pay additionalspecified research funding if it terminates the agreement prior to April 23,2010.  Our agreement with Firmenichpermits Firmenich to terminate the agreement without cause upon 90 days writtennotice on any anniversary of the effective date of the agreement provided thatit pay additional specified research funding if it terminates prior to December 14,2010.    If any or all of our materialagreements with our collaborators expire or are terminated, our revenue couldsignificantly decline and if all of our agreements expire or are terminated,our revenue would be substantially eliminated, which would have a materialadverse effect on our business, financial condition and results of operations.Our collaborators may not renew their agreements with us or, if they do, theymay not be on terms that are as favorable to us as our current agreements.  For example, our discovery and developmentcollaboration with Kraft Foods Global, Inc. concluded on December 9,2007, one year earlier than the scheduled term of the agreement.

 

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Our current collaboration agreements provide that wewill receive royalties of up to 4% on our collaborators’ sales of retail andfood service products, and up to 5% on our collaborators’ sales of ingredientsupplies containing our flavor ingredients. The actual royalties payable vary by agreement and depend on a number offactors including, for example, the product field, cost of goods savings,degree of flavor enhancement and sales volume of collaborator productsincorporating our flavor ingredients.  Itis possible that our collaborators will not incorporate our flavor ingredientsinto any or all of their products within their exclusive or co-exclusiveproduct fields.

 

We are dependent on our current and any otherpossible future collaborators to commercialize any flavor ingredients that wesuccessfully develop and to provide the sales, marketing and distributioncapabilities required for the success of our business. We have limited or nocontrol over the amount and timing of resources that our current or any futurecollaborators may devote to our programs or potential products. Ourcollaborators may decide not to devote the necessary resources to thecommercialization of our flavor ingredients, or may pursue a competitor’sproduct if our flavor ingredients do not have the characteristics desired bythe collaborator. These characteristics include, among other things,enhancement properties, temperature stability, solubility, taste and cost. Ifthese collaborators fail to conduct their commercialization, sales andmarketing or distribution activities successfully and in a timely manner, wewill earn little or no royalty revenues from our flavor ingredients and we willnot be able to achieve our objectives or build a sustainable or profitablebusiness.

 

Our present and any future product discovery anddevelopment collaboration opportunities could be harmed if:

 

·                  ourexisting or any future collaborators terminate their collaboration agreementswith us prior to the expiration of the agreements;

·                  wedo not achieve our research and development objectives under our collaborationagreements prior to the termination of the collaboration periods;

·                  wedisagree with our collaborators as to the parties’ respective licensing rightsto our flavor ingredients, methods or other intellectual property we develop;

·                  weare unable to manage multiple simultaneous collaborations;

·                  potentialcollaborators fail to spend their resources on research and development orcommercialization of our flavor ingredients due to general market conditions orfor any other reason; or

·                  consolidationin our target markets limits the number of potential collaborators.

 

***We may not be able to negotiate additionalcollaboration agreements having terms satisfactory to us or at all.***

 

We may not be able to enter into additional productdiscovery and development collaborations due to the exclusive nature of ourcurrent product discovery and development collaborations. Each of our currentcollaboration agreements provides that we will conduct research and developmenton flavor ingredients for use within one or more defined packaged food,beverage and ingredient product fields on an exclusive or co-exclusive basisfor the respective collaborator during the collaborative period specified inthe agreement. Because each of these agreements is exclusive or co-exclusive,we will not be able to enter into a collaboration agreement with any otherfood, beverage and ingredient company covering the same product field duringthe applicable collaborative period. In addition, our collaborators’competitors may not wish to do business with us at all due to our relationshipwith our collaborators. If we are unable to enter into additional productdiscovery and development collaborations, our ability to sustain or expand ourbusiness will be significantly diminished.

 

***We may not be successful in developingflavor ingredients useful for formulation into products.***

 

In order to develop flavor ingredients, we must havefirst identified the correct human taste receptor for the taste of interest anddevelop high-throughput assays to test for compounds that affect the taste ofinterest. If we are not able to identify the correct human taste receptor forthe taste of interest, our assays

 

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may not successfullyidentify compounds that affect the taste of interest. For example, in the eventthat SNMX-29 is not the primary human salt-taste receptor, we may not be ableto develop an effective salt taste enhancer.  Similarly, we may notsucceed in identifying the specific receptors needed to reduce or block bittertaste in soy-based products under our collaboration with Solae. In addition, wemay not be successful in the development of a high-throughput assay toeach human taste receptor of interest to us. Even if we succeed in theidentification of a human taste receptor of interest to us and develop anappropriate high-throughput assay, we may not succeed in developing flavoringredients with the appropriate attributes required for use in successfulcommercial products. Successful flavor ingredients require, among other things,appropriate biological activity, including the correct taste property for theproduct application, an acceptable safety profile, including lack of toxicityor allergenicity, and appropriate physical or chemical properties, includingrelative levels of stability, volatility and resistance to heat. Successfulflavor ingredients must also be cost-efficient for our collaborators. We maynot be able to develop flavor ingredients that meet these criteria.

 

***If we or our collaborators are unable toobtain and maintain the GRAS determination or other regulatory approvalrequired before certain of our flavor ingredients can be incorporated intoproducts that are sold, we would be unable to commercialize our flavoringredients and our business would be adversely affected.***

 

In March 2005, we obtained a GRAS determinationfor four of our savory flavor ingredients. Apart from these flavor ingredients, we do not have GRAS determinationor other regulatory approval for any other flavor ingredient at this time. Inthe United States, the development, sale and incorporation of our flavoringredients into products are subject to regulation by the FDA and in someinstances other government bodies. Obtaining and maintaining a GRASdetermination or other regulatory approval can be costly and take many years.

 

Depending on the amount or intended use of aparticular flavor ingredient added to a product and the number of productcategories in which the flavor ingredient will be incorporated, specific safetyassessment protocols and regulatory processes must be satisfied before we orour collaborators can commercially market and sell products containing anyflavor ingredients that we may discover. A key element of our strategy is todevelop flavor ingredients that may be subject to review under the FEMA GRASprocess.  In our experience with thesavory program, safety studies, preparation and FEMA GRAS review tookapproximately 12 months and cost less than $1 million.  This experience may not be representative ofthe timing and cost for future programs. This approach is less expensive than the alternative of filing a foodadditive petition with the FDA, approval of which can take up to four years.The FEMA GRAS process may take longer than 12 months and cost more than$1 million depending on the properties of the flavor ingredient, and ifadditional safety studies are requested by the FEMA Expert Panel or arenecessary to explain unexpected safety study findings. There is a risk that oneor more of our product candidates for which we seek FEMA GRAS determination maynot qualify for a FEMA GRAS determination. This may occur for a variety ofreasons, including the flavor ingredient’s intended use, the amount of theflavor ingredient intended to be added to packaged foods and beverages, thenumber of product categories in which the flavor ingredient will beincorporated, whether the flavor ingredient imparts sweetness, the safetyprofile of the flavor ingredient and the FEMA Expert Panel’s interpretation ofthe safety data. Even if we obtain a GRAS determination with respect to aflavor ingredient, the FDA has the ability to challenge such determination,which could materially adversely affect our ability to market products onschedule or at all. In the event that a particular flavor ingredient does notqualify for FEMA GRAS determination, we could be required to pursue a lengthyFDA approval process or dedicate our development efforts to alternativeingredients, which would further delay commercialization. In addition, laws,regulations or FDA practice governing the regulatory approval process, theavailability of the GRAS determination process or the manufacture or labelingof such products, may change in a manner that could adversely affect ourability to commercialize products on schedule or at all.

 

Sales of our flavor ingredients outside of theUnited States will be subject to foreign regulatory requirements, which aresubject to change and inherent uncertainty. In most cases, whether or not aGRAS determination has been obtained, approval of a product by the comparableregulatory authorities of foreign countries must still be obtained prior tomanufacturing or marketing the product in those countries. A GRAS determinationin the United States or 

 

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in any other jurisdiction does not ensure approval in otherjurisdictions because the requirements from jurisdiction to jurisdiction mayvary widely and may change over time. Because of the inherent uncertaintyassociated with the regulatory approval process outside the United States,predicting the outcome or timing of review of any of our submissions to foreignregulatory authorities, present or in the future, is difficult. Accordingly,our estimates and forecasts for those submissions and potential approvals may notbe accurate. The process of obtaining foreign approvals could result insignificant delays, difficulties and costs for us and require additional safetystudies and additional expenses. If we experience delays or if we fail tocomply with these regulatory requirements or to obtain and maintain requiredapprovals, our ability to generate revenue will be diminished.

 

We and our collaborators may not be successful inovercoming these regulatory hurdles, which could result in product launchdelays, unanticipated expenses, termination of collaborations and flavoringredients not being approved for incorporation into consumer products. Theseconsequences would have a material adverse effect on our business financialcondition and results of operations.

 

***If we or our collaborators are unable toobtain and maintain the regulatory approval required before any high potencysweeteners can be incorporated into products that are sold, we would be unableto commercialize our high potency sweeteners and our business would beadversely affected.***

 

In the United States, the development, sale andincorporation of our high potency sweeteners into products are subject toregulation by the FDA and in some instances other government bodies. Obtainingand maintaining regulatory approval can be costly and take many years.

 

Depending on the amount or intended use of aparticular high potency sweetener added to a product and the number of productcategories in which the high potency sweetener will be incorporated, specificsafety assessment protocols and regulatory processes must be satisfied beforewe or our collaborators can commercially market and sell products containingany high potency sweeteners that we may discover. An element of our strategy isto develop high potency sweeteners that may be subject to review under the FoodAdditive Petition process, which encompasses filing a food additive petitionwith the FDA, approval of which can take up to four years or more and may costup to $7 million or more.  Governmentresource constraints may also slow the review and approval process.  In addition, laws, regulations or FDApractice governing the regulatory approval process, the availability of theFood Additive Petition process or the manufacture or labeling of such products,may change in a manner that could adversely affect our ability to commercializeproducts on schedule or at all.

 

Sales of our high potency sweeteners outside of theUnited States will be subject to foreign regulatory requirements. In mostcases, whether or not FDA approval has been obtained, approval of a product bythe comparable regulatory authorities of foreign countries must still beobtained prior to manufacturing or marketing the product in those countries.FDA approval in the United States or regulatory approval in any otherjurisdiction does not ensure similar approval in other jurisdictions becausethe requirements from jurisdiction to jurisdiction may vary widely. Obtainingforeign approvals could result in significant delays, difficulties and costsfor us and require additional safety studies and additional expenses. If wefail to comply with these regulatory requirements or to obtain and maintainrequired approvals, our ability to generate revenue will be diminished.

 

We and our collaborators may not be successful inovercoming these regulatory hurdles, which could result in product launchdelays, unanticipated expenses, termination of collaborations and high potencysweeteners not being approved for incorporation into consumer products. Theseconsequences would have a material adverse effect on our business financialcondition and results of operations.

 

***Even if we or our collaborators receiveregulatory approval and incorporate our flavor ingredients into products, thoseproducts may never be commercially successful.***

 

Even if we discover and develop flavor ingredientsthat obtain the necessary GRAS determination or other regulatory approval, oursuccess depends to a significant degree upon the commercial success of packagedfood, beverage and ingredient products incorporating those flavor ingredients.If these products fail to achieve or subsequently maintain market acceptance orcommercial viability, our business would be significantly harmed because ourroyalty revenue is dependent upon consumer sales of these products. Inaddition, we could be unable to maintain our existing collaborations or attractnew product discovery and

 

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development collaborators.Many factors may affect the market acceptance and commercial success of anypotential products incorporating flavor ingredients that we may discover,including:

 

·                  healthconcerns, whether actual or perceived, or unfavorable publicity regarding ourflavor ingredients or those of our competitors;

·                  thetiming of market entry as compared to competitive products;

·                  therate of adoption of products by our collaborators and other companies in theflavor industry; and

·                  anyproduct labeling that may be required by the FDA or other United States orforeign regulatory agencies for products incorporating our flavor ingredients.

 

***We have a history of operating losses andwe may not achieve or maintain profitability.***

 

We have not been profitable and have generatedsubstantial operating losses since we were incorporated in September 1998.We incurred net losses of approximately $21.8 million for the year ended December 31,2007. As of December 31, 2007, we had an accumulated deficit ofapproximately $149.1 million. We expect to incur additional losses for at leastthe next two years. The extent of our future losses will depend, in part, onthe rate of increase in our operating expenses and the rate of growth, if any,in our revenue from our existing and any future product discovery anddevelopment collaborations as well as from other sources that may becomeavailable to us in the future and on the level of our expenses. To date, substantiallyall of our revenue has come from research and development funding, upfrontfees, cost reimbursement and milestone payments under our product discovery anddevelopment collaborations. In order for us to generate further royalty revenueand become profitable, we must substantially retain our existing productdiscovery and development collaborations and our collaborators must furthercommercialize products incorporating one or more of our flavor ingredients,from which we can derive additional royalty revenues. Our ability to generateroyalty revenue is uncertain and will depend upon our ability to meetparticular research, development and commercialization objectives.

 

***We expect that our results of operationswill fluctuate from period to period, and this fluctuation could cause ourstock price to decline.***

 

Our operating results have fluctuated in the pastand are likely to vary significantly in the future based upon a number offactors, many of which we have little or no control over. We operate in ahighly dynamic industry and future results could be subject to significantfluctuations. These fluctuations could cause us to fail to meet or exceed ourpublished guidance or financial expectations of securities analysts orinvestors, which could cause our stock price to decline rapidly andsignificantly. Revenue and expenses in future periods may be greater or lessthan revenue and expenses in the immediately preceding period or in thecomparable period of the prior year. Therefore, period-to-period comparisons ofour operating results are not necessarily a good indication of our futureperformance. Some of the factors that could cause our operating results tofluctuate include:

 

·                  terminationof any of our product discovery and development collaboration agreements;

·                  ourability to discover and develop flavor ingredients or the ability of ourproduct discovery and development collaborators to incorporate them intopackaged food, beverage and ingredient products;

·                  ourreceipt of milestone payments in any particular period;

·                  theability and willingness of collaborators to commercialize productsincorporating our flavor ingredients on expected timelines, or at all;

·                  ourability to enter into new product discovery and development collaborations andtechnology collaborations or to extend the terms of our existing collaborationagreements and our payment obligations, expected revenue and other terms of anyother agreements of this type;

·                  ourability, or our collaborators’ ability, to successfully satisfy all pertinentregulatory requirements;

·                  thedemand for our collaborators’ products containing our flavor ingredients; and

 

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·                  generaland industry specific economic conditions, which may affect our collaborators’research and development expenditures.

 

***Changes in financial accounting standardsrelated to stock-based compensation expenses have had and are expected tocontinue to have a significant effect on our reported results.***

 

On January 1, 2006 we adopted Statement ofFinancial Accounting Standards, or SFAS, No. 123R, *Share-BasedPayment*, which requires that we record compensation expense in thestatement of operations for stock-based payments, such as employee stockoptions, using the fair value method. The adoption of the standard is expectedto continue to have a significant effect on our reported earnings, although itwill not affect our cash flows, and could adversely impact our ability toprovide accurate guidance on our projected future financial results due to thevariability of the factors used to establish the value of stock options.  If factors change and we employ differentassumptions or different valuation methods in the application of SFAS No. 123Rin future periods, the compensation expense that we record under SFAS No. 123Rmay differ significantly from what we have recorded in the current period,which could negatively affect our stock price and our stock price volatility.

 

***Compliance with regulation of corporate governance andpublic disclosure may result in additional expenses.***

 

Laws, regulations and standards relating to corporategovernance and public disclosure, including the Sarbanes-Oxley Act of 2002, SECregulations and NASDAQ Stock Market rules, are costly to comply with.  Our efforts to comply with these laws,regulations and standards have resulted in, and are likely to continue toresult in, general and administrative expense and management time related tocompliance activities.  In particular,our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002and the related regulations regarding our required assessment of our internalcontrols over financial reporting and our external auditors’ audit of thatassessment requires the commitment of significant financial and managerialresources. If our efforts to comply with laws, regulations and standards differfrom the activities intended by regulatory or governing bodies, our reputationmay be harmed and we might be subject to sanctions or investigation byregulatory authorities, such as the SEC. Any such action could adversely affectour financial results and the market price of our common stock.

 

***We may need to obtain additional capital tofund our operations.***

 

If we are unable to successfully commercialize ourflavor ingredients, we may need to obtain additional capital or change ourstrategy to continue our operations. In addition, our business and operationsmay change in a manner that would consume available resources at a greater ratethan anticipated. In such event, we may need to raise substantial additionalcapital to, among other things:

 

·                  fund new research, discovery or developmentprograms;

·                  advance additional product candidates intoand through the regulatory approval process; and

·                  acquire rights to products or productcandidates, technologies or businesses.

 

If we require additional capital to continue ouroperations, we cannot assure you that additional financing will be available onterms acceptable to us, or at all. If adequate funds are not available or arenot available on acceptable terms, our ability to fund our operations, takeadvantage of opportunities, identify and develop flavor ingredients, developtechnologies or otherwise respond to competitive pressures could besignificantly limited. In addition, if financing is not available, we may needto alter our strategy or cease operations. In addition, issuances of debt oradditional equity could impact the rights of the holders of our common stock,may dilute our stockholders’ ownership and may impose restrictions on ouroperations. These restrictions could include limitations on additionalborrowing, specific restrictions on the use of our assets as well asprohibitions on our ability to create liens, pay dividends, redeem our stock ormake investments.

 

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***If we lose our key personnel or are unableto attract and retain qualified personnel, it could adversely affect ourbusiness.***

 

Our success depends to a significant degree upon thecontinued contributions of our executive officers, management and scientificstaff. If we lose the services of one or more of these people and, inparticular, Kent Snyder, our President and Chief Executive Officer, or MarkZoller, Ph.D., our Executive Vice President of Discovery & Developmentand Chief Scientific Officer, the relationships we have with our collaboratorswould likely be negatively impacted and we may be delayed or unable to developnew product candidates, commercialize our existing product candidates orachieve our other business objectives, any of which could cause our stock priceto decline. We have entered into employment letter agreements with thefollowing executive officers: Kent Snyder, Mark Zoller, Ph.D., John Poyhonen,our Senior Vice President, Chief Financial and Business Officer, Sharon Wicker,our Senior Vice President and Chief Strategy Officer and David Berger, our VicePresident, General Counsel and Corporate Secretary.  All of our employees are at-will employees,which means that either we or the employee may terminate their employment atany time. We currently have no key person insurance.

 

In addition, our discovery and development programsdepend on our ability to attract and retain highly skilled scientists,including molecular biologists, biochemists, chemists and engineers. We may notbe able to attract or retain qualified employees in the future due to theintense competition for qualified personnel among technology-based businesses,particularly in the San Diego area. We also face competition from universitiesand public and private research institutions in recruiting and retaining highlyqualified scientific and management personnel. If we are not able to attractand retain the necessary personnel to accomplish our business objectives, wemay experience constraints that will adversely affect our ability to meet thedemands of our current or any future product discovery and developmentcollaborators in a timely fashion or to support our independent discovery anddevelopment programs.

 

***We may encounter difficulties managing ourgrowth, which could adversely affect our business.***

 

Our strategy includes entering into and working onsimultaneous flavor ingredient discovery and development programs acrossmultiple markets. We increased the number of our full-time employees from sevenon December 31, 1999 to 118 on December 31, 2007 and we expect tocontinue to grow to meet our strategic objectives. If our growth continues, itwill continue to place a strain on us, our management and our resources. Ourability to effectively manage our operations, growth and various projects requiresus to continue to improve our operational, financial and management controls,reporting systems and procedures and to attract and retain sufficient numbersof talented employees. We may not be able to successfully implement these taskson a larger scale and, accordingly, we may not achieve our research,development and commercialization goals. If we fail to improve our operational, financial and managementinformation systems, or fail to effectively monitor or manage our new andfuture employees or our growth, our business would suffer significantly. Inaddition, no assurance can be made that we will be able to maintain adequatefacilities to house our staff, conduct our research or achieve our businessobjectives.

 

***We will rely on third parties to manufacture our flavor ingredients ona commercial scale.***

 

We do not have experience in manufacturing, nor dowe have the resources or facilities to manufacture, flavor ingredients on acommercial scale. Therefore, the commercialization of our flavor ingredientswill depend in part on our or our collaborators’ ability to contract withthird-party manufacturers of our flavor ingredients on a large scale, at acompetitive cost, with the specified quality and in accordance with relevantfood, beverage and ingredient regulatory requirements. Any such third-partymanufacturers may encounter manufacturing difficulties at any time that couldresult in delays in the commercialization of potential flavor ingredients. Ourinability to find capable third-party manufacturers or to enter into agreementson acceptable terms with third-party manufacturers could delaycommercialization of any products we may develop and may harm our relationshipswith our existing and any future product discovery and development collaboratorsand our customers. Moreover, if we are required to change from one third-partymanufacturer to another for any reason, the commercialization of our productsmay be delayed further. In addition, if third-party manufacturers fail tocomply with the FDA’s good manufacturing practice regulations or similarregulations in other countries, then we may be subject to

 

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adverse regulatory action including product recalls,warning letters and withdrawal of our products, or our collaborators’ orcustomers’ products, from the market.

 

Further,because our flavor ingredients are regulated as food products under theFD&C Act, we and the third parties with which we collaborate or contract tomanufacture, process, pack, import or otherwise handle our products or ourproduct ingredients, may be required to comply with certain registration, priornotice submission, recordkeeping and other regulatory requirements. Failure ofany party in the chain of distribution to comply with any applicablerequirements under the FD&C Act or the FDA’s implementing regulations, orsimilar regulations in other countries, may adversely affect the manufactureand/or distribution of our products in commerce.

 

***If we acquire products, technologies or other businesses, wewill incur a variety of costs, may have integration difficulties and mayexperience numerous other risks that could adversely affect our business.***

 

Ifappropriate opportunities become available, we may consider acquiringbusinesses, technologies or products that we believe are a strategic fit withour business. We currently have no commitments or agreements with respect to,and are not actively seeking, any material acquisitions. We have limitedexperience in identifying acquisition targets, successfully acquiring them andintegrating them into our current infrastructure. We may not be able tosuccessfully integrate any businesses, products, technologies or personnel thatwe might acquire in the future without a significant expenditure of operating,financial and management resources, if at all. In addition, future acquisitionsmight be funded by issuances of additional debt or equity, which could impactyour rights as a holder of our common stock and may dilute your ownershippercentage. Any of the foregoing could have a significant adverse effect on ourbusiness, financial condition and results of operations.

 

**Risks Related To Our Industry**

 

***Our ability to compete in the flavor ingredient market maydecline if we do not adequately protect our proprietary technologies.***

 

Oursuccess depends in part on our ability to obtain and maintain intellectualproperty that protects our technologies and flavor ingredients. Patentpositions may be highly uncertain and may involve complex legal and factualquestions, including the ability to establish patentability of sequencesrelating to taste receptors, proteins, chemical synthesis techniques, compoundsand methods for using them to modulate taste for which we seek patentprotection. No consistent standard regarding the allowability or enforceabilityof claims in many of our pending patent applications has emerged to date. As aresult, we cannot predict the breadth of claims that will ultimately be allowedin our patent applications, if any, including those we have in-licensed or theextent to which we may enforce these claims against our competitors. The degreeof future protection for our proprietary rights is therefore highly uncertainand we cannot assure you that:

 

·                  we were the first to file patentapplications or to invent the subject matter claimed in patent applicationsrelating to the technologies upon which we rely;

·                  others will not independently developsimilar or alternative technologies or duplicate any of our technologies;

·                  others did not publicly disclose ourclaimed technology before we conceived the subject matter included in any ofour patent applications;

·                  any of our patent applications willresult in issued patents;

·                  any of our patent applications will notresult in interferences or disputes with third parties regarding priority ofinvention;

·                  any patents that have issued or may beissued to us, our collaborators or our licensors will provide a basis forcommercially viable products or will provide us with any competitive advantagesor will not be challenged by third parties;

·                  we will develop additional proprietarytechnologies that are patentable;

 

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·                  the patents of others will not have anadverse effect on our ability to do business; or

·                  new proprietary technologies from thirdparties, including existing licensors, will be available for licensing to us onreasonable commercial terms, if at all.

 

Inaddition, patent law outside the United States is uncertain and in manycountries intellectual property laws are undergoing review and revision. Thelaws of some countries do not protect intellectual property rights to the sameextent as domestic laws. It may be necessary or useful for us to participate inopposition proceedings to determine the validity of our competitors’ patents orto defend the validity of any of our or our licensors’ future patents, whichcould result in substantial costs and would divert our efforts and attentionfrom other aspects of our business.

 

Technologieslicensed to us by others, or in-licensed technologies, are important to ourbusiness. In particular, we depend on high-throughput screening technologiesthat we licensed from Aurora Biosciences, technology related to certain tastereceptor sequences that we license from the University of California and othersand technology related to compound libraries that we license from thirdparties. In addition, we may in the future acquire rights to additionaltechnologies by licensing such rights from existing licensors or from thirdparties. Such in-licenses may be costly. Also, we generally do not control thepatent prosecution, maintenance or enforcement of in-licensed technologies.Accordingly, we are unable to exercise the same degree of control over thisintellectual property as we do over our internally developed technologies.Moreover, some of our academic institution licensors, collaborators andscientific advisors have rights to publish data and information to which wehave rights. If we cannot maintain the confidentiality of our technologies andother confidential information in connection with our collaborations, ourability to protect our proprietary information or obtain patent protection inthe future may be impaired, which could have a significant adverse effect onour business, financial condition and results of operations.

 

***Many of the patent applications we and our licensors havefiled have not yet been substantively examined and may not result in patentsbeing issued.***

 

Manyof the patent applications filed by us and our licensors were filed recentlywith the United States Patent and Trademark Office and most have not beensubstantively examined and may not result in patents being issued. Some ofthese patent applications claim sequences that were identified from differentpublicly available sequence information sources such as the High-ThroughputGenomic Sequences division of GenBank. It is difficult to predict whether anyof our or our licensors’ applications will ultimately be found to be patentableor, if so, to predict the scope of any allowed claims. In addition, thedisclosure in our or our licensors’ patent applications, particularly inrespect of the utility of our claimed inventions, may not be sufficient to meetthe statutory requirements for patentability in all cases. Furthermore, recentchanges in rules promulgated by the United States Patent and TrademarkOffice may adversely affect the patentability of inventions claimed in our andour licensors’ patent applications.  As aresult, it is difficult to predict whether any of our or our licensors’applications will be allowed, or, if so, to predict the scope of any allowedclaims or the enforceability of the patents. Even if enforceable, others may beable to design around any patents or develop similar technologies that are notwithin the scope of such patents. Our and our licensors’ patent applicationsmay not issue as patents that will provide us with any protection orcompetitive advantage.

 

***Disputes concerning the infringement or misappropriation ofour proprietary rights or the proprietary rights of others could be timeconsuming and extremely costly and could delay our research and developmentefforts.***

 

Our commercial success, if any, will be significantlyharmed if we infringe the patent rights of third parties or if we breach anylicense or other agreements that we have entered into with regard to ourtechnology or business.

 

We areaware of other companies and academic institutions that have been performingresearch in the areas of taste modulation and flavor ingredients. Inparticular, other companies, academic institutions and inventor applicants haveannounced that they have conducted taste-receptor or ion channel research andhave published data on 

 

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taste receptor sequence information and tastereceptors or filed patent applications or obtained patent protection on tastemodulation or taste receptors and their uses, including Ajinomoto, CaliforniaInstitute of Technology, Cargill, Dendreon, Duke University, Firmenich, theGerman Institute of Human Nutrition, Givaudan SA, International Flavors &Fragrances Inc., Johannes Gutenberg University, Monell Chemical Senses Corp.,Mount Sinai School of Medicine, Nestlé, Novartis, NutraSweet, Pfizer, Inc.,Redpoint Bio, Sloan Kettering, Symrise, Tate & Lyle, The ScrippsResearch Institute, Unilever, the University of California, Virginia CommonwealthUniversity and Wiessenbach. To the extent any of these companies, academicinstitutions or inventor applicants currently have, or obtain in the future,broad patent claims, such patents could block our ability to use variousaspects of our discovery and development process and might prevent us fromdeveloping or commercializing newly discovered flavor ingredients or otherwiseconducting our business. The University of California, for example, claimscertain patent rights relating to the coexpression of T1R receptors that maynot have been licensed to us. While our technology is focused on the use ofhuman T1R receptors, we cannot assure you that it does not infringe such patentrights.  In such event, if we are not able to amend our license with theUniversity of California to include such patent rights and our technology isfound to interfere with or infringe such patent rights, our business, financialcondition and results of operations could suffer a significant adverse effect.  In addition, it is possible that some of theflavor ingredients that are discovered using our technology may not bepatentable or may be covered by intellectual property of third parties.

 

We arenot currently a party to any litigation, interference, opposition, protest,reexamination, reissue or any other potentially adverse governmental, ex parteor inter-party proceeding with regard to our patent or trademarkpositions.  However, the life sciences and other technology industries arecharacterized by extensive litigation regarding patents and other intellectualproperty rights. Many life sciences and other technology companies haveemployed intellectual property litigation as a way to gain a competitiveadvantage. If we become involved in litigation, interference proceedings, oppositions,reexamination, protest or other potentially adverse intellectual propertyproceedings as a result of alleged infringement by us of the rights of othersor as a result of priority of invention disputes with third parties, we mighthave to spend significant amounts of money, time and effort defending ourposition and we may not be successful. In addition, any claims relating to theinfringement of third-party proprietary rights or proprietary determinations,even if not meritorious, could result in costly litigation, lengthygovernmental proceedings, divert management’s attention and resources, orrequire us to enter into royalty or license agreements that are notadvantageous to us.

 

Shouldany person have filed patent applications or obtained patents that claiminventions also claimed by us, we may have to participate in an interferenceproceeding declared by the relevant patent regulatory agency to determinepriority of invention and, thus, the right to a patent for these inventions inthe United States. Such a proceeding could result in substantial cost to useven if the outcome is favorable. Even if successful on priority grounds, aninterference action may result in loss of claims based on patentability groundsraised in the interference action. Litigation, interference proceedings orother proceedings could divert management’s time and efforts. Even unsuccessfulclaims could result in significant legal fees and other expenses, diversion ofmanagement’s time and disruption in our business. Uncertainties resulting frominitiation and continuation of any patent proceeding or related litigationcould harm our ability to compete and could have a significant adverse effecton our business, financial condition and results of operations.

 

Anadverse ruling arising out of any intellectual property dispute, including anadverse decision as to the priority of our inventions, could undercut orinvalidate our intellectual property position. An adverse ruling could alsosubject us to significant liability for damages, including possible trebledamages, prevent us from using technologies or developing products, or requireus to negotiate licenses to disputed rights from third parties. Although patentand intellectual property disputes in the technology area are often settledthrough licensing or similar arrangements, costs associated with thesearrangements may be substantial and could include license fees and ongoingroyalties. Furthermore, necessary licenses may not be available to us onsatisfactory terms, if at all. Failure to obtain a license in such a case couldhave a significant adverse effect on our business, financial condition andresults of operations.

 

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***If we are unable to protect our trade secrets and otherproprietary information, we could lose any competitive advantage we may have,which could adversely affect our business.***

 

Werely in part on trade secret protection for our confidential and proprietaryinformation, know how and processes. Our policy is to execute proprietaryinformation and invention agreements with our employees and consultants uponthe commencement of an employment or consulting relationship. These agreementsgenerally require that all confidential information developed by the individualor made known to the individual by us during the course of the individual’srelationship with us be kept confidential and not be disclosed to thirdparties. These agreements also generally provide that inventions conceived bythe individual in the course of their employment shall be our exclusiveproperty. There can be no assurance that we will be able to effectively enforcethese agreements or that proprietary information is our exclusive property.There can be no assurance that the subject proprietary information will not bedisclosed, that others will not independently develop substantially equivalentproprietary information and techniques or otherwise gain access to our tradesecrets or that we can meaningfully protect our trade secrets. Costly andtime-consuming litigation could be necessary to enforce and determine the scopeof our proprietary rights, and failure to obtain or maintain trade secretprotection could adversely affect our competitive business position.

 

***Many potential competitors, including those who have greaterresources and experience than we do, may develop products or technologies thatmake ours obsolete or noncompetitive.***

 

Thelife sciences and other technology industries are characterized by rapidtechnological change, and the area of sensory or taste receptor research is arapidly evolving field. Our future success will depend on our ability tomaintain a competitive position with respect to technological advances.Technological developments by others may result in our flavor ingredients andtechnologies becoming obsolete.

 

In particular, we face substantial competition fromcompanies pursuing the commercialization of products and services relevant totaste using more traditional methods for the discovery of flavor ingredients, orfor the reduction of salt, sugar, MSG or bitter taste. These competitorsinclude leading flavor companies, such as Firmenich, Givaudan SA, InternationalFlavors & Fragrances Inc., Symrise and Takasago. These companiesprovide flavors and other products, such as oils, extracts and distillates, toconsumer products companies for use in a wide variety of products includingfoods, beverages, confectionaries, dairy products and pharmaceuticals.Competitors currently developing or marketing high potency sweeteners includeAjinomoto, Cargill, Nutrasweet and Tate & Lyle. Competitors currentlydeveloping or marketing menthol or cooling agents include Jindal Drugs, Mentha &Allied, Sharp Menthol, Symrise, Takasago and Millenium SpecialtyChemicals.  We currently compete and will continue to compete in thefuture with these companies in collaborating with and selling flavor productsand technologies to manufacturers of packaged food, beverage and ingredientproducts. Many of these companies have substantially greater capital resources,research and development resources and experience, manufacturing capabilities,regulatory expertise, sales and marketing resources, established relationshipswith consumer products companies and production facilities.

 

Savoryflavor enhancers, particularly IMP, are commercially available, and we willcompete with the companies that produce these flavors. IMP is widely availableand is a generally accepted food additive by the packaged food, beverage andingredient industries. As a result, our existing and future collaborators maychoose to incorporate IMP or similar savory flavor enhancers into theirpackaged food, beverage and ingredient products instead of our savory flavoringredients.  We may compete with bitter masking or bitter blockingcompounds, such as AMP.  We may alsocompete with known methods for reducing sodium, such as the use of potassiumchloride in combination with flavors and masking agents.  In addition, we may compete with existingcooling agents, such as menthol and WS3, that are currently in use.

 

We mayin the future face competition from life sciences and other technologycompanies and other commercial enterprises. These entities engage as we do inbiotechnology, biology or chemistry research and could apply this technology tothe discovery and development of flavor ingredients. We are aware of one othercompany, Redpoint Bio, that is involved in research on sweetness potentiators,salt substitutes 

 

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and bitter blockers, specifically AMP. We cannotguarantee that products developed as a result of our competitors’ existing orfuture collaborations will not compete with our flavor ingredients.

 

Universitiesand public and private research institutions are also potential competitors.While these organizations primarily have educational objectives, they maydevelop proprietary technologies related to the sense of taste or secure patentprotection that we may need for the development of our technologies andproducts. We may attempt to license these proprietary technologies, but theselicenses may not be available to us on acceptable terms, if at all.

 

Ourcompetitors, either alone or with their collaborative partners, may succeed indeveloping technologies or discovering flavor ingredients that are moreeffective, safer, more affordable or more easily commercialized than ours, andour competitors may obtain intellectual property protection or commercializeproducts sooner than we do. Developments by others may render our productcandidates or our technologies obsolete. In addition, our current productdiscovery and development collaborators are not prohibited from entering intoresearch and development collaboration agreements with third parties in anyproduct field. Our failure to compete effectively would have a significantadverse effect on our business, financial condition and results of operations.

 

***We may be sued for product liability, which could adverselyaffect our business.***

 

Becauseour business strategy involves the development and sale by our collaborators ofcommercial products incorporating our flavor ingredients, we may be sued forproduct liability. We may be held liable if any product we develop andcommercialize, or any product our collaborators commercialize that incorporatesany of our flavor ingredients, causes injury or is found otherwise unsuitableduring product testing, manufacturing, marketing, sale or consumer use. Inaddition, the safety studies we must perform and the regulatory approvals wemust obtain prior to incorporating our flavor ingredients into a commercialproduct will not protect us from any such liability.

 

Ourproduct liability insurance may not fully cover our potential liabilitiesassociated with the sale of commercial products incorporating any of our flavoringredients. Inability to obtain sufficient insurance coverage to protectagainst potential product liability claims could prevent or inhibit thecommercialization of products developed by us or our product discovery anddevelopment collaborators. We may be obligated to indemnify our productdiscovery and development collaborators for product liability or other lossesthey incur as a result of our flavor ingredients. Any indemnification wereceive from such collaborators for product liability that does not arise fromour flavor ingredients may not be sufficient to satisfy our liability toinjured parties. If we are sued for any injury caused by our flavor ingredientsor products incorporating our flavor ingredients, our liability could exceedour total assets.

 

***We use hazardous materials. Any claims relating to improperhandling, storage or disposal of these materials could be time consuming andcostly.***

 

Ourdiscovery and development process requires our employees to routinely handle hazardouschemical, radioactive and biological materials. Our operations also producehazardous waste products. Federal, state and local laws and regulations governthe use, manufacture, storage, handling and disposal of these materials. As aresult of the increase in size of our operations, we are now classified as alarge quantity generator of hazardous waste. This classification may result inincreased scrutiny of our operations by the Environmental Protection Agency.Compliance with applicable environmental laws and regulations may be expensive,and current or future environmental regulations may impair our discovery anddevelopment efforts.

 

Inaddition, we cannot entirely eliminate the risk of accidental contamination ordischarge and any resultant injury from these materials. Our insurance policieshave limited coverage for damages or cleanup costs related to hazardous wastedisposal or contamination. We may be forced to curtail operations or be suedfor any injury or contamination that results from our use or the use by othersof these materials, and our liability may exceed our total assets.

 

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**Risks Related To Our Common Stock**

 

***The price of our common stock is volatile.***

 

The market prices forsecurities of biotechnology companies historically have been highly volatile,and the market has from time to time experienced significant price and volumefluctuations that are unrelated to the operating performance of particularcompanies. Since our initial public offering in June 2004, the price ofour common stock has ranged from approximately $5 per share to approximately$23 per share. The market price of our common stock may fluctuate in responseto many factors, including:

 

·                  developments concerning our collaborativeagreements;

·                  delays in commercialization of our flavoringredients;

·                  results of safety evaluation of ourflavor ingredients;

·                  developments related to the United Statesand international regulatory approval of our products;

·                  results of consumer acceptance testing ofour flavor ingredients by our collaborators;

·                  announcements of technologicalinnovations by us or others;

·                  developments in patent or otherproprietary rights;

·                  changes in our management, key personnelor members of our Board of Directors;

·                  future sales of our common stock byexisting stockholders;

·                  comments by securities analysts;

·                  general market conditions;

·                  fluctuations in our operating results;

·                  government regulation;

·                  failure of any of our flavor ingredients,if approved, to achieve commercial success; and

·                  public concern as to the safety of ourflavor ingredients.

 

***Anti-takeover provisions in our charter documents and underDelaware law may make an acquisition of us more complicated and the removal andreplacement of our directors and management more difficult.***

 

Provisionsof our amended and restated certificate of incorporation and bylaws, as well asprovisions of Delaware law, could make it more difficult for a third party toacquire us, even if doing so would benefit our stockholders. These provisionsmay also make it difficult for stockholders to remove and replace our board ofdirectors and management. These provisions:

 

·                  authorize the issuance of “blank check”preferred stock by our board of directors, without stockholder approval, whichcould increase the number of outstanding shares and prevent or delay a takeoverattempt;

·                  limit who may call a special meeting ofstockholders;

·                  prohibit stockholder action by writtenconsent, thereby requiring all stockholder actions to be taken at a meeting ofour stockholders; and

·                  establish advance notice requirements fornominations for election to the board of directors or for proposing mattersthat can be acted upon at stockholder meetings.

 

Inaddition, the requirements of Section 203 of the Delaware GeneralCorporation Law may discourage, delay or prevent a third party from acquiringus.

 

***Our shareholder rights plan may hinder or prevent change ofcontrol transactions.***

 

Ourshareholder rights plans may discourage transactions involving an actual orpotential change in our ownership.  Inaddition, our board of directors may issue shares of preferred stock withoutany further action by you.  Suchissuances may have the effect of delaying or preventing a change in ourownership.  If changes in our ownershipare discouraged, delayed or prevented, it would be more difficult for ourcurrent 

 

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board of directors to be removed and replaced, even ifyou and other stockholders believe such actions are in the best interests of usand our stockholders.

 

***We have never paid cash dividends on our capital stock andwe do not anticipate paying dividends in the foreseeable future.***

 

Wehave paid no cash dividends on any of our classes of capital stock to date, andwe currently intend to retain our future earnings, if any, to fund thedevelopment and growth of our business. In addition, the terms of any futuredebt or credit facility may preclude us from paying any dividends. As a result,capital appreciation, if any, of our common stock will be your sole source ofpotential gain for the foreseeable future.

 

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**Item 1B.   *Unresolved Staff Comments***

 

None.

 

**Item2.    *Properties***

 

We currently lease approximately 65,000 square feet oflaboratory and office space at 4767 Nexus Center Drive, San Diego, California,92121.  Our lease for this facilityexpires on February 28, 2017. Our current monthly lease obligation forrent is approximately $200,000. We are responsible for expenses associated withthe use and maintenance of the building, such as utilities and common areamaintenance. These costs will vary each month, and we expect that these costswill be approximately $110,000 per month.

 

We believe that our facilities are adequate to meetour business requirements for the near-term and that additional space will beavailable on commercially reasonable terms, if required.

 

**Item3.    *Legal Proceedings***

 

We are not a party to any material legal proceedingsat this time.

 

**Item4.    *Submission ofMatters to a Vote of Security Holders***

 

No matters were submitted to a vote of our securityholders during the quarter ended December 31, 2007.

 

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**PART II**

 

**Item 5.    *Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities***

 

**CommonStock Market Price**

 

Our common stock commencedtrading on the NASDAQ Stock Market on June 22, 2004 under the symbol “SNMX.”The following table sets forth the high and low sales prices per share of ourcommon stock as traded on the NASDAQ Stock Market for the periods indicated.

 
| **Fiscal 2007 Quarter ended** | ** ** | **March 31,  2007** | ** ** | **June 30,  2007** | ** ** | **September  30, 2007** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| High                                         |       | $                        | 14.85      |                    | $          | 16.36                        |       | $                           | 14.00      |   | $ | 12.40 |   |
| Low                                          |       | $                        | 11.26      |                    | $          | 11.89                        |       | $                           | 10.21      |   | $ | 6.29 |   |

 
| **Fiscal 2006 Quarter ended** | ** ** | **March 31,  2006** | ** ** | **June 30,  2006** | ** ** | **September  30, 2006** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| High                                         |       | $                        | 17.08      |                    | $          | 16.59                        |       | $                           | 15.75      |   | $ | 19.00 |   |
| Low                                          |       | $                        | 11.87      |                    | $          | 11.36                        |       | $                           | 12.01      |   | $ | 12.35 |   |

 

The last sale price for ourcommon stock as reported by the NASDAQ Stock Market on January 31, 2008was $6.51 per share.  As of January 31,2008, there were approximately 68 shareholders of record of our common stock.

 

We have never declared orpaid any cash dividends to our shareholders. We do not presently plan to paycash dividends in the foreseeable future and intend to retain any futureearnings for reinvestment in our business.

 

Information about our equitycompensation plans is included in Item 12 of Part III of this annualreport.

 

**Repurchasesof Equity Securities**

 

There were no repurchases of equity securities in the fourth quarter of2007.

 

40

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**PerformanceMeasurement Comparison(1)**

 

The following graph shows a comparison of the 42-month total cumulativereturns of an investment of $100 in cash in (i) our common stock on June 22,2004, the first trading date following our initial public offering, (ii) theNasdaq Composite Index, U.S. Companies on May 31, 2004 and (iii) theNasdaq Biotechnology Index on May 31, 2004.  The comparisons in the graph are required bythe SEC and are not intended to forecast or be indicative of the possiblefuture performance of our common stock. The graph assumes that all dividends have been reinvested (to date, wehave not declared any dividends).

 

**COMPARISONOF 42 MONTH CUMULATIVE TOTAL RETURN***

Among Senomyx Inc., The NASDAQComposite Index

And the NASDAQ BiotechnologyIndex

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*  $100invested on 6/22/04 in stock or 5/31/04 in index-including reinvestment ofdividends.

Fiscal year ending December 31.

 

(1)  This section is not “soliciting material,” is not deemed“filed” with the SEC, is not subject to the liabilities of Section 18 of the SecuritiesExchange Act of 1934, as amended, and is not to be incorporated by reference inany of our filings under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended, whether made before or after thedate hereof and irrespective of any general incorporation language in any suchfiling.

 

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**Item 6.    *Selected Financial Data***

 

The Statement of OperationsData and Balance Sheet Data presented below should be read in conjunction withItem 7, Management’s Discussion and Analysis of Financial Condition andResults of Operations, and Item 8, Financial Statements and Supplementary Dataincluded in this annual report on Form 10-K.  Amounts are in thousands, except share andper share amounts.

 
| ** **                                                       | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Statements of Operations Data:**                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Revenues:                                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Development revenue                                              |       | $                                           | 18,197     |   | $ | 12,230 |   | $ | 9,385 |   | $ | 8,347 |   | $ | 9,537 |   |
| Commercial revenue                                               |       | 23                                          |       | — |   | — |   | — |   | — |   |
| Total revenues                                                   |       | 18,220                                      |       | 12,230 |   | 9,385 |   | 8,347 |   | 9,537 |   |
| Operating expenses:                                              |       |                                        |       |   |   |   |   |   |   |   |   |
| Research and development                                         |       | 29,874                                      |       | 25,393 |   | 20,330 |   | 18,318 |   | 18,095 |   |
| General and administrative                                       |       | 13,572                                      |       | 13,735 |   | 10,229 |   | 10,178 |   | 9,093 |   |
| Total operating expenses                                         |       | 43,446                                      |       | 39,128 |   | 30,559 |   | 28,496 |   | 27,188 |   |
| Loss from operations                                             |       | (25,226                                     | )          | (26,898 | ) | (21,174 | ) | (20,149 | ) | (17,651 | ) |
| Interest income, net                                             |       | 3,395                                       |       | 3,841 |   | 1,344 |   | 435 |   | 198 |   |
| Net loss                                                         |       | $                                           | (21,831    | ) | $ | (23,057 | ) | $ | (19,830 | ) | $ | (19,714 | ) | $ | (17,453 | ) |
| Basic and diluted net loss per share(1):                         |       |                                        |       |   |   |   |   |   |   |   |   |
| Historical                                                       |       | $                                           | (0.72      | ) | $ | (0.77 | ) | $ | (0.77 | ) | $ | (1.40 | ) | $ | (10.03 | ) |
| Pro forma                                                        |       |                                        |       |   |   |   |   | $ | (0.89 | ) | $ | (0.97 | ) |
| Shares used to compute basic and diluted  net loss per share(1): |       |                                        |       |   |   |   |   |   |   |   |   |
| Historical                                                       |       | 30,326,768                                  |       | 29,809,854 |   | 25,916,229 |   | 14,040,727 |   | 1,739,380 |   |
| Pro forma                                                        |       |                                        |       |   |   |   |   | 22,143,380 |   | 17,944,686 |   |

 

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| (1) |   | Please see Note 1 to our financial statements for an explanation  of the method used to calculate the historical net loss per share and the  number of shares used in the computation of the per share amounts. The pro  forma basic and diluted net loss per share gives effect to the conversion of  our convertible preferred stock into shares of common stock as if converted  at the date of original issuance. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| ** **                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Balance Sheet Data:**                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and investments  available-for-sale |       | $                                     | 62,624     |   | $ | 74,104 |   | $ | 83,813 |   | $ | 40,847 |   | $ | 17,058 |   |
| Working capital                                            |       | 51,977                                |       | 65,455 |   | 80,178 |   | 36,841 |   | 15,160 |   |
| Total assets                                               |       | 79,249                                |       | 90,182 |   | 88,531 |   | 43,802 |   | 20,440 |   |
| Accumulated deficit                                        |       | (149,114                              | )          | (127,283 | ) | (104,226 | ) | (84,396 | ) | (64,682 | ) |
| Total stockholders’ equity                            |       | 56,627                                |       | 69,477 |   | 82,445 |   | 38,373 |   | 17,104 |   |
|                                                            |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7.    *Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

 

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with our Financial Statements and the relatedNotes to Financial Statements in Item 8, “Financial Statements andSupplementary Data” in this annual report on Form 10-K.*

 

*Certain**statements contained inthis annual report on Form 10-K, including statements regarding thedevelopment, growth and expansion of our business, our intent, belief orcurrent expectations, primarily with respect to our future operatingperformance, and the products we expect to offer and other statements regardingmatters that are not historical facts, are “forward-looking statements” withinthe meaning of Section 27A of the Securities Act and Section 21E ofthe Securities Exchange Act of 1934, as amended, and are subject to the “safeharbor” created by these sections. Future filings with the SEC, future pressreleases and future oral or written statements made by us or with our approval,which are not statements of historical fact, may also contain forward-lookingstatements. Because such statements include risks and uncertainties, many of whichare beyond our control, actual results may differ materially from thoseexpressed or implied by such forward-looking statements. Some of the factorsthat could cause actual results to differ materially from those expressed orimplied by such forward-looking statements can be found under the caption “RiskFactors” and elsewhere in this annual report on Form 10-K.  Readers are cautioned not to place unduereliance on forward-looking statements. The forward-looking statements speakonly as of the date on which they are made, and we undertake no obligation toupdate such statements to reflect events that occur or circumstances that existafter the date on which they are made.*

 

**Overviewand Recent Developments**

 

We are a leading companyusing proprietary taste receptor technologies to discover and develop novelflavor ingredients in the savory, sweet, salt, bitter and cool areas.  We believe our flavor ingredients will enablepackaged food, beverage and ingredient companies to improve the nutritionalprofile of their products while maintaining or enhancing taste and may generatecost of goods savings.  We license ourflavor ingredients to our collaborators on an exclusive or co-exclusive basis,which we believe will provide these companies with the ability to differentiatetheir products.  We have entered intoproduct discovery and development collaborations with seven of the world’sleading packaged food, beverage and ingredient companies: Ajinomoto, Cadbury,Campbell, Coca-Cola, Firmenich, Nestlé and Solae.  We currently anticipate that we will deriveall of our revenues from existing and future collaborations.  Depending upon the collaboration, ourexisting collaboration agreements provide for upfront fees, research and developmentfunding, reimbursement of certain regulatory costs, milestone payments basedupon our achievement of research or development goals and, in the event ofcommercialization, commercial milestones, minimum periodic royalties androyalties on future sales of consumer products incorporating our flavoringredients.  Our current programs focuson the development of savory, sweet and salt flavor enhancers, high potencysweeteners, bitter blockers and cooling agents.

 

We have incurred significantlosses since our inception in 1998 and, as of December 31, 2007 ouraccumulated deficit was $149.1 million. We expect to incur additional losses over at least the next two years aswe continue to develop flavor ingredients. Our results of operations have fluctuated from period to period andlikely will continue to fluctuate substantially in the future based upon:

 

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·                  terminationof any of our product discovery and development collaboration agreements;

·                  therate at which we add personnel;

·                  ourability to discover and develop new flavor ingredients or the ability of ourproduct discovery and development collaborators to incorporate them into theirproducts;

·                  ourability to enter into new, or extend existing, product discovery anddevelopment collaborations and technology collaborations;

·                  thedemand for our collaborators’ products containing our flavor ingredients; and

·                  variabilityof our stock-based compensation expense in conjunction with fluctuations of ourstock price.

 

In March 2006, weentered into a Collaborative Research, Development, Commercialization andLicense Agreement with Ajinomoto for the discovery and commercialization ofnovel flavor ingredients in select product categories within Japan and otherAsian markets. In April 2007, we amended the agreement to expand Ajinomoto’srights into North America. The expanded license provided Ajinomoto withexclusive rights on the development and commercialization of certain existingflavor ingredients for the soup and bouillon, sauce and culinary aids, noodles,snack food and frozen foods product categories within the new territory. Thelicense covers retail, food service and ingredient supply applications for theflavor ingredients. In August 2007, we further amended the agreement toexpand Ajinomoto’s rights into in additional product categories and geographiesnot previously licensed by us. The expanded license will provide Ajinomoto withexclusive rights on the development and commercialization of certain existingflavor ingredients in a wide variety of product categories that were notpreviously licensed within a respective territory including soups, sauces,instant noodles, snack foods, frozen foods and processed meats.  The new territories for these product categoriesinclude Africa, the Caribbean, Europe, Latin America, the Middle East andOceania.  Upon commercialization, we willreceive royalty payments based on sales of products containing flavoringredients developed under the agreement. In addition, the royalty obligationfor both amendments includes predetermined minimum royalties.

 

In April 2007, weentered into a Collaborative Research, Development, Commercialization andLicense Agreement with Solae for the discovery and exclusive worldwidecommercialization of novel flavor ingredients for soy proteins.  Under the terms of the new collaboration,Solae has agreed to pay us research fees for up to three years.  Inaddition, we are eligible to receive milestone payments upon achievement ofspecific product discovery and development goals.  Upon commercialization, we will receiveroyalty payments based on sales of products containing flavor ingredientsdeveloped under the agreement.

 

In June 2007, weannounced that Nestlé, the world’s largest food company, has begun the initialcommercial introduction of the first food products that contain our savoryflavor ingredients.  Under the terms ofour agreement with Nestlé, we receive royalty payments based on sales ofproducts containing our flavor ingredients.

 

In July 2007, weamended our Collaborative Research and License Agreement with Cadbury dated July 15,2005, to extend the collaborative period for an additional twelve months,through July 15, 2008.  During theextension period, we will continue to work with Cadbury on the discovery andcommercialization of new flavor ingredients in the gum confectionary area.

 

In July 2007, weamended our collaboration agreement, dated December 6, 2000, as amended,with Kraft Foods Global, Inc., or Kraft Foods, a global leader in brandedfoods and beverages, to extend until December 9, 2008 Kraft Foods’ abilityto evaluate novel flavor modifiers under development by us for potential use byKraft Foods on an exclusive basis in a specified product field in the dessertproduct category and on a co-exclusive basis in the powdered beverage productfield.    On October 31, 2007 wereceived notification from Kraft Foods terminating our collaboration agreementeffective as of December 9, 2007. All rights previously licensed to Kraft Foods returned to us upon suchtermination.

 

In January 2008, weannounced that we entered into a Collaborative Research, Development,Commercialization and License Agreement with Firmenich for novel flavoringredients intended to provide 

 

44

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a cooling taste effect.  Under the terms of theagreement, Firmenich has agreed to pay us research funding for up to threeyears based on research progress during the collaborative period.  Inaddition, we are eligible to receive milestone payments upon achievement ofspecific product discovery and development goals. The combined total ofresearch funding and milestone payments could exceed $3.5 million if allmilestones are met. Upon commercialization, we will receive royalty paymentsbased on sales of products containing new flavor ingredients developed underthe agreement.

 

**Revenue**

 

We derive revenue from ourproduct discovery and development collaborations. To date, our revenue has comesolely from upfront fees, research and development funding, reimbursement ofcertain regulatory costs, milestone payments and royalty payments under ourproduct discovery and development collaboration agreements. As of December 31,2007, we have recognized cumulative revenue under our collaborations of $67.4million. If any of these collaborative agreements were to be terminated, thiscould have a significant effect on future revenues.

 

From our inception date tothe present, research and development payments represented the primary sourceof our revenue. Based on current collaborations, we anticipate thatsubstantially all of our revenues in the near future will be derived fromresearch and development payments.  Wemay receive additional milestone payments in the future upon the achievement ofcertain goals set forth in our collaboration agreements.

 

In addition, as ourcollaborators launch products incorporating our flavor ingredients, we receiveminimum periodic royalties and royalty payments based upon the sales of thoseproducts, which in the future could be significantly larger than research anddevelopment funding or milestone payments. In order for us to generate materialroyalty revenue and become profitable, we must retain our existing or establishnew product discovery and development collaborations and our collaborators mustcommercialize products incorporating one or more of our flavor ingredients. Ourability to generate material royalty revenue is uncertain and will depend uponour ability to meet particular research, development and commercializationobjectives.

 

**Researchand Development**

 

Our research and developmentexpenses consist primarily of costs associated with our discovery anddevelopment efforts in connection with our primary programs focused on thedevelopment of savory, sweet and salt flavor enhancers, high potencysweeteners, bitter blockers and cooling agents. We track research anddevelopment costs by the type of cost incurred rather than by project. Researchand development costs are comprised of salaries and other personnel-relatedexpenses, facilities and depreciation, research and development supplies,patent and licensing, outside services and non-cash stock-based compensationexpenses. We charge research and development expenses to operations asincurred.

 

The research and developmentpayments we have received from our collaboration agreements historically havenot covered all of our research and development expenses. We expect that ourresearch and development expenses are likely to increase in the future as aresult of our existing product discovery and development collaborations,internal product discovery and development activities and technologydevelopment and any expansion of these activities.

 

At this time, due to therisks inherent in the discovery of flavor ingredients, we are unable to estimatewith any certainty the costs we will incur in the continued development of ourflavor ingredients for commercialization. We anticipate that we will make determinations regarding the researchand development projects to pursue and the funding of each project on anongoing basis in response to the progress of each discovery and developmentprogram, as well as an ongoing assessment of its market potential. We cannot becertain when any material net cash inflow from the commercialization of ourflavor ingredients will commence.

 

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Our ability to complete thedevelopment of our current product candidates is subject to many risks anduncertainties. These risks include the risks, among others, that:

 

·                  weare substantially dependent upon our collaborators for research and developmentfunding;

·                  ourcollaborators may terminate their respective collaboration programs early;

·                  wemay not be able to discover flavor ingredients with the desired taste attributes;

·                  wemay not be successful in developing flavor ingredients with attributes requiredfor use in commercial products;

·                  wemay be unable to maintain FEMA GRAS determination for our savory productcandidates; and

·                  wemay be unable to obtain FEMA GRAS determination or regulatory approval forcandidates in our other programs.

 

If we do not complete thedevelopment of our flavor ingredients on a timely basis, our collaborators mayterminate or not renew our collaboration agreements, we may begin receivingrevenue from the commercialization of products incorporating our flavoringredients later than anticipated, or not at all, and it may be more difficultto enter into new collaboration agreements. In any of these cases, we mayrequire substantial additional funding in order to continue development of ourflavor ingredients.

 

**Generaland Administrative**

 

General and administrativeexpenses consist primarily of salaries and other personnel-related expensesrelated to business development, legal, financial, commercial development andother administrative functions and Sarbanes-Oxley compliance.  General and administrative expenses alsoinclude non-cash stock-based compensation expenses.   We expect that our general andadministrative expenses are likely to increase in the future as a result ofsupporting additional commercial development activities, business developmentand research and development.

 

**Resultsof Operations**

 

**YearsEnded December 31, 2007, 2006 and 2005**

 

***Revenue Under Collaboration Agreements***

 

We recorded revenue of $18.2million, $12.2 million and $9.4 million during the years ended December 31,2007, 2006 and 2005, respectively.  Research and development payments,upfront fees, milestone payments and royalty revenues under collaborations withAjinomoto, Cadbury Schweppes, Campbell, Coca-Cola, Firmenich, Kraft Foods,Nestlé and Solae accounted for 100% of total revenue for the year ended December 31,2007.  The increase of $6.0 million from2006 to 2007 was primarily due to revenue recognized related to amendments ofexisting collaborations.   Research anddevelopment payments, upfront fees and milestone payments under collaborationswith Ajinomoto, Cadbury Schweppes, Campbell, Coca-Cola, Kraft Foods and Nestlé accountedfor approximately 100% of total revenue for the year ended December 31,2006.  Research and development payments,reimbursement of certain regulatory expenses, upfront fees and milestonepayments under collaborations with Cadbury Schweppes, Campbell, Coca-Cola,Kraft Foods and Nestlé accounted for approximately 100% of total revenue forthe year ended December 31, 2005. The increase of $2.8 million from 2005 to 2006 was primarily due torevenue recognized for new collaborations.

 

***Research and Development Expenses***

 

Our research and developmentexpenses (including stock-based compensation expenses charged to research anddevelopment) were $29.9 million, $25.4 million and $20.3 million for the yearsended December 31, 2007, 2006 and 2005, respectively.  A comparisonof research and development expenses by category is as follows (in thousands):

 

46

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| ** **                              | ** ** | **Years Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Salaries and personnel                  |       | $                                       | 11,535     |   | $ | 9,133 |   | $ | 7,685 |   |
| Facilities and depreciation             |       | 5,721                                   |       | 5,133 |   | 4,568 |   |
| Research and development supplies       |       | 5,047                                   |       | 3,328 |   | 2,742 |   |
| Non-cash stock-based compensation       |       | 2,588                                   |       | 3,048 |   | 2,647 |   |
| Patent and licensing                    |       | 2,503                                   |       | 1,854 |   | 1,406 |   |
| Outside services                        |       | 1,521                                   |       | 2,202 |   | 806 |   |
| Miscellaneous                           |       | 959                                     |       | 695 |   | 476 |   |
| Total research and development expenses |       | $                                       | 29,874     |   | $ | 25,393 |   | $ | 20,330 |   |

 

***Salaries and Personnel.***  Our expenses for research and development personnel, includingconsultants, were $11.5 million, $9.1 million and $7.7 million for the yearsended December 31, 2007, 2006 and 2005, respectively. The increase insalaries and personnel expenses is primarily due to the addition of staff tosupport research and development operations. Our research and development staff increased from an average of 79 forthe year ended December 31, 2006 to and average of 88 for the year ended December 31,2007.  In addition, the increase insalaries and personnel expenses was due to the impact of annual salaryadjustments.  Our research anddevelopment staff increased from an average of 61 for the year ended December 31,2005 to an average of 79 for the year ended December 31, 2006.  The increase in staff was primarily tosupport the identification and optimization of product candidates from ourdiscovery and development programs and tosupport increasing activities in product development and research management.

 

***Facilities and Depreciation.***    Our facilities anddepreciation expenses were $5.7 million, $5.1 million and $4.6 million for theyears ended December 31, 2007, 2006 and 2005, respectively. The increaseof $588,000 from 2006 to 2007 was primarily attributable to an increase indepreciation expense of $1.1 million primarily due to tenant improvements inour current facility being placed in service during 2006 and being depreciatedfor an entire year in 2007, as compared to only part of a year for 2006,partially offset by a decrease in our facilities expenses of $511,000 due todecreased rent expense for our new facility as compared to our former facility.  We relocated to our new facility in November 2006.  The increase of $565,000 from 2005 to 2006was primarily attributable to increased depreciation expense due to theaddition of new scientific equipment and costs associated with the move to thenew facility in the fourth quarter of 2006.

 

***Research and Development Supplies.***  Our expenses for supplies used inresearch and development were $5.0 million, $3.3 million and $2.7 million forthe years ended December 31, 2007, 2006 and 2005, respectively.  Theincrease of $1.7 million from 2006 to 2007 was primarily attributable to higherresearch and development screening and other lab supplies expenses and tohigher compound acquisition expenses. The increase of $586,000 from 2005 to 2006 was primarily attributable toincreased purchases of scientific supplies and compound acquisition expensesassociated with increased screening activity in 2006.

 

***Non-cash Stock-basedCompensation.***  Our non-cash stock-based compensationexpenses were $2.6 million, $3.0 million and $2.6 million for the years ended December 31,2007, 2006 and 2005, respectively.  Thedecrease of $459,000 was primarily attributable to decreases in compensationexpense in 2007 compared to 2006 for stock options granted to both employeesprior to 2006 and to non-employees, as the expense for these options isaccounted for on an accelerated basis, which results in more expense beingrecognized for the options earlier in the options’ vesting period.  This decrease was partially offset byincreases in expense related to stock options granted to employees during 2006and 2007.  Options granted to employeesafter 2005 are accounted for on a straight-line basis.  The increase of $401,000 from 2005 to 2006was primarily due to an increase in compensation expense in 2006 compared to2005 for stock options granted to employees, partially offset by a decrease incompensation expense for stock options granted to non-employees.  The increase in employee-related stock-basedcompensation expense was due to our adoption of Financial Accounting StandardsBoard, or FASB, SFAS No. 123R, *Share Based*

 

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*Payment,* inthe first quarter of 2006.

 

***Patent and Licensing.***  Our patent and licensing expenses were $2.5 million, $1.9million and $1.4 million for the years ended December 31, 2007, 2006 and2005, respectively.  The increase of $649,000 from 2006 to 2007 wasprimarily attributable to outsourced patent filing related activitiesassociated with our expanding intellectual property portfolio.  The increase of $448,000 from 2005 to 2006was primarily attributable to certain foreign patent activities commencing inthe fourth quarter of 2005 and completed in the second quarter of 2006.

 

***Outside Services.***  Our outside services expenses were $1.5 million, $2.2 millionand $806,000 for the years ended December 31, 2007, 2006 and 2005,respectively.  The decrease of $681,000 from 2006 to 2007 was primarilyattributable to a decrease in costs for chemistry outsourcing, as we redeployedthese resources to internal activities. The increase of $1.4 million from 2005 to 2006 was primarilyattributable to an increase in costs incurred for chemistry and productdevelopment outsourcing.

 

***General and Administrative Expenses***

 

Our general andadministrative expenses (including non-cash stock-based compensation expensescharged to general and administrative) were $13.6 million, $13.7 million and$10.2 million for the years ended December 31, 2007, 2006 and 2005,respectively.  The $163,000 decrease in expenses from 2006 to 2007 wasprimarily attributable to decreases in consulting expenses, non-cashstock-based compensation expenses and recruiting and relocation expenses,partially offset by increases in salaries and personnel costs.  The decrease in consulting expenses ofapproximately $356,000 from 2006 to 2007 was due to the one-time use ofstrategic planning consultants in the first quarter of 2006.  The decrease in non-cash stock-basedcompensation expense of approximately $225,000 was due to stock options grantedto both employees prior to 2006 and to non-employees, as the expense for theseoptions is accounted for on an accelerated basis, which results in more expensebeing recognized for the options earlier in the options’ vesting period.  This decrease was partially offset byincreases in expense related to stock options granted to employees during 2006and 2007.  The decrease in recruiting andrelocation expenses of approximately $167,000 was due to the addition of keygeneral and administrative personnel in the second quarter of 2006.  The increase in expenses for salaries andpersonnel of approximately $599,000 was primarily due to the impact of salaryadjustments.

 

The $3.5 million increase inexpenses from 2005 to 2006 was primarily attributable to an increase innon-cash stock-based compensation expense of approximately $1.8 million, anincrease in payroll expense of approximately $1.2 million, and an increase inconsulting expenses of approximately $488,000. The increase in non-cash stock-basedcompensation expense is due to the adoption of SFAS 123R in the first quarterof 2006, offset by a decrease in amortization of deferred compensation andcompensation expense for stock options granted to non-employees.  The increases in expenses for payroll and inexpenses for recruiting and relocation were due to the impact of annual merit,cost of living and promotion salary increases and to increased headcount.  The increase in consulting expenses was dueto one-time consulting expenses.

 

***Interest Income***

 

Interest income was $3.4million, $3.8 million and $1.3 million for the years ended December 31,2007, 2006 and 2005, respectively.  The decrease of $446,000 was primarilyattributable to less cash invested for 2007 compared to 2006 that was partiallyoffset by higher average rates of return on those invested balances for 2007compared to 2006.  The increase of $2.5million from 2005 to 2006 was primarily attributable to our higher average cashbalances for the year ended December 31, 2006 as a result of our November 2005public offering of common stock, and to higher rates of return on thosebalances.

 

***Liquidity and Capital Resources***

 

Since our inception, we havefinanced our business primarily through private and public placements of stock,research and development payments under our product discovery and developmentcollaborations and interest income.  As of December 31, 2007 we hadreceived in excess of $169.6 million in proceeds from the sales of common andpreferred stock.  In addition, we had received $73.2 million innon-refundable license fees, research and development payments, costreimbursements and milestone payments 

 

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from our collaboration agreements, and $10.9 millionin interest income.  As of December 31, 2007, over the remaining lifeof our current collaboration agreements, we expect to receive an additional$17.7 million in non-refundable research and development payments from ourcollaborators.  We may not receive these payments if the collaborations areterminated.  In addition, we may receivepayments in the event we achieve research or development milestones and royaltypayments in the event our collaborators commercialize products incorporatingour flavor ingredients.

 

At December 31, 2007,we had $62.6 million in cash, cash equivalents and investmentsavailable-for-sale as compared to $74.1 million at December 31, 2006, adecrease of $11.5 million.  This overall decrease resulted primarily fromthe use of cash to fund our operations.

 

***Operating Activities***

 

Operating activities usedcash of $12.4 million for the year ended December 31, 2007 compared to$8.1 million for the year ended December 31, 2006.  Operating cash flow in 2007 compared to theprior year reflects a decrease in our net loss of $1.2 million.  Non-cash expenses decreased $658,000 to $6.9million for the year ended December 31, 2007 from $7.6 million for theyear ended December 31, 2006.  Thedecrease in non-cash operating expenses was primarily due to an increase in theamortization of leasehold obligation of $867,000 (a contra-expense), relativedecreases in both non-employee and employee non-cash stock-based compensationexpense for $591,000 and $93,000, respectively, and an increase in accretion ofdiscount on available-for-sale securities of $490,000.  These reductions in non-cash expenses werepartially offset by a relative increase in depreciation expense of $1.4million.  Net changes in other current assetsused cash of $810,000 for the year ended December 31, 2007, while net decreasesin other current assets provided cash of $1.1 million for the year ended December 31,2006.  Net increases in operatingliabilities provided cash of $3.4 million and $6.4 million for the years ended December 31,2007 and 2006, respectively.

 

Operating activities usedcash of $8.1 million for the year ended December 31, 2006 compared to$13.9 million for the year ended December 31, 2005.  Operating cash flow in 2006 compared to theprior year period reflects an increase in our net loss of $3.2 million.  Non-cash expenses increased $1.2 million to$7.6 million for the year ended December 31, 2006 from $6.3 million forthe year ended December 31, 2005. The increase in non-cash operating expenses was primarily due to theimplementation of SFAS 123R in the first quarter of 2006.  Net decreases in other current assetsprovided cash of $1.1 million for the year ended December 31, 2006, whilenet increases in other current assets used cash of $978,000 for the year ended December 31,2005.  Net increases in operatingliabilities provided cash of $6.4 million and $522,000 for the years ended December 31,2006 and 2005, respectively.

 

***Investing Activities***

 

Investing activitiesprovided cash of $9.0 million for the year ended December 31, 2007.  Cash provided in 2007 reflects the maturitiesof available-for-sale securities of $104.8 million.  These maturities were partially offset bypurchases of available-for-sale securities of $92.6 million and purchases ofproperty and equipment of $3.2 million for newly hired employees and for thenew facility.

 

Investing activities usedcash of $47.2 million for the year ended December 31, 2006.  Cash used in 2006 reflects the purchases ofavailable-for-sale securities of $110.2 million and purchases of property andequipment of $5.7 million for newly hired employees and for the newfacility.  These purchases were partiallyoffset by the maturities of available-for-sale securities of $68.7 million.

 

Investing activitiesprovided cash of $12.1 million for the year ended December 31, 2005. Cash provided in 2005 reflects the maturities of available-for-sale securitiesof $45.8 million, offset by purchases of available-for-sale securities of $31.8million with the proceeds from our public offering in November 2005 toobtain higher rates of interest income.

 

***Financing Activities***

 

Financing activitiesprovided cash of $2.1 million, $2.6 million and $58.7 million for the yearsended December 31, 2007, 2006 and 2005, respectively.  Cash provided by financing activities in 2007reflects 

 

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the net proceeds from the sale of common stock of$2.1 million, primarily from the exercise of stock options.  Cash provided by financing activities in 2006reflects the net proceeds from the sale of common stock of $2.6 million,primarily from the exercise of stock options. Cash provided by financing activities in 2005 reflects the net proceedsfrom the sale of common stock of $58.7 million, primarily from the sale ofcommon stock during our November 2005 public offering of common stock.

 

As of December 31, 2007future minimum payments due under our contractual obligations are as follows(in thousands):

 
| ** **       | ** ** | **Payments Due by Period** | ** ** |
|------------------|------------|-------------------------------------------|------------|
| ** **       | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Operating leases |       | $                                         | 25,478     |   | $ | 2,494 |   | $ | 5,166 |   | $ | 5,439 |   | $ | 12,379 |   |
| License payments |       | 68                                        |       | 53 |   | 15 |   | — |   | — |   |
| Total            |       | $                                         | 25,546     |   | $ | 2,547 |   | $ | 5,181 |   | $ | 5,439 |   | $ | 12,379 |   |

 

As of December 31,2007, we had no long-term debt obligations.

 

As of December 31,2007, we have net open purchase orders (defined as total open purchase ordersat year end less any accruals or invoices charged to or amounts paid againstsuch purchase orders) totaling approximately $1.4 million.  In the next twelve months, we also plan tospend approximately $3.0 to $3.5 million on capital expenditures.

 

Our license agreement withthe University of California calls for annual maintenance fees commencing in2006 or royalties or service revenues on sales of any products developed usingtechnologies licensed under the agreement. Royalties are calculated as a percentage of covered sales.  The agreement specifies minimum periodicroyalty payments commencing in 2014 and continuing through the expiration ofthe last to expire patent licensed under the agreement.

 

Our future capital uses andrequirements depend on numerous forward-looking factors.  These factorsmay include, but are not limited to, the following:

 

·                  therate of progress and cost of research and development activities;

·                  thenumber and scope of our research activities;

·                  thecosts of filing, prosecuting, defending and enforcing any patent claims andother intellectual property rights;

·                  ourability to establish and maintain product discovery and developmentcollaborations;

·                  theeffect of competing technological and market developments;

·                  theterms and timing of any collaborative, licensing and other arrangements that wemay establish; and

·                  theextent to which we acquire or in-license new products, technologies orbusinesses.

 

We believe our availablecash, cash equivalents, investments and existing sources of funding will besufficient to satisfy our anticipated operating and capital requirements throughat least the next 12 months.

 

Until we can generatesignificant cash from our operations, we expect to continue to fund ouroperations with existing cash resources that were primarily generated from theproceeds of offerings of our equity securities and research and developmentpayments and milestone payments under our product discovery and developmentcollaborations.  As of December 31, 2007, under our existingcollaboration agreements, assuming all milestones are achieved and we receiveall research and development funding, we may be entitled to up to $31.1million.  In 2008, we anticipate receiving $8.8 million in non-refundableresearch and development funding.  Thisdoes not include any additional payments we may receive related to theachievement of additional milestones, or to new collaborations or extensions ofexisting collaborations.  This does notinclude any additional payments we will receive related to royalties from thesale of products containing our flavor ingredients.  We may not receive the payments if thecollaborations are terminated or not renewed, or if we do not achieve themilestones set forth in the collaboration 

 

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agreements.  In addition, the timing of thereceipt of milestone payments in particular is uncertain, as we may achievemilestones significantly earlier or later than we currently expect.  Wecannot predict at this time the level of our collaborators’ royalty-generatingsales, as these sales to date have been based on launches of new productswithout established sales histories.

 

We continue to pursueadditional collaborations, which could result in additional revenue.  Wemay not recognize revenues for research and development funding, milestones,minimum periodic royalties or royalties if the collaborations are terminated,or if we do not achieve the milestones set forth in the collaborationagreements.  Our expenses will vary based upon (but not limited to) theforward-looking factors listed above.

 

***Off-Balance Sheet Arrangements***

 

As of December 31, 2007and 2006, we did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as special purposeor structured finance entities, which would have been established for thepurposes of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes.  As such, we are not materially exposed to anyfinancing, liquidity, market or credit risk that could arise if we had engagedin these relationships.

 

**CriticalAccounting Policies**

 

Our discussion and analysisof our financial condition and results of operations are based on our financialstatements, which have been prepared in accordance with United States generallyaccepted accounting principles, or GAAP.  The preparation of thesefinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities and expenses and relateddisclosure of contingent assets and liabilities.  On an ongoing basis, weevaluate these estimates, including those related to revenue recognition,long-lived assets, accrued liabilities, and income taxes.  These estimatesare based on historical experience and various other assumptions that webelieve to be reasonable under the circumstances, the results of which form thebasis for judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions orconditions.  While our significant accounting policies are described inmore detail in Note 1 to our financial statements, we believe the followingaccounting policies to be critical to the judgments and estimates used in thepreparation of our financial statements:

 

***Revenue Recognition***

 

Ourrevenue recognition policies are in compliance with the Staff AccountingBulletin, or SAB, No. 104, *Revenue Recognition*,and Emerging Issues Task Force, or EITF, Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*.  Some of our agreements contain multipleelements, including technological and territorial licenses and research anddevelopment services.  In accordance withthese agreements, we may be eligible for upfront fees, research and developmentfunding, cost reimbursements, development milestones, commercializationmilestones, minimum periodic royalty payments and royalty payments.

 

Developmentrevenues include revenues from license fees, research and development funding,development milestones and cost reimbursement.

 

Non-refundablelicense fees, if not associated with future performance, are recognized whenreceived. Non-refundable license fees, if associated with future performance,are attributed to a specific program or collaboration and recognized over theperiod of service for that specific program or collaboration.

 

Amountsreceived for research funding are recognized as revenues as the services areperformed. Revenue is deferred for fees received before earned.

 

Revenuefrom development milestones is recognized when earned, as evidenced by writtenacknowledgment from the collaborator or other persuasive evidence that themilestone has been achieved, 

 

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provided that (i) the milestone event issubstantive and its achievability was not reasonably assured at the inceptionof the agreement and (ii) our performance obligations after the milestoneachievement will continue to be funded by the collaborator at a levelcomparable to before the milestone achievement. If both of these criteria arenot met, the milestone payment is recognized over the remaining minimum periodof our performance obligations under the agreement.

 

Revenuefrom cost reimbursements is recognized when earned, as evidenced by writtenacknowledgment from the collaborator or other persuasive evidence.

 

Commercialrevenues include revenues from commercialization milestones, minimum periodicroyalty payments and royalties on product sales made by our collaboratorsincorporating our flavor ingredients.

 

Revenuefrom commercialization milestones is recognized over the royalty term.

 

Non-refundableminimum periodic royalty payments are recognized as revenues over relatedannual royalty periods.  Annual royaltyterms vary between collaborations and collaborators and can vary from year to year.  These terms vary based on factors such as thecharacteristics of the flavor ingredient and the product categories andgeographies licensed by the collaborator. Periodically, as contractually specified, our collaborators are requiredto provide a report detailing all sales of products containing our flavoringredients.  To the extent thatcalculated royalties on sales of such products exceed the minimum periodicroyalty payments made to date, the collaborators are required to remit to usthe difference between royalties calculated and minimum periodic royaltypayments made to date.  We recognize thisdifference as royalties on product sales at the time the report isreceived.  To the extent that minimumperiodic royalty payments made to date exceed calculated royalties, we are notrequired to refund the difference.

 

Althoughwe do not currently have any collaborations that include refundable minimumperiodic royalty payments, in such a case, revenue would be deferred forrefundable minimum periodic royalty payments received before earned.

 

Royaltieson product sales made by our collaborators incorporating our flavor ingredientsare recognized when received, which is generally expected to be one quarter inarrears.

 

Asapplicable, commercial revenues are reported net of royalties payable under ourthird party licensing agreements.  Todate, substantially all of our commercial revenues have been related to minimumperiodic royalty payments.

 

***Stock-Based Compensation***

 

We grant options to purchaseour common stock to our employees and directors under our equity incentiveplan. Eligible employees can also purchase shares of our common stock under ouremployee stock purchase plan at the lower of: (i) 85% of the fair marketvalue on the first day of a two-year offering period; or (ii) 85% of thefair market value on the last date of each six-month purchase period within thetwo-year offering period.  In addition,we grant options to purchase our common stock to non-employees under our equityincentive plan.

 

For the year ended December 31,2005, prior to the adoption of SFAS 123R, we recorded deferred compensation forstock options and stock awards granted equal to the difference between theexercise price and the fair value of our common stock on the date of grant asdetermined for the purpose of recording our initial public offering, or IPO,cheap stock calculation. We recorded options or awards issued to non-employeesat their fair value in accordance with the SFAS 123, *Accountingfor Stock-Based Compensation*, and periodically remeasure them inaccordance with EITF 96-18 and recognize them over the service period.  Deferred compensation amounts were recordedas a component of stockholders’ equity and amortized, on an accelerated basis,as a non-cash charge to operations over the vesting period of the options. Werecorded employee and non-employee stock-based compensation expense of $5.3million for the year ended December 31, 2005.

 

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In December 2004, theFASB issued SFAS 123R, which requires companies to expense the estimatedfair value of employee stock options and similar awards. This statement is arevision to SFAS 123 and supersedes Accounting Principles Board, or APB,Opinion No. 25, *Accounting for Stock Issuedto Employees*, and amends FASB Statement No. 95, *Statement of Cash Flows*. The accounting provisions of SFAS 123R were effective for the firstquarter of fiscal 2006.   In conjunctionwith the adoption of SFAS 123R, the unamortized balance of deferred compensationrecorded for our IPO cheap stock calculation was reclassified to additionalpaid-in capital.  As of our adoption dateof SFAS 123R, the unamortized balance of deferred compensation was $1.1million.

 

EffectiveJanuary 1, 2006, we use the fair value method to apply the provisions ofSFAS 123R with a modified prospective application which provides for certainchanges to the method for valuing stock-based compensation. The valuationprovisions of SFAS 123R apply to new awards and to awards that are outstandingon the effective date and subsequently modified or cancelled. Under themodified prospective application, prior periods are not revised for comparativepurposes. Stock-based compensation expense recognized under SFAS 123R for theyears ended December 31, 2007 and 2006 were $6.2 million and $6.3 million,respectively. At December 31, 2007, total unrecognized estimatedcompensation expense related to non-vested stock options granted prior to thatdate was $11.8 million, which is expected to be recognized over a weightedaverage period of 1.9 years. Total stock options granted to employees andnon-employee directors during the years ended December 31, 2007, 2006 and2005 represented 3.6%, 4.1% and 2.5%, respectively, of outstanding shares as ofthe end of each fiscal year.

 

Bothprior and subsequent to the adoption of SFAS 123R, we estimated the value ofstock-based awards on the date of grant using the Black-Scholes option pricingmodel. Prior to the adoption of SFAS 123R, the value of each stock-based awardwas estimated on the date of grant using the Black-Scholes model for the proforma information required to be disclosed under SFAS 123 in the footnotes toour financial statements. The determination of the fair value of stock-basedpayment awards on the date of grant using an option-pricing model is affectedby our stock price as well as assumptions regarding a number of complex andsubjective variables. These variables include, but are not limited to, ourexpected stock price volatility over the term of the awards, risk-free interestrate and the expected term of the awards.

 

Forpurposes of estimating the fair value of stock options granted during 2007using the Black-Scholes model, we have made a subjective estimate regarding ourstock price volatility (weighted average of 67.3%). We used an average of thehistorical volatility of our stock for the period our stock has been publiclytraded and the historical volatilities of the common stock of several publiclytraded companies management feels are comparable to us, consistent with theguidance in SFAS No. 123R and SAB No. 107.  If our stock price volatility assumption wereincreased to 75%, the weighted average estimated fair value of stock optionsgranted during the year ended December 31, 2007 would increase by $0.59per share, or 7%.

 

Theexpected term of options granted is derived from the average midpoint betweenvesting and the contractual term, as described in SAB No. 107.  For options granted during the year ended December 31,2007, we have calculated a weighted average expected term of 6.0 years.  If the expected term of the options grantedwas increased to 8.0 years, the weighted average estimated fair value of stockoptions granted during the year ended December 31, 2007 would increase by $0.96per share, or 11%.

 

Therisk-free interest rate for the expected term of the option is based on theaverage U.S. Treasury yield curve at the balance sheet date for the expectedterm (weighted average of 4.6% for the year ended December 31, 2007) which,if increased to 6.0%, would increase the weighted average estimated fair valueof stock options granted during the year ended December 31, 2007 by $0.22per share, or 3%.

 

For2007 and 2006, we have reduced stock-based compensation expense recognized inthe Statement of Operations for 2007 and 2006 to reflect for estimatedforfeitures.  SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.  Pre-vesting forfeitures were estimated to beapproximately 3.7% and 7.2% for the years ended December 31, 2007 and2006, respectively, based on historical experience.  To date, we have 

 

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not required any materials adjustments to ourexpected forfeitures.  In our pro formainformation required under SFAS 123 for the periods prior to fiscal 2006, weaccounted for forfeitures as they occurred.

 

***Leasehold Incentive Obligation***

 

In conjunction with our lease of our facility, wereceived a tenant improvement allowance of up to $155 per square foot, or $10.1million.  As the tenant improvements wereconstructed, we recorded both the covered tenant improvements (as property andequipment) and an offsetting leasehold incentive obligation on our balancesheet.  As construction on the facilityhas been completed and we have taken occupancy of the new facility, we arerecording depreciation expense to depreciate the covered tenant improvementsand recording an offsetting reduction to rent expense to amortize the leaseholdincentive obligation over the initial term of the facility lease, in accordancewith FASB Technical Bulletin 88-1, *Issues Relating toAccounting for Leases*.

 

***Income Taxes***

 

InJuly 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes – An Interpretation of FASBStatement No. 109,*or FIN 48, which clarifies the accountingfor uncertainty in income taxes recognized in an entity’s financial statementsin accordance with SFAS No. 109, *Accounting for IncomeTaxes*, and prescribes a recognition threshold and measurementattributes for financial statement disclosure of tax positions taken orexpected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on theincome tax return must be recognized at the largest amount that is more-likely–than-notto be sustained upon audit by the relevant taxing authority.  An uncertain income tax position will not berecognized if it has less than a 50% likelihood of being sustained.  Additionally, FIN 48 provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.  FIN48 is effective for fiscal years beginning after December 15, 2006.

 

We adoptedthe provisions of FIN 48 on January 1, 2007, and we commenced analyzingfiling positions in all of the federal and state jurisdictions where we arerequired to file income tax returns, as well as all open tax years in thesejurisdictions.  As a result of adoption,we recorded no additional tax liability. The total amount of unrecognized tax benefits as of January 1, 2007was $958,000.  As of December 31,2007 we have not yet completed our analysis of the deferred tax assets for netoperating losses of $33.5 million and research and development credits of $3.8million generated in years prior to 2007 and net operating losses of $3.6million and research and development credits of $559,000 generated in2007.   As such, we removed these amountsand the offsetting valuation allowance from our deferred tax assets.  We are in the process of completing a Section 382analysis regarding the limitation of the net operating loss and research anddevelopment credits. For additional information regarding the adoption of FIN48 and for further discussion of our critical accounting estimates related toincome taxes, see Note 6, Income Taxes.

 

**NewAccounting Pronouncements**

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements*. SFAS No. 157 establishes a framework formeasuring fair value in accordance with GAAP, clarifies the definition of fairvalue within that framework, and expands disclosures about the use of fairvalue measurements.  It also responds to investors’requests for expanded information about the extent to which companies measureassets and liabilities at fair value, the information used to measure fairvalue and the effect of fair value measurements on earnings. SFAS No. 157applies whenever other standards require (or permit) assets or liabilities tobe measured at fair value, and does not expand the use of fair value in any newcircumstances. SFAS No. 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007. The FASB has statedthat it is considering a potential deferral on the application of Statement No. 157to the fair value measurement of non-financial assets and liabilities.  We do not expect the adoption of SFAS No. 157to have a material impact on our financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities - Including anamendment to FASB Statement No. 115*.  SFAS No. 159allows certain 

 

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financial assets and liabilities to berecognized, at our election, at fair market value, with any gains or losses forthe period recorded in the statement of income.  SFAS No. 159includes available-for-sale securities in the assets eligible for thistreatment.  Currently, we record the gains or losses for the period incomprehensive income and in the equity section of the balance sheet.  SFASNo. 159 is effective for fiscal years beginning after November 15,2007, and interim periods in those fiscal years.  We do not expect theadoption of SFAS No. 159 to have a material impact on our financialstatements.

 

InJune 2007, the EITF issued EITF Issue No. 07-3, *Accountingfor Nonrefundable Advance Payments for Goods or Services to be Used in FutureResearch and Development Activities*. The consensus requires companies to defer and capitalize prepaid,nonrefundable research and development payments to third parties over theperiod that the research and development activities are performed or the servicesare provided, subject to an assessment of recoverability.  EITF Issue No. 07-3 is effective for newcontracts entered into in fiscal years beginning after December 15, 2007,including interim periods within those fiscal years. We do not expect theadoption of EITF Issue No. 07-3 to have a material impact on our financialstatements.

 

In November 2007, theEITF issued EITF Issue No. 07-1, *Accounting forCollaborative Arrangements Related to the Development and Commercialization ofIntellectual Property. *Companiesmay enter into arrangements with other companies to jointly develop,manufacture, distribute, and market a product. Often the activities associatedwith these arrangements are conducted by the collaborators without the creationof a separate legal entity (that is, the arrangement is operated as a “virtualjoint venture”). The arrangements generally provide that the collaborators willshare, based on contractually defined calculations, the profits or losses fromthe associated activities. Periodically, the collaborators share financialinformation related to product revenues generated (if any) and costs incurredthat may trigger a sharing payment for the combined profits or losses. Theconsensus requires collaborators in such an arrangement to present the resultof activities for which they act as the principal on a gross basis and reportany payments received from (made to) other collaborators based on otherapplicable GAAP or, in the absence of other applicable GAAP, based on analogyto authoritative accounting literature or a reasonable, rational, andconsistently applied accounting policy election. EITF Issue No. 07-1 iseffective for collaborative arrangements in place at the beginning of theannual period beginning after December 15, 2008.  As our collaborative agreements do notincorporate such revenue- and cost-sharing arrangements, we do not expect theadoption of EITF Issue No. 07-1 to have a material impact on our financialstatements.

 

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**Item7A.    *Quantitative andQualitative Disclosures About Market Risk***

 

Ourprimary exposure to market risk is interest income sensitivity, which isaffected by changes in the general level of United States interest rates. Dueto the nature of our investments, we believe that we are not subject to anymaterial market risk exposure. We do not have any foreign currency or otherderivative financial instruments.

 

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** **

**Item8.    *FinancialStatements and Supplementary Data***

 

**Index to Financial Statements**

 
| **Description**                                          | ** ** | **Page** |
|----------------------------------------------------------|------------|----------|
|                                                     |       |     |
| Report of Independent  Registered Public Accounting Firm |       | 58       |
|                                                     |       |     |
| Balance Sheets                                           |       | 59       |
|                                                     |       |     |
| Statements of Operations                                 |       | 60       |
|                                                     |       |     |
| Statements of Stockholders’  Equity                 |       | 61       |
|                                                     |       |     |
| Statements of Cash Flows                                 |       | 63       |
|                                                     |       |     |
| Notes to Financial Statements                            |       | 64       |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Stockholders of Senomyx, Inc.

 

We have audited the accompanying balance sheets of Senomyx, Inc.as of December 31, 2007 and 2006, and the related statements ofoperations, stockholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2007. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Senomyx, Inc.at December 31, 2007 and 2006, and the results of its operations and itscash flows for each of the three years in the period ended December 31,2007, in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 1 to the financial statements, effective January 1,2006, Senomyx, Inc. adopted Statement of Financial Accounting Standards No. 123(revised 2004), *“Accounting for Stock-Based Compensation.”*

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), Senomyx Inc.’s internal control over financial reportingas of December 31, 2007, based on criteria established in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 11,2008 expressed an unqualified opinion thereon.

 

 
|                    |   | /s/  Ernst & Young LLP |
|-------------------------|--------|---------------------------------|
|                    |   |                            |
|                    |   |                            |
| San Diego,  California  |   |                            |
| February 11,  2008 |   |                            |

 

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**Senomyx, Inc.**

**Balance Sheets**

**(In thousands, except share and pershare data)**

 
| ** **                                                                                                                                                               | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                               | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Assets:**                                                                                                                                                              |       |                  |       |   |   |
| Current assets:                                                                                                                                                          |       |                  |       |   |   |
|                                                                                                                                                                     |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                |       | $                     | 19,983     |   | $ | 21,225 |   |
| Investments available-for-sale                                                                                                                                           |       | 42,641                |       | 52,879 |   |
| Other current assets                                                                                                                                                     |       | 2,090                 |       | 1,239 |   |
|                                                                                                                                                                     |       |                  |       |   |   |
| Total current assets                                                                                                                                                     |       | 64,714                |       | 75,343 |   |
|                                                                                                                                                                     |       |                  |       |   |   |
| Property and equipment, net                                                                                                                                              |       | 14,535                |       | 14,839 |   |
|                                                                                                                                                                     |       |                  |       |   |   |
| Total assets                                                                                                                                                             |       | $                     | 79,249     |   | $ | 90,182 |   |
|                                                                                                                                                                     |       |                  |       |   |   |
| **Liabilities and stockholders’ equity**                                                                                                                            |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                     |       |                  |       |   |   |
|                                                                                                                                                                     |       |                  |       |   |   |
| Accounts payable and accrued expenses                                                                                                                                    |       | $                     | 5,779      |   | $ | 5,410 |   |
| Other current liabilities                                                                                                                                                |       | —                |       | 39 |   |
| Leasehold incentive obligation                                                                                                                                           |       | 987                   |       | 966 |   |
| Deferred revenue                                                                                                                                                         |       | 5,971                 |       | 3,473 |   |
|                                                                                                                                                                     |       |                  |       |   |   |
| Total current liabilities                                                                                                                                                |       | 12,737                |       | 9,888 |   |
|                                                                                                                                                                     |       |                  |       |   |   |
| Deferred rent                                                                                                                                                            |       | 1,073                 |       | 213 |   |
| Leasehold incentive obligation                                                                                                                                           |       | 8,062                 |       | 8,854 |   |
| Deferred revenue                                                                                                                                                         |       | 750                   |       | 1,750 |   |
|                                                                                                                                                                     |       |                  |       |   |   |
| Commitments                                                                                                                                                              |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                               |       |                  |       |   |   |
| Preferred stock, $.001 par value, 7,500,000 shares authorized; no  shares issued or outstanding at December 31, 2007 and 2006                                       |       | —                |       | — |   |
| Common stock, $.001 par value, 120,000,000 shares authorized;  30,476,072 and 30,166,399 shares issued and outstanding at December 31,  2007 and 2006, respectively |       | 30                    |       | 30 |   |
| Additional paid-in-capital                                                                                                                                               |       | 205,697               |       | 196,748 |   |
| Accumulated other comprehensive gain/(loss)                                                                                                                              |       | 14                    |       | (18 | ) |
| Accumulated deficit                                                                                                                                                      |       | (149,114              | )          | (127,283 | ) |
|                                                                                                                                                                     |       |                  |       |   |   |
| Total stockholders’ equity                                                                                                                                          |       | 56,627                |       | 69,477 |   |
|                                                                                                                                                                     |       |                  |       |   |   |
| Total liability and stockholders’ equity                                                                                                                            |       | $                     | 79,249     |   | $ | 90,182 |   |

 

See accompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Statements of Operations**

**(In thousands, except share and pershare data)**

 
| ** **                                                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                 |       |                                        |       |   |   |   |   |
| Revenues:                                                                                                            |       |                                        |       |   |   |   |   |
| Development revenues                                                                                                 |       | $                                           | 18,197     |   | $ | 12,230 |   | $ | 9,385 |   |
| Commercial revenues                                                                                                  |       | 23                                          |       | — |   | — |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |
| Total revenues                                                                                                       |       | 18,220                                      |       | 12,230 |   | 9,385 |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |
| Operating expenses:                                                                                                  |       |                                        |       |   |   |   |   |
| Research and development (including $2,588, $3,048 and $2,647 of  non-cash stock-based compensation, respectively)   |       | 29,874                                      |       | 25,393 |   | 20,330 |   |
| General and administrative (including $4,233, $4,457 and $2,701 of  non-cash stock-based compensation, respectively) |       | 13,572                                      |       | 13,735 |   | 10,229 |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |
| Total operating expenses                                                                                             |       | 43,446                                      |       | 39,128 |   | 30,559 |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |
| Loss from operations                                                                                                 |       | (25,226                                     | )          | (26,898 | ) | (21,174 | ) |
|                                                                                                                 |       |                                        |       |   |   |   |   |
| Interest income                                                                                                      |       | 3,395                                       |       | 3,841 |   | 1,344 |   |
|                                                                                                                 |       |                                        |       |   |   |   |   |
| Net loss                                                                                                             |       | $                                           | (21,831    | ) | $ | (23,057 | ) | $ | (19,830 | ) |
|                                                                                                                 |       |                                        |       |   |   |   |   |
| Basic and diluted net loss per share                                                                                 |       | $                                           | (0.72      | ) | $ | (0.77 | ) | $ | (0.77 | ) |
|                                                                                                                 |       |                                        |       |   |   |   |   |
| Shares used to compute basic and diluted net loss per share                                                          |       | 30,326,768                                  |       | 29,809,854 |   | 25,916,229 |   |

 

Seeaccompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Statements of Stockholders’ Equity**

**(In thousands, except for share data)**

 
| ** **                                                                             | ** ** | **Common Stock** | ** ** | **Additional  paid-in** | ** ** | **Deferred** | ** ** | **Accumulated other  comprehensive** | ** ** | **Accumulated** | ** ** | **Total  stockholders’** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|-------------------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **capital**  | ** ** | **compensation**                          | ** ** | **gain/(loss)** | ** ** | **deficit**                   | ** ** | **equity** | ** ** |
| ** **                                                                             | ** ** | ** **            | ** ** | ** **              | ** ** | ** **   | ** ** | ** **                                | ** ** | ** **      | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Balance at  December 31, 2004                                                     |       | 25,309,565            |       | $                       | 25         |         | $          | 126,243                                   |       | $               | (3,492     | )                             | $          | (7 | ) | $ | (84,396 | ) | $ | 38,373 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Issuance of  common stock related to the exercise of options                           |       | 196,270               |       | 1                       |       | 617          |       | —                                    |       | —          |       | —                        |       | 618 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Issuance of common  stock related to employee stock plan purchases                     |       | 123,567               |       | —                  |       | 640          |       | —                                    |       | —          |       | —                        |       | 640 |   |
| Issuance of  common stock in a public offering, net of issuance costs                  |       | 4,049,295             |       | 4                       |       | 57,294       |       | —                                    |       | —          |       | —                        |       | 57,298 |   |
| Compensation  related to stock options issued to consultants                           |       | —                |       | —                  |       | 2,870        |       | —                                    |       | —          |       | —                        |       | 2,870 |   |
| Compensation  related to acceleration of vesting of stock option issued to director    |       | —                |       | —                  |       | 128          |       | —                                    |       | —          |       | —                        |       | 128 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Amortization of  deferred compensation                                                 |       | —                |       | —                  |       | —       |       | 2,349                                     |       | —          |       | —                        |       | 2,349 |   |
| Comprehensive  loss:                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Unrealized loss  on investments                                                        |       | —                |       | —                  |       | —       |       | —                                    |       | (1              | )          | —                        |       | (1 | ) |
| Net loss                                                                               |       | —                |       | —                  |       | —       |       | —                                    |       | —          |       | (19,830                       | )          | (19,830 | ) |
| Comprehensive  loss                                                                    |       | —                |       | —                  |       | —       |       | —                                    |       | —          |       | —                        |       | (19,831 | ) |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Balance at  December 31, 2005                                                     |       | 29,678,697            |       | 30                      |       | 187,792      |       | (1,143                                    | )          | (8              | )          | (104,226                      | )          | 82,445 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Issuance of  common stock related to the exercise of options                           |       | 337,514               |       | —                  |       | 1,733        |       | —                                    |       | —          |       | —                        |       | 1,733 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Issuance of  common stock related to employee stock plan purchases                     |       | 150,188               |       | —                  |       | 861          |       | —                                    |       | —          |       | —                        |       | 861 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Compensation  related to stock options granted to consultants                          |       | —                |       | —                  |       | 1,193        |       | —                                    |       | —          |       | —                        |       | 1,193 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Compensation  related to stock options granted to employees and non-employee directors |       | —                |       | —                  |       | 6,312        |       | —                                    |       | —          |       | —                        |       | 6,312 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Reduction of  deferred compensation due to adoption of SFAS 123(R)                     |       | —                |       | —                  |       | (1,143       | )          | 1,143                                     |       | —          |       | —                        |       | — |   |
| Comprehensive  loss:                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Unrealized loss  on investments                                                        |       | —                |       | —                  |       | —       |       | —                                    |       | (10             | )          | —                        |       | (10 | ) |
| Net loss                                                                               |       | —                |       | —                  |       | —       |       | —                                    |       | —          |       | (23,057                       | )          | (23,057 | ) |
| Comprehensive  loss                                                                    |       | —                |       | —                  |       | —       |       | —                                    |       | —          |       | —                        |       | (23,067 | ) |
| Balance at  December 31, 2006                                                     |       | 30,166,399            |       | 30                      |       | 196,748      |       | —                                    |       | (18             | )          | (127,283                      | )          | 69,477 |   |
|                                                                                        |            |                       |            |                         |            |              |            |                                           |            |                 |            |                               |            |  |  |  |  |  |  |  |  |

 

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**Senomyx, Inc.**

**Statements of Stockholders’ Equity**

**(In thousands, except for share data)**

 
| ** **                                                                             | ** ** | **Common Stock** | ** ** | **Additional  paid-in** | ** ** | **Deferred** | ** ** | **Accumulated other  comprehensive** | ** ** | **Accumulated** | ** ** | **Total  stockholders’** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|-------------------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **capital**  | ** ** | **compensation**                          | ** ** | **gain/(loss)** | ** ** | **deficit**                   | ** ** | **equity** | ** ** |
| ** **                                                                             | ** ** | ** **            | ** ** | ** **              | ** ** | ** **   | ** ** | ** **                                | ** ** | ** **      | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Balance at  December 31, 2006                                                     |       | 30,166,399            |       | $                       | 30         |         | $          | 196,748                                   |       | $               | —     |                          | $          | (18 | ) | $ | (127,283 | ) | $ | 69,477 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Issuance of  common stock related to the exercise of options                           |       | 230,492               |       | —                  |       | 1,285        |       | —                                    |       | —          |       | —                        |       | 1,285 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Issuance of  common stock related to employee stock plan purchases                     |       | 79,181                |       | —                  |       | 843          |       | —                                    |       | —          |       | —                        |       | 843 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Compensation related  to stock options granted to consultants                          |       | —                |       | —                  |       | 602          |       | —                                    |       | —          |       | —                        |       | 602 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Compensation  related to stock options granted to employees and non-employee directors |       | —                |       | —                  |       | 6,219        |       | —                                    |       | —          |       | —                        |       | 6,219 |   |
| Comprehensive  loss:                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Unrealized gain  on investments                                                        |       | —                |       | —                  |       | —       |       | —                                    |       | 32              |       | —                        |       | 32 |   |
| Net loss                                                                               |       | —                |       | —                  |       | —       |       | —                                    |       | —          |       | (21,831                       | )          | (21,831 | ) |
| Comprehensive  loss                                                                    |       | —                |       | —                  |       | —       |       | —                                    |       | —          |       | —                        |       | (21,799 | ) |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Balance at  December 31, 2007                                                     |       | 30,476,072            |       | $                       | 30         |         | $          | 205,697                                   |       | $               | —     |                          | $          | 14 |   | $ | (149,114 | ) | $ | 56,627 |   |

 

See accompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Statements of Cash Flows**

**(In thousands)**

 
| ** **                                                                                                                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating Activities**                                                                                                   |       |                                        |       |   |   |   |   |
| Net loss                                                                                                                   |       | $                                           | (21,831    | ) | $ | (23,057 | ) | $ | (19,830 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:                                               |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                                                              |       | 2,967                                       |       | 1,584 |   | 1,215 |   |
| Accretion of discount on available-for-sale securities                                                                     |       | (1,917                                      | )          | (1,427 | ) | (215 | ) |
| Amortization of leasehold incentive obligation                                                                             |       | (947                                        | )          | (80 | ) | — |   |
| Stock-based compensation for employees and non-employee directors                                                          |       | 6,219                                       |       | 6,312 |   | — |   |
| Amortization of deferred stock-based compensation                                                                          |       | —                                      |       | — |   | 2,349 |   |
| Stock-based compensation for non-employees                                                                                 |       | 602                                         |       | 1,193 |   | 2,998 |   |
| Change in operating assets and liabilities:                                                                                |       |                                        |       |   |   |   |   |
| Other current assets                                                                                                       |       | (810                                        | )          | 1,061 |   | (978 | ) |
| Accounts payable and accrued expenses                                                                                      |       | 833                                         |       | 702 |   | 711 |   |
| Deferred revenue                                                                                                           |       | 1,498                                       |       | 3,495 |   | (130 | ) |
| Deferred rent                                                                                                              |       | 860                                         |       | 62 |   | (59 | ) |
| Leasehold incentive obligation                                                                                             |       | 176                                         |       | 2,092 |   | — |   |
| Net cash used in operating activities                                                                                      |       | (12,350                                     | )          | (8,063 | ) | (13,939 | ) |
|                                                                                                                       |       |                                        |       |   |   |   |   |
| **Investing activities**                                                                                                   |       |                                        |       |   |   |   |   |
| Purchases of property and equipment                                                                                        |       | (3,166                                      | )          | (5,657 | ) | (1,941 | ) |
| Proceeds from sale of property and equipment                                                                               |       | —                                      |       | — |   | 84 |   |
| Purchases of available-for-sale securities                                                                                 |       | (92,632                                     | )          | (110,207 | ) | (31,813 | ) |
| Maturities of available-for-sale securities                                                                                |       | 104,778                                     |       | 68,650 |   | 45,775 |   |
| Net cash provided by (used in) investing activities                                                                        |       | 8,980                                       |       | (47,214 | ) | 12,105 |   |
|                                                                                                                       |       |                                        |       |   |   |   |   |
| **Financing activities**                                                                                                   |       |                                        |       |   |   |   |   |
| Proceeds from issuance of common stock                                                                                     |       | 2,128                                       |       | 2,594 |   | 58,657 |   |
| Net cash provided by financing activities                                                                                  |       | 2,128                                       |       | 2,594 |   | 58,657 |   |
|                                                                                                                       |       |                                        |       |   |   |   |   |
| Net (decrease) increase in cash and cash equivalents                                                                       |       | (1,242                                      | )          | (52,683 | ) | 56,823 |   |
| Cash and cash equivalents at beginning of year                                                                             |       | 21,225                                      |       | 73,908 |   | 17,085 |   |
| Cash and cash equivalents at end of year                                                                                   |       | $                                           | 19,983     |   | $ | 21,225 |   | $ | 73,908 |   |
|                                                                                                                       |       |                                        |       |   |   |   |   |
| **Supplemental schedule of non-cash investing  and financing activities:**                                            |       |                                        |       |   |   |   |   |
| Purchases of property and equipment included in accounts payable,  accrued expenses and other current liabilities          |       | $                                           | 37         |   | $ | 540 |   | $ | 34 |   |
| Purchases of property and equipment and leasehold incentive  obligation directly reimbursed by lessor of new facility      |       | —                                      |       | $ | 7,808 |   | — |   |
| Proceeds from issuance of common stock (net) included in accounts  payable, accrued expenses and other current liabilities |       | —                                      |       | — |   | $ | 101 |   |

 

See accompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Notes to Financial Statements**

 

**1.Organization and Summary of Significant Accounting Policies**

 

***Organization and Business***

 

Senomyx, Inc.(the “Company”) was incorporated on September 16, 1998 in Delaware andcommenced operations in January 1999. The Company is a leading companyfocused on using proprietary taste receptor-based assays, screeningtechnologies and optimization techniques to discover and develop novel flavors,flavor enhancers and taste modulators for the packaged food, beverage andingredient industries. The Company has product discovery and developmentcollaborations with seven of the world’s leading packaged food, beverage andingredient companies: Ajinomoto Co., Inc. (“Ajinomoto”), Cadbury Schweppes(“Cadbury”), Campbell Soup Company (“Campbell”), The Coca-Cola Company (“Coca-Cola”),Firmenich SA (“Firmenich”), Nestlé SA (“Nestlé”) and Solae LLC (“Solae”).  The Company’s collaboration agreementsprovide for upfront license fees, research and development funding,reimbursement of certain regulatory costs, milestone payments if the Companyachieves development or commercialization goals, minimum periodic royalties androyalties on sales of consumer products incorporating the Company’s flavoringredients. The Company’s current programs focus on the development of savory,sweet and salt flavor enhancers, high potency sweeteners, bitter blockers andcooling agents.

 

***Use of Estimates***

 

Thepreparation of financial statements in conformity with United States generallyaccepted accounting principles (“GAAP”) requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

***Cash and Cash Equivalents***

 

TheCompany considers all highly liquid investments with a remaining maturity ofthree months or less when purchased to be cash equivalents. Cash equivalentsare recorded at cost, which approximates market value.

 

***Investments Available-for-Sale***

 

TheCompany’s surplus cash is invested in commercial paper, corporate notes andUnited States government agency bonds with maturity dates of one year or lessfrom the settlement date.  The amortizedcost of debt securities is adjusted for amortization of premiums and accretionof discounts to maturity with all amortization and accretion included ininterest income. The Company’s short-term investments are classified asavailable-for-sale and carried at estimated fair value, as determined by quotedmarket prices, with unrealized gains and losses reported in a separatecomponent of accumulated other comprehensive income. Realized gains and lossesand declines in value judged to be other-than-temporary, if any, onavailable-for-sale securities are included in interest income. The cost ofsecurities sold is based on the specific identification method. Interest onsecurities classified as available-for-sale is included in interest income.

 

***Fair Value of Financial Instruments***

 

Thecarrying amount of cash and cash equivalents, investments available-for-sale,accounts payable and accrued expenses are considered to be representative oftheir respective fair value because of the short-term nature of those items.

 

64

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***Concentration of Credit Risk and Major Collaborations***

 

Financialinstruments, which potentially subject the Company to concentrations of creditrisk, consist of cash, cash equivalents and investments available-for-sale. TheCompany limits its exposure to credit loss by placing its cash, cashequivalents, and investments with high credit quality financial institutions ininstruments with short maturities.

 

TheCompany derives significant portions of its revenues from a relatively smallnumber of collaborators. For the year ended December 31, 2007, revenuesfrom its three largest collaborators accounted for 80% of total revenues.  For the year ended December 31, 2006,revenues from its four largest collaborators accounted for 87% of totalrevenues.  For the year ended December 31,2005, revenues from its four largest collaborators accounted for 96% of totalrevenues.

 

***Property and Equipment***

 

Propertyand equipment are stated at cost less accumulated depreciation and aredepreciated over the estimated useful lives of the assets (ranging from threeto five years) using the straight-line method. Leasehold improvements areamortized over the estimated useful life of the asset or the lease term,whichever is shorter.

 

***Patent Costs***

 

Costsrelated to filing and pursuing patent applications are expensed as incurred, asrecoverability of such expenditures is uncertain.  The Company includes all patent costs relatedto the filing of patents on developments in Research and Development expenses.

 

***Impairment of Long-Lived Assets***

 

Inaccordance with Financial Accounting Standards Board (“FASB”) Statement ofFinancial Accounting Standards (“SFAS”) No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, if indicators of impairment exist, the Companyassesses the recoverability of the affected long-lived assets by determiningwhether the carrying value of such assets can be recovered through undiscountedfuture operating cash flows. If impairment is indicated, the Company measuresthe amount of such impairment by comparing the fair value to the carryingvalue. There have been no indicators of impairment through December 31,2007.

 

***LeaseholdIncentive Obligation***

 

Inconjunction with the lease agreement covering the facility occupied by theCompany (the “Nexus Lease”), the Company received a tenant improvementallowance of $155 per square foot leased, or $10.1 million.  As the tenant improvements were constructed,the Company recorded both the covered tenant improvements (as property andequipment) and an offsetting leasehold incentive obligation on the Company’sbalance sheet.  Through the initial termof the Nexus Lease, the Company records depreciation expense to depreciate thetenant improvements and records an offsetting reduction to rent expense (toamortize the leasehold incentive obligation), in accordance with FASB TechnicalBulletin 88-1, *Issues Relating to Accounting for Leases*.

 

***Revenue Recognition***

 

The Company’s revenue recognition policies are incompliance with the Staff Accounting Bulletin (“SAB”) No. 104, *Revenue Recognition*, and Emerging Issues Task Force (“EITF”)Issue No. 00-21, *Revenue Arrangements withMultiple Deliverables*.  Someof the Company’s agreements contain multiple elements, including technologicaland territorial licenses and research and development services.  In accordance with these agreements, theCompany may be eligible for upfront fees, research and development funding,cost reimbursements, development milestones, commercialization milestones,minimum periodic royalty payments and royalty payments.

 

65

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Development revenues include revenues from licensefees, research and development funding, development milestones and costreimbursement.

 

Non-refundable license fees, if not associated withfuture Company performance, are recognized when received. Non-refundablelicense fees, if associated with future Company performance, are attributed toa specific program or collaboration and recognized over the period of servicefor that specific program or collaboration.

 

Amounts received for research funding are recognizedas revenues as the services are performed. Revenue is deferred for feesreceived before earned.

 

Revenue from development milestones is recognized whenearned, as evidenced by written acknowledgment from the collaborator or otherpersuasive evidence that the milestone has been achieved, provided that (i) themilestone event is substantive and its achievability was not reasonably assuredat the inception of the agreement and (ii) the Company’s performanceobligations after the milestone achievement will continue to be funded by thecollaborator at a level comparable to before the milestone achievement. If bothof these criteria are not met, the milestone payment is recognized over theremaining minimum period of the Company’s performance obligations under theagreement.

 

Revenue from cost reimbursements is recognized whenearned, as evidenced by written acknowledgment from the collaborator or otherpersuasive evidence.

 

Commercial revenues include revenues fromcommercialization milestones, minimum periodic royalty payments and royaltieson product sales made by the Company’s collaborators incorporating the Company’sflavor ingredients.

 

Revenue from commercialization milestones isrecognized over the royalty term.

 

Non-refundable minimum periodic royalty payments arerecognized as revenues over the related annual royalty periods.  Annual royalty terms vary betweencollaborations and collaborators and can vary from year to year.  These terms vary based on factors such as thecharacteristics of the flavor ingredient and the product categories andgeographies licensed by the collaborator. Periodically, as contractually specified, the Company’s collaboratorsare required to provide a report detailing all sales of products containing theCompany’s flavor ingredients.  To theextent that calculated royalties on sales of such products exceed the minimumperiodic royalty payments made to date, the collaborators are required to remitto the Company the difference between royalties calculated and minimum periodicroyalty payments made to date.  TheCompany recognizes this difference as royalties on product sales at the timethe report is received.  To the extentthat minimum periodic royalty payments made to date exceed calculatedroyalties, the Company is not required to refund the difference.

 

Although the Company currently does not have anycollaborations that include refundable minimum periodic royalty payments, insuch a case, revenue would be deferred for refundable minimum periodic royaltypayments received before earned.

 

Royalties on product sales made by the Company’scollaborators incorporating the Company’s flavor ingredients are recognizedwhen received which is generally expected to be one quarter in arrears.

 

As applicable, commercial revenues are reported net ofroyalties payable under the Company’s third party licensing agreements.  To date, substantially all of the Company’scommercial revenues have been related to minimum periodic royalty payments.

 

***Research andDevelopment***

 

Researchand development costs, including those incurred in relation to the Company’scollaborative agreements, are expensed in the period incurred. Research anddevelopment costs primarily consist of 

 

66

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salaries and relatedexpenses for personnel, facilities and depreciation, research and developmentsupplies, patents and licenses and outside services.

 

***Comprehensive Income (Loss)***

 

SFAS No. 130,*Reporting Comprehensive Income*,requires that all components of comprehensive income, including net income, bereported in the financial statements in the period in which they arerecognized. Comprehensive income (loss) is defined as the change in equityduring a period from transactions and other events and circumstances from non-ownersources. The Company’s accumulated other comprehensive loss, as of December 31,2007 and 2006, consisted of unrealized gains and losses on investmentsavailable-for-sale and is reported in stockholders’ equity.

 

***Deferred Rent***

 

Rentexpense is recorded on a straight-line basis over the initial term of anylease. The difference between rent expense accrued and amounts paid under anylease agreement is recorded as deferred rent in the accompanying balancesheets.

 

***Stock-Based Compensation***

 

Forthe year ended December 31, 2005, prior to the adoption of SFAS 123R,*Share-Based Payment,* the Company recorded deferredcompensation for stock options and stock awards granted to employees andnon-employee directors equal to the difference between the exercise price andthe fair value of the Company’s common stock on the date of grant as determinedfor the purpose of recording the Company’s initial public offering (“IPO”)cheap stock calculation. The Company recorded options or awards issued tonon-employees at their fair value in accordance with the SFAS 123, *Accounting for Stock-Based Compensation*, and periodicallyremeasures them in accordance with EITF 96-18, *Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring orin Conjunction with Selling Goods or Services*, and recognized themover the service period.  Deferredcompensation amounts were recorded as a component of stockholders’ equity andamortized, on an accelerated basis, as a non-cash charge to operations over thevesting period of the options. The Company recorded employee and non-employeestock-based compensation expense of $5.3 million for the year ended December 31,2005.

 

In December 2004,the FASB issued SFAS 123R, which requires companies to expense theestimated fair value of employee stock options and similar awards. Thisstatement is a revision to SFAS 123, and supersedes Accounting Principles Board(“APB”) Opinion No. 25, *Accounting for StockIssued to Employees*, and amends FASB Statement No. 95, *Statement of Cash Flows*. The accounting provisions of SFAS 123R were effective for the firstquarter of fiscal 2006.   In conjunctionwith the adoption of SFAS 123R, the unamortized balance of deferred stock-basedcompensation was reclassified against stockholders’ equity.  As of the adoption date of SFAS 123R, theunamortized balance of deferred stock-based compensation was $1.1 million.

 

Effective January 1, 2006, the Company uses thefair value method to apply the provisions of SFAS 123R with a modifiedprospective application which provides for certain changes to the method forvaluing stock-based compensation. The valuation provisions of SFAS 123R applyto new awards and to awards that are outstanding on the effective date andsubsequently modified or cancelled. Under the modified prospective application,prior periods are not revised for comparative purposes.  Upon adoption of SFAS 123R, the Company hascontinued to use the Black-Scholes model which was previously used for the Company’spro forma information required under SFAS 123.

 

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The weighted-average estimated fair value of employeestock options granted during the years ended December 31, 2007 and 2006were $8.39 and $9.54 per share, respectively, using the Black-Scholes modelwith the following weighted average assumptions (annualized percentages):

 
| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| ** **              | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| Expected volatility     |       | 67.33                                       | %          | 60.43 | % |
| Risk-free interest rate |       | 4.62                                        | %          | 4.88 | % |
| Dividend yield          |       | 0.0                                         | %          | 0.0 | % |
| Expected term           |       | 6  years                                    |       | 6  years |   |

 

The weighted-average estimated fair value of employeestock purchase rights granted during the years ended December 31, 2007 and2006 were $5.63 and $6.94 per share, respectively, using the Black-Scholesmodel with the following weighted average assumptions (annualized percentages):

 
| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| ** **              | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| Expected volatility     |       | 64.59                                       | %          | 67.33 | % |
| Risk-free interest rate |       | 4.46                                        | %          | 4.90 | % |
| Dividend yield          |       | 0.0                                         | %          | 0.0 | % |
| Expected term           |       | 1.25  years                                 |       | 1.25  years |   |

 

Expected volatility is based on the Company’shistorical volatility and the historical volatilities of the common stock ofcomparable publicly traded companies. The risk-free interest rate for theexpected term of the option is based on the average United States Treasuryyield curve at the balance sheet date for the expected term.  The expected term of options granted isderived from the average midpoint between vesting and the contractual term, asdescribed in SAB No. 107, *Share-BasedPayment. *The assumptionsrelated to expected volatility and risk-free interest rate used for thevaluation of stock options under the Company’s stock plan differ from thoseused for the valuation of stock purchase rights under the Company’s employeestock purchase plan primarily due to the difference in their respectiveexpected terms.

 

As stock-based compensation expense recognized in theStatement of Operations for 2007 and 2006 is based on awards ultimatelyexpected to vest, it should be reduced for estimated forfeitures.  SFAS 123R requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates.  Pre-vesting forfeitures were estimated to beapproximately 3.7% and 7.2% for the years ended December 31, 2007 and2006, respectively, based on historical experience.  In the Company’s pro forma informationrequired under SFAS 123 for the periods prior to fiscal 2006, the Companyaccounted for forfeitures as they occurred.

 

Compensation expense related to stock-basedcompensation for options and awards granted subsequent to the adoption of SFAS123R is recognized on a straight-line basis. Compensation expense related to stock-based compensation is allocated toresearch and development or general and administrative based upon thedepartment to which the associated employee or non-employee reports.

 

Total estimated stock-based compensation expense,related to all of the Company’s stock-based awards granted to employees andnon-employee directors, recognized for the years ended December 31, 2007and 2006 was comprised as follows (in thousands):

 
| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| Research and development                                            |       | $                                           | (1,997     | ) | $ | (1,939 | ) |
| General and administrative                                          |       | (4,222                                      | )          | (4,373 | ) |
| Employee and non-employee director stock-based compensation expense |       | $                                           | (6,219     | ) | $ | (6,312 | ) |

 

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At December 31, 2007, total unrecognizedestimated compensation expense related to non-vested stock options grantedprior to that date was $11.8 million, which is expected to be recognized over aweighted average period of 1.9 years.

 

***Pro Forma Information under SFAS 123 for Periods Prior to Fiscal 2006***

 

Prior to adopting the provisions of SFAS 123R, theCompany recorded estimated compensation expense for employee stock optionsbased upon their intrinsic value on the date of grant pursuant to APB Opinion No. 25,and provided the required pro forma disclosures of SFAS 123.  Under APB Opinion No. 25, when thepurchase price of restricted stock or the exercise price of the Company’semployee stock options equals or exceeds the fair value of the underlying stockon the date of issuance or grant, no compensation expense is recognized. In theevent that stock options are granted with an exercise price below the fairvalue of the Company’s common stock per share on the grant date, the differencebetween the fair value of the Company’s common stock and the exercise price ofthe stock option was recorded as deferred compensation.  Deferred compensation was amortized tocompensation expense on an accelerated basis in accordance with FinancialAccounting Standards Board Interpretation (“FIN”) No. 28, *Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans*, over the vesting period of therelated options, generally four years.

 

Options or stock awards issued to non-employees whoare not directors of the Company are recorded at their fair value in accordancewith SFAS No. 123 and EITF Issue No. 96-18, *Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring or in Conjunction with Selling Goods orServices*, and are periodically revalued as the options vest and arerecognized as expense over the related service period.

 

For the year ended December 31, 2005, the fairvalue of options issued to employees was estimated at the date of grant usingthe Black-Scholes option valuation model with the following weighted averageassumptions: (a) risk-free interest rate of 4.1%; (b) expecteddividend yield of 0%; (c) volatility factor of 70%; and (d) five-yearestimated life of the options. The estimated weighted average fair value ofstock options granted during 2005 was $6.03.

 

As required under SFAS No. 123, for purposes ofpro forma disclosures, the estimated fair value of the options is amortized toexpense over the vesting period of the related options. The Company’s pro formainformation follows (in thousands, except per share data):

 
| ** **                                                                            | ** ** | **Year Ended  December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
|                                                                                  |       |                                         |       |
| Net loss as reported                                                                  |       | $                                            | (19,830    | ) |
| Add: Stock-based employee compensation expense included in net loss                   |       | 2,477                                        |       |
| Deduct: Stock-based employee compensation expense determined under  fair value method |       | (6,538                                       | )          |
|                                                                                  |       |                                         |       |
| Pro forma net loss                                                                    |       | $                                            | (23,891    | ) |
|                                                                                  |       |                                         |       |
| Basic and diluted net loss per share as reported                                      |       | $                                            | (0.77      | ) |
|                                                                                  |       |                                         |       |
| Pro forma basic and diluted net loss per share                                        |       | $                                            | (0.92      | ) |

 

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***Net Loss Per Share***

 

TheCompany calculated net loss per share in accordance with SFAS No. 128, *Earnings Per Share*, and SAB No. 98, *Earnings Per Share*. Basic earnings per share (“EPS”) iscalculated by dividing the net loss by the weighted average number of commonshares outstanding for the period, without consideration for common stockequivalents. Diluted EPS is computed by dividing the net income or loss by theweighted average number of common share equivalents outstanding for the perioddetermined using the treasury-stock method. Dilutive common share equivalents include the dilutive effect ofin-the-money shares, which is calculated based on the average share price foreach period using the treasury stock method. Under the treasury stock method,the exercise price of a share, the amount of compensation cost, if any, forfuture service that the Company has not yet recognized, and the amount ofestimated tax benefits that would be recorded in paid-in capital, if any, whenthe share is exercised are assumed to be used to repurchase shares in thecurrent period.  For purposes of thiscalculation, common stock subject to repurchase by the Company, convertiblepreferred stock, options, and warrants are considered to be common stockequivalents and are only included in the calculation of diluted earnings pershare when their effect is dilutive.

 

Thefollowing table sets forth the computation of basic and diluted, and unauditedpro forma basic and diluted, net loss per share for the respective periods.

 
| ** **                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Historical:**                                               |       |                                        |       |   |   |   |   |
| Net loss (in thousands)                                       |       | $                                           | (21,831    | ) | $ | (23,057 | ) | $ | (19,830 | ) |
|                                                          |       |                                        |       |   |   |   |   |
| Weighted average common shares                                |       | 30,350,277                                  |       | 29,910,453 |   | 26,090,294 |   |
| Weighted average unvested common shares subject to repurchase |       | (23,509                                     | )          | (100,599 | ) | (174,065 | ) |
|                                                          |       |                                        |       |   |   |   |   |
| Denominator for basic and diluted earnings per share          |       | 30,326,768                                  |       | 29,809,854 |   | 25,916,229 |   |
|                                                          |       |                                        |       |   |   |   |   |
| Basic and diluted net loss per share                          |       | $                                           | (0.72      | ) | $ | (0.77 | ) | $ | (0.77 | ) |
|                                                          |       |                                        |       |   |   |   |   |

 
| ** **                                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Historical outstanding antidilutive securities  not included in diluted net loss per share calculation:** | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock subject to repurchase                                                                          |       | 1,275                                       |       | 59,426 |   | 148,779 |   |
| Options to purchase common stock                                                                            |       | 4,120,085                                   |       | 3,489,874 |   | 2,483,417 |   |
|                                                                                                        |       |                                        |       |   |   |   |   |
|                                                                                                        |       | 4,121,360                                   |       | 3,549,300 |   | 2,632,196 |   |

 

***Segment Reporting***

 

TheCompany currently operates in a single operating segment.  The Company generates revenues fromcollaborations that result primarily from its underlying research anddevelopment activities.  In addition,financial results are prepared and reviewed by management as a single operatingsegment.  The Company periodicallyevaluates the benefits of operating in distinct segments and will reportaccordingly when such distinction is made.

 

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***Recent Accounting Pronouncements***

 

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurement*.  SFAS No. 157 establishes a framework formeasuring fair value in accordance with GAAP, clarifies the definition of fairvalue within that framework, and expands disclosures about the use of fairvalue measurements.  It also responds toinvestors’ requests for expanded information about the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value and the effect of fair value measurements on earnings. SFAS No. 157applies whenever other standards require (or permit) assets or liabilities tobe measured at fair value, and does not expand the use of fair value in any newcircumstances. SFAS No. 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007. The Company does notexpect the adoption of SFAS No. 157 to have a material impact on itsfinancial statements.

 

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities - Including an amendment to FASB Statement No. 115*. SFAS No. 159 allows certain financial assets and liabilities to berecognized, at the Company’s election, at fair market value, with any gains orlosses for the period recorded in the statement of income.  SFAS No. 159includes available-for-sales securities in the assets eligible for thistreatment.  Currently, the Company records the gains or losses for theperiod in comprehensive income and in the equity section of the balancesheet.  SFAS No. 159 is effective for fiscal years beginning after November 15,2007, and interim periods in those fiscal years.  The Company does notexpect the adoption of SFAS No. 159 to have a material impact on itsfinancial statements.

 

In June 2007, the EITF issued EITF Issue No. 07-3,*Accounting for Nonrefundable Advance Payments forGoods or Services to be Used in Future Research and Development Activities*.  The consensus requires companies to defer andcapitalize prepaid, nonrefundable research and development payments to thirdparties over the period that the research and development activities areperformed or the services are provided, subject to an assessment ofrecoverability.  EITF Issue No. 07-3is effective for new contracts entered into in fiscal years beginning after December 15,2007, including interim periods within those fiscal years. The Company does notexpect the adoption of EITF Issue No. 07-3 to have a material impact onits financial statements.

 

In November 2007, the EITF issued EITF Issue No. 07-1,*Accounting for Collaborative Arrangements Relatedto the Development and Commercialization of Intellectual Property. *Companies may enter intoarrangements with other companies to jointly develop, manufacture, distribute,and market a product. Often the activities associated with these arrangementsare conducted by the collaborators without the creation of a separate legalentity (that is, the arrangement is operated as a “virtual joint venture”). Thearrangements generally provide that the collaborators will share, based oncontractually defined calculations, the profits or losses from the associatedactivities. Periodically, the collaborators share financial information relatedto product revenues generated (if any) and costs incurred that may trigger asharing payment for the combined profits or losses. The consensus requirescollaborators in such an arrangement to present the result of activities forwhich they act as the principal on a gross basis and report any paymentsreceived from (made to) other collaborators based on other applicable GAAP or,in the absence of other applicable GAAP, based on analogy to authoritativeaccounting literature or a reasonable, rational, and consistently appliedaccounting policy election. EITF Issue No. 07-1 is effective forcollaborative arrangements in place at the beginning of the annual periodbeginning after December 15, 2008. As the Company’s collaborative agreements do not incorporate suchrevenue- and cost-sharing arrangements, the Company does not expect theadoption of EITF Issue No. 07-1 to have a material impact on its financialstatements.

 

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n

**2. Balance Sheet Details**

 

***InvestmentsAvailable-for-Sale***

 

The following is a summaryof investments available-for-sale securities at December 31, 2007(in thousands):

 
| ** **                            | ** ** | **Amortized Cost** | ** ** | **Unrealized Gain** | ** ** | **Unrealized Loss** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------------------------|------------|-------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------------|------------|
| United States Government Agency Bonds |       | $                       | 33,166     |                     | $          | 16                       |       | $                              | —     |   | $ | 33,182 |   |
| Corporate Notes                       |       | 5,993                   |       | 5                        |       | —                   |       | 5,998                          |       |
| Commercial Paper                      |       | 3,468                   |       | —                   |       | (7                       | )          | 3,461                          |       |
|                                  |       |                    |       |                     |       |                     |       |                           |       |
|                                  |       | $                       | 42,627     |                     | $          | 21                       |       | $                              | (7         | ) | $ | 42,641 |   |

 

The following is a summaryof investments available-for-sale securities at December 31, 2006(in thousands):

 
| ** **                            | ** ** | **Amortized Cost** | ** ** | **Unrealized Gain** | ** ** | **Unrealized Loss** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------------------------|------------|-------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------------|------------|
| Commercial Paper                      |       | $                       | 30,171     |                     | $          | —                   |       | $                              | (20        | ) | $ | 30,151 |   |
| United States Government Agency Bonds |       | 22,726                  |       | 2                        |       | —                   |       | 22,728                         |       |
|                                  |       |                    |       |                     |       |                     |       |                           |       |
|                                  |       | $                       | 52,897     |                     | $          | 2                        |       | $                              | (20        | ) | $ | 52,879 |   |

 

Gross realized gains andlosses on available-for-sale securities were immaterial during the years ended December 31,2007 and 2006. All of the available-for-sale securities have a contractualmaturity at December 31, 2007 of one year or less.

 

***Property andEquipment***

 

Property and equipmentconsists of the following (in thousands):

 
| ** **                                      | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                      | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| Scientific equipment                            |       | $                                     | 8,690      |   | $ | 7,285 |   |
| Computer equipment                              |       | 2,568                                 |       | 2,376 |   |
| Furniture and fixtures                          |       | 1,005                                 |       | 1,004 |   |
| Leasehold improvements                          |       | 11,679                                |       | 12,399 |   |
|                                            |       |                                  |       |   |   |
|                                            |       | 23,942                                |       | 23,064 |   |
| Less accumulated depreciation and  amortization |       | (9,407                                | )          | (8,225 | ) |
|                                            |       |                                  |       |   |   |
|                                            |       | $                                     | 14,535     |   | $ | 14,839 |   |

Depreciation andamortization expense was $3.0 million, $1.5 million and $1.2 million for theyears ended December 31, 2007, 2006 and 2005, respectively.

 

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***Accounts Payableand Accrued Expenses***

 

Accounts payable and accruedexpenses consist of the following (in thousands):

 
| ** **                | ** ** | **As of December 31,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| Accounts payable          |       | $                                     | 739        |   | $ | 1,107 |   |
| Accrued employee benefits |       | 3,766                                 |       | 2,719 |   |
| Other accrued expenses    |       | 1,274                                 |       | 1,584 |   |
|                      |       |                                  |       |   |   |
|                      |       | $                                     | 5,779      |   | $ | 5,410 |   |

 

**3. Product Discovery andDevelopment Collaborations**

 

*Ajinomoto.*    In March 2006,the Company entered into a collaboration agreement with Ajinomoto for thediscovery and commercialization of novel flavor ingredients on an exclusivebasis in the soup, sauce and culinary aids, and noodle product categories, andon a co-exclusive basis in the bouillon product category within Japan and otherAsian markets.  The agreement requiresAjinomoto to pay an upfront license fee and make research and developmentfunding payments for up to three years. The Company is also eligible to receivemilestone payments upon the achievement of specific product discovery anddevelopment goals and, in the event of commercialization, receive royalties onsales of products containing new flavor ingredients developed under the agreementuntil the expiration of relevant patents.

 

In April 2007, theCompany and Ajinomoto amended the agreement to expand Ajinomoto’s rights intoNorth America.  Under the terms of the April amendment,Ajinomoto has agreed to pay the Company a non-refundable upfront license feeand the Company is eligible to receive an additional milestone payment uponachievement of a specific goal.  TheCompany is also eligible to receive minimum periodic royalty payments.

 

In August 2007, theCompany and Ajinomoto further amended the agreement to expand Ajinomoto’srights into additional product categories and geographies that were notpreviously licensed by the Company. Under the terms of the August amendment, Ajinomoto has agreed topay the Company a non-refundable upfront license fee.  The Company is also eligible to receiveminimum periodic royalty payments.

 

Through December 31,2007, the Company has received $15.6 million in upfront fees and research anddevelopment funding and one milestone of $500,000.  If all milestones are achieved, and includingthe $16.1 million in upfront fees, research and development funding andmilestones paid through December 31, 2007, the Company may be entitled toup to $18.1 million in upfront fees, research and development funding andmilestone payments.  In addition to theupfront fees, research and development funding and milestone payment, theCompany has received a minimum periodic royalty payment.  This minimum periodic royalty payment isnon-refundable.  Under the terms of thecontract, Ajinomoto will provide the Company a sales report and the Companywill record any additional calculated royalties as royalties from productsales.  There is no guarantee that theCompany will receive any further milestone payments or royalties under thiscollaboration.

 

In October 2006, theCompany entered into a second collaboration agreement with Ajinomoto for thediscovery and commercialization of specified natural flavor ingredients. The agreement requires Ajinomoto to make research and development fundingpayments for up to three years. The Company is also eligible to receivemilestone payments upon the achievement of specific product discovery anddevelopment goals and, in the event of commercialization, receive royalties onsales of products containing new flavor ingredients developed under theagreement.

 

Under the secondcollaborative agreement, through December 31, 2007 the Company hasreceived $563,000 in research and development funding.  If all milestones are achieved, and includingthe $563,000 

 

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in research and developmentfunding paid through December 31, 2007, the Company may be entitled to upto $2.3 million in research and development funding and milestonepayments.  In addition, uponcommercialization, the Company is entitled to receive minimum periodicroyalties and royalty payments based on sales of products containing flavoringredients developed under the agreement. There is no guarantee that the Company will receive any future milestonepayments or royalties under this collaboration.

 

*Cadbury.*    In July 2005,the Company entered into a collaboration agreement with Cadbury for thediscovery and commercialization of new flavor ingredients in the gumconfectionary area. The agreement requires Cadbury to make research fundingpayments for up to two years. The Company is also eligible to receive milestonepayments upon the achievement of specific product discovery and developmentgoals and, in the event of commercialization, receive royalties on sales ofproducts containing new flavor ingredients developed under the agreement.

 

In July 2007, theCompany amended its Collaborative Research and License Agreement with Cadbury,dated July 15, 2005, to extend the collaborative period for an additionaltwelve months, through July 15, 2008. During the extension period, the Company will continue to work withCadbury on the discovery and commercialization of new flavor ingredients in thegum confectionary area.  Under the termsof the extension, Cadbury has agreed to pay the Company incremental researchfunding of up to $600,000 based on discovery progress during the extensionperiod. The other payment terms, including milestones and royalties basedon sales of products containing new flavor ingredients developed under theagreement, remain unchanged.

 

Through December 31,2007, the Company has received $1.9 million in non-refundable upfront licensefees and research funding. If all milestones are achieved, and including allresearch funding paid or payable, the Company may be entitled to up to$3.7 million. There is no guarantee that the Company will receive anymilestone payments or royalties under this collaboration.

 

*Campbell.*    In March 2001,the Company entered into a collaboration agreement with Campbell to work for athree-year collaborative period for the discovery and development of specifiedflavors and flavor enhancers. The agreement requires Campbell to make researchfunding payments over three years totaling $3.6 million. The Company isalso eligible to receive milestone payments upon the achievement of a specificproduct development goal and, in the event of commercialization, receiveroyalties on future net sales of collaborator products containing a discoveredingredient.

 

The agreement was amended inJuly 2002 to provide for an option to negotiate the right to expand thefield to include additional specified products. The Company received$1.8 million from Campbell for the option, which was recorded as deferredrevenue and recognized as revenue ratably over the remaining term of theagreement (20 months). The agreement was further amended in November 2002to redefine calculated royalties during the royalty term.

 

In July 2003, theCompany received $650,000 in additional research support funding and expensereimbursement. The payment was recorded as deferred revenue and was recognizedas revenue ratably over the remaining term of the agreement (eight months).

 

The agreement was furtheramended in March 2004 to extend the collaborative period until the earlierof March 2006 or when a flavor or flavor enhancer selected by Campbellreceives Generally Recognized as Safe (“GRAS”) determination, subject toearlier termination under specified circumstances. Under the terms of theextension, the Company will provide additional research and receive additionalresearch funding totaling $3.0 million for two additional years.

 

The agreement was furtheramended in February 2006 to extend the collaborative period until theearlier of March 2009 or when a flavor or flavor enhancer selected byCampbell receives a GRAS determination, subject to earlier termination underspecified circumstances. Under the terms of the extension, the Company willprovide additional research and receive additional research funding totaling upto $3.0 million for three additional years.

 

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Through December 31,2007, the Company has received $10.3 million in research and developmentfunding. If all milestones are achieved, and including all research anddevelopment funding paid or payable, the Company may be entitled to up to$12.5 million. There is no guarantee that the Company will receive anymilestone payments or royalties under this collaboration.

 

*Coca-Cola.*    In April 2002,the Company entered into a collaboration agreement with Coca-Cola for thediscovery and development of specified flavors and flavor enhancers. Theagreement required Coca-Cola to make research funding payments over three yearstotaling $6.0 million. The Company is also eligible to receive milestonepayments upon the achievement of specific product development goals and, in theevent of commercialization, receive minimum periodic royalties and royalties onfuture sales of collaborator products containing a discovered ingredient.  Theagreement was amended in April 2004 to extend the collaborative perioduntil April 2008, subject to earlier termination under specifiedcircumstances. Under terms of the extension, the Company will provideadditional research and receive additional research funding totaling $6.0million for three additional years.

 

Through December 31,2007, the Company has received $11.5 million in research and developmentfunding. If all milestones are achieved, and including all research anddevelopment funding paid or payable, the Company may be entitled to up to$14.8 million. There is no guarantee that the Company will receive anymilestone payments or royalties under this collaboration.

 

***Firmenich***.  In December 2007, the Company enteredinto a collaboration agreement with Firmenich to work for a three-yearcollaborative period to discover and develop novel compounds that may be usedby Firmenich on an exclusive basis worldwide as ingredients that impart a cooltaste in flavor systems.  Under theagreement, Firmenich has agreed to pay research fees and specified paymentsupon the achievement of milestones of up to $3.5 million.  In addition, in the event of regulatoryapproval of a discovered compound, the Company is entitled to minimum periodicroyalties.  In the event ofcommercialization, the Company is entitled to receive royalties on future salesof products containing a discovered flavor or flavor enhancer until theexpiration of relevant patents.

 

*** Through December 31, 2007, the Companyhas received $0 in research fees.  If allmilestones are achieved, the Company may be entitled to up to $3.5million. *** There is no guarantee that the Company will receiveany milestone payments or royalties under this collaboration.

 

*KraftFoods Global, Inc.*    InDecember 2000, the Company entered into a collaboration agreement withKraft Foods Global Inc. (“Kraft Foods”) for the discovery and development offlavor enhancers. Under the terms of the collaboration, Kraft Foods agreed topay research funding of approximately $1.4 million per year for threeyears. In May 2002, the agreement was amended to provide for an additionalcollaborative program. The level of research support under the original programwas reduced from $1.4 million to $1.1 million per year for theremainder of the research term. In May 2005 and July 2005, theagreement was further amended to extend the collaborative period until June 2005and July 2007, respectively, and to provide for an additional specifiedproduct field.

 

Kraft Foods agreed to makeresearch funding payments related to the May 2002 program of$1.8 million over the period from May 2002 through December 2003,$1.8 million over the period from January 2004 through May 2005,$339,000 over the period May 2005 through July 2005, and $1.7 millionfrom July 2005 though November 2006. The Company earned a milestone payment of $375,000 in 2002 and amilestone payment of $250,000 in 2006 from the May 2002 research program.

 

In December 2005, theCompany further amended the agreement to provide for a new three-year discoveryand development collaboration. In November 2006, this agreement wasfurther amended to revise the structure of the research and developmentfunding.   Under the terms of the newcollaboration, Kraft Foods agreed to pay the Company an initial license fee andincremental research and development funding over the three-year period.  The Company was eligible to receive milestonepayments upon achievement of specific product discovery and development goals,and, in the event of commercialization, receive royalties based on sales ofKraft Foods products containing any flavor modifiers developed under 

 

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the agreement.

 

In July 2007, theCompany further amended the collaboration agreement to extend until December 9,2008 Kraft Foods’ ability to evaluate novel flavor modifiers under developmentby us for potential use by Kraft Foods on an exclusive basis in a specifiedproduct field in the dessert product category and on a co-exclusive basis inthe powdered beverage product field.  On October 31,2007 the Company received notification from Kraft Foods terminating thecollaboration agreement effective as of December 9, 2007.  All rights previously licensed to Kraft Foodsreturned to the Company upon such termination.

 

Through December 31,2007, the Company has received $12.1 million in research and developmentfunding and two milestone payments which totaled $625,000.

 

*Nestlé.*    In April 2002,as amended in April 2005, the Company entered into a collaborationagreement with Nestlé for the discovery and development of specified flavorsand flavor enhancers. The agreement requires Nestlé to make research fundingpayments through 2008, subject to earlier termination under specifiedcircumstances.  The Company is alsoeligible to receive milestone payments upon the achievement of specific productdevelopment goals and, in the event of commercialization, receive royalties onnet sales of collaborator products containing a discovered ingredient. TheCompany received payments for the achievement of four milestones in 2002, 2003,2004 and 2005.  The Company also receivedpayment for the reimbursement of certain regulatory expenses in 2005.  Through December 31, 2007, the Companyhas received $11.2 million in research and development funding, fourmilestone payments of $375,000 each, and $339,000 in reimbursement of certainregulatory costs. In addition, the Company has received royalties on net salesof collaborator products containing discovered flavor ingredients. If allmilestones are achieved, and including all research and development fundingpaid or payable, the Company may be entitled to up to $14.8 million. Thereis no guarantee that the Company will receive any further milestone payments orroyalties under this collaboration.

 

In October 2004, theCompany entered into a second product discovery and development collaborationagreement with Nestlé which provides for a five-year collaborative periodfocusing on the discovery and commercialization of specified novel flavoringredients, subject to extension or earlier termination under specifiedcircumstances.  This agreement hassubsequently been extended for two three-month increments.  Under the terms of the agreement, Nestlé hasagreed to pay to the Company research and development funding over five andone-half years, subject to earlier termination under specified circumstances.The Company is also eligible to receive milestone payments upon achievement ofspecific product discovery and development goals, and in the event ofcommercialization, is entitled to receive royalties on future net sales ofproducts containing a discovered novel flavor ingredient.  There is no guarantee that the Company willreceive any milestone payments or royalties under this collaboration.

 

Under this second agreement,through December 31, 2007, the Company has received $5.4 million inresearch and development funding. If all milestones are achieved, and includingall research and development funding paid or payable, the Company may beentitled to up to $15.8 million. There is no guarantee that the Companywill receive any milestone payments or royalties under this collaboration.

 

In connection with the abovelisted collaboration agreements, the Company has recognized revenue of $18.2million, $12.2 million and $9.4 million for the years ended December 31,2007, 2006 and 2005, respectively. As of December 31, 2007 and 2006, theCompany has deferred revenue of $6.7 million and $5.2 million, respectively.

 

**4. Commitments**

 

***Leases and Loans***

 

The Company leases itsprimary office facility under the Nexus Lease that expires on February 28,2017. The Company moved the majority of its operations to the new facility in November 2006.  Rent payments on the facility commenced April 1,2007. The Nexus Lease provides for an annual minimum 3% rent increase. TheCompany began recognizing rent expense upon the facility being ready to occupy.  Rent

 

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expense for the years ended December 31,2007, 2006 and 2005 was $2.1 million, $3.8 million and $4.1 million,respectively. Prior to moving to the new facility, the Company sublet part ofthe facility it occupied, and the sublease rental income for the years ended December 31,2006 and 2005 was $619,000 and $742,000, respectively. Sublease income isrecorded as an offset to the Company’s facilities expense. The Company has alsoentered into various operating lease agreements for office equipment.

 

The estimated annual futureminimum rental payments under the Company’s operating leases in effect at December 31,2007, which expire through 2017, for the years ending December 31 are asfollows (in thousands):

 
| ** **                   | ** ** | **Operating  Leases** | ** ** |
|------------------------------|------------|-----------------------|------------|
| 2008                         |       | $                     | 2,494      |   |
| 2009                         |       | 2,555                 |       |
| 2010                         |       | 2,611                 |       |
| 2011                         |       | 2,680                 |       |
| 2012                         |       | 2,759                 |       |
| Thereafter                   |       | 12,379                |       |
|                         |       |                  |       |
| Total minimum lease payments |       | $                     | 25,478     |   |

 

In connection with certainlicense agreements, the Company’s annual future minimum obligation payments areas follows, $53,000 and $15,000 for the years ending December 31, 2008 and2009, respectively.

 

**5. Stockholders’ Equity**

 

***Public Offering***

 

On November 9, 2005,the Company completed a public offering of 4.0 million shares of common stockfor proceeds to the Company of $57.3 million, net of underwriting discounts,commissions and offering expenses.  Theoffering was made under a shelf registration statement and included theexercise by the underwriters of an over-allotment option of 528,000 shares ofcommon stock.

 

***ConvertiblePreferred Stock***

 

The Company’s certificate ofincorporation, as amended and restated, authorizes the Company to issue up to7,500,000 shares of preferred stock, with a par value of $0.001, in one or moreseries. The Board of Directors may authorize the issuance of convertiblepreferred stock with voting or conversion rights that could adversely affectthe voting power or other rights of the holders of the common stock. Theissuance of convertible preferred stock, while providing flexibility inconnection with possible acquisitions and other corporate purposes, could,among other things, have the effect of delaying, deferring or preventing achange in control of the Company and may adversely affect the market price ofthe common stock and the voting and other rights of the holders of commonstock.  No shares of convertiblepreferred stock were outstanding as of December 31, 2007 or 2006.

 

***Equity IncentivePlan***

 

During 1999, the Companyadopted the 1999 Equity Incentive Plan, which was amended and restated by the2004 Equity Incentive Plan in connection with the Company’s initial publicoffering (the “Plan”), which provides for the grant of incentive andnon-statutory stock options and restricted stock purchase rights to employees,directors and consultants of the Company. The Plan, as amended, authorizes theCompany to issue up to 9,222,731 shares of common stock.  At December 31, 2007, the Company hasrepurchased a total of 131,153 shares and 3,046,526 shares remainavailable for grant under the Plan.  TheCompany issues new shares upon the exercise of stock options.

 

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The Plan allows the Companyto grant restricted stock purchase rights at no less than 85% of the fair valueof the Company’s common stock as determined by the Board of Directors at thedate of the grant. All restricted stock purchase rights vest in accordance witha vesting schedule determined by the Board of Directors, typically over afour-year period.  Under the Plan,457,069 restricted stock purchase rights have been granted at exercise pricesranging from $0.35 to $0.94 per share, all of which have been exercised as of December 31,2007, of which no shares are subject to repurchase.

 

Options granted under thePlan generally expire no later than 10 years from the date of grant (five yearsfor a 10% stockholder). Options generally vest and become fully exercisableover a period of four years.  In certaincases, grants to officers, directors and consultants can be made fullyexercisable at the date of grant. The exercise price of incentive stock optionsmust be equal to at least the fair value of the Company’s common stock on thedate of grant, and the exercise price of non-statutory stock options may be noless than 85% of the fair value of the Company’s common stock on the date ofgrant. The exercise price of any option granted to a 10% stockholder may be noless than 110% of the fair value of the Company’s common stock on the date ofgrant.  The Company has an option torepurchase all unvested shares, at the original purchase price, upon thevoluntary or involuntary termination of employment with, or consulting servicesprovided to, the Company for any reason. At December 31, 2007, 1,275 shares of common stock were unvestedand subject to repurchase.

 

The following is a furtherbreakdown of the options outstanding as of December 31, 2007:

 
| ** **                     | ** **  | ** **                  | ** ** | **Options Outstanding**              | ** ** | ** **                             | ** ** |
|--------------------------------|-------------|-----------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** **  | ** **                  | ** ** | **Weighted**                              | ** ** | ** **                             | ** ** | **Options Vested and Exercisable** | ** ** |
| **Range of  Exercise  Prices** | ** **  | **Number of  Options** | ** ** | **Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                           |        |                        |       |                                      |       |                                   |       |   |   |   |   |
| $                              | 0.74-6.00   |                        | 415,036    |                                      | 5.26       |                                   | $          | 0.95 |   | 414,289 |   | $ | 0.94 |   |
| $                              | 6.02-6.02   |                        | 713,019    |                                      | 6.52       |                                   | $          | 6.02 |   | 614,190 |   | $ | 6.02 |   |
| $                              | 6.30-12.51  |                        | 691,913    |                                      | 7.69       |                                   | $          | 9.33 |   | 381,612 |   | $ | 8.66 |   |
| $                              | 12.56-12.91 |                        | 855,844    |                                      | 8.90       |                                   | $          | 12.87 |   | 137,738 |   | $ | 12.75 |   |
| $                              | 13.10-15.89 |                        | 633,573    |                                      | 8.79       |                                   | $          | 13.96 |   | 205,605 |   | $ | 13.95 |   |
| $                              | 16.25-18.99 |                        | 810,700    |                                      | 8.06       |                                   | $          | 16.34 |   | 385,203 |   | $ | 16.35 |   |
|                           |        |                        |       |                                      |       |                                   |       |   |   |   |   |
|                           |        | 4,120,085                   |       |                                      |       | $                                      | 10.74      |   | 2,138,637 |   | $ | 8.56 |   |

 

As of December 31,2007, the total intrinsic value of options outstanding and exercisable was $3.7million and $3.6 million, respectively. At December 31, 2007, the weighted average remaining contractualterm for options vested and exercisable was 6.9 years.

 

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The following is a summaryof stock option and stock award activity under the Plan through December 31,2007:

 
| ** **                            | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|
|                                  |       |                  |       |                                       |       |
| Outstanding at January 1, 2005   |       | 1,992,710             |       | $                                          | 4.46       |   |
| Granted                               |       | 753,733               |       | $                                          | 9.88       |   |
| Exercised                             |       | (196,270              | )          | $                                          | 3.14       |   |
| Cancelled                             |       | (66,756               | )          | $                                          | 6.64       |   |
|                                  |       |                  |       |                                       |       |
| Outstanding at December 31, 2005 |       | 2,483,417             |       | $                                          | 6.15       |   |
| Granted                               |       | 1,355,290             |       | $                                          | 15.50      |   |
| Exercised                             |       | (337,514              | )          | $                                          | 5.16       |   |
| Cancelled                             |       | (11,319               | )          | $                                          | 10.26      |   |
|                                  |       |                  |       |                                       |       |
| Outstanding at December 31, 2006 |       | 3,489,874             |       | $                                          | 9.86       |   |
| Granted                               |       | 1,214,691             |       | $                                          | 12.86      |   |
| Exercised                             |       | (230,492              | )          | $                                          | 5.61       |   |
| Cancelled                             |       | (353,988              | )          | $                                          | 12.70      |   |
|                                  |       |                  |       |                                       |       |
| Outstanding at December 31, 2007 |       | 4,120,085             |       | $                                          | 10.74      |   |

 

The total intrinsic value of stock option exercisesduring the years ended December 31, 2007, 2006 and 2005 was $1.5 million,$3.1 million and $2.2 million, respectively.

 

***Employee StockPurchase Plan***

 

During2004, the Company adopted the 2004 Employee Stock Purchase Plan (the “PurchasePlan”), which allows all eligible employees to purchase shares of the Company’scommon stock at the lower of: (i) 85% of the fair market value on thefirst day of a two-year offering period; or (ii) 85% of the fair marketvalue on the last date of each six-month purchase period within the two-yearoffering period.  Employees may authorizethe Company to withhold up to 15% of their compensation during any purchaseperiod, subject to certain limitations. The Purchase Plan authorizes up to 953,096 shares to be granted.  At December 31, 2007, 352,936 shares ofcommon stock have been issued under the Purchase Plan at an average price of$7.62 per share.

 

***Shares Reservedfor Future Issuance***

 

The following shares ofcommon stock are reserved for future issuance:

 
| ** **                                              | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|
| Common stock options granted and  outstanding           |       | 4,120,085              |       |
| Common stock options reserved for future  grant         |       | 3,046,526              |       |
| Common stock reserved under Purchase Plan               |       | 600,160                |       |
| Total common stock shares reserved for  future issuance |       | 7,766,771              |       |

 

***Shareholders’ Rights Plan***

 

In February 2005, theCompany entered into a Share Purchase Rights Plan (the “Rights Plan”).  Terms of the Rights Plan provide for adividend distribution of one preferred share purchase right (a “Right”) foreach outstanding share of common stock, par value $0.001 per share (the “Common Shares”),of the Company.  The dividend was payable on February 21, 2005 to thestockholders of record on that date.  Each Right entitles the registeredholder to purchase from the Company one one-hundredth of a share of Series AJunior Participating Preferred Stock, par value $0.001 per share (the “Preferred Shares”),at a price of $100.00 per one one-hundredth of a Preferred Share, subject toadjustment.  Each one one-hundredth of 

 

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a share of Preferred Shares hasdesignations and powers, preferences and rights, and the qualifications,limitations and restrictions which make its value approximately equal to the valueof a Common Share.  The description and terms of the Rights are set forthin a Rights Agreement, dated as of February 14, 2005 entered into betweenthe Company and Mellon Investor Services LLC, as rights agent.

 

**6. Income Taxes**

 

OnJuly 13, 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes – An Interpretation of FASBStatement No. 109*(“FIN 48”), which clarifies the accountingfor uncertainty in income taxes recognized in an entity’s financial statementsin accordance with SFAS No. 109, *Accounting for IncomeTaxes*, and prescribes a recognition threshold and measurementattributes for financial statement disclosure of tax positions taken orexpected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on theincome tax return must be recognized at the largest amount that is more-likely–than-notto be sustained upon audit by the relevant taxing authority.  An uncertain income tax position will not berecognized if it has less than a 50% likelihood of being sustained.  Additionally, FIN 48 provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.  FIN48 is effective for fiscal years beginning after December 15, 2006.

 

TheCompany adopted the provisions of FIN 48 on January 1, 2007, and hascommenced analyzing filing positions in all of the federal and statejurisdictions where it is required to file income tax returns, as well as allopen tax years in these jurisdictions. As a result of adoption, the Company has recorded no additional taxliability.  The total amount ofunrecognized tax benefits as of January 1, 2007 was $958,000.  As of December 31, 2007 the Company hasnot yet completed its analysis of the deferred tax assets for net operatinglosses of $33.5 million and research and development credits of $3.8 milliongenerated in years prior to 2007 and net operating losses of $3.6 million andresearch and development credits of $559,000 generated in 2007.   As such, these amounts and the offsettingvaluation allowance have been removed from the Company’s deferred taxassets.  As noted below, the Company isin the process of completing a Section 382 analysis regarding thelimitation of the net operating loss and research and development credits.

 

Arollforward of changes in the Company’s unrecognized tax benefits is shownbelow (in thousands).

 
| Balance at January 1, 2007                               |   | $      | (958   | )      |
|---------------------------------------------------------------|--------|--------|--------|--------|
| Additions based on tax positions related to  the current year |   | — |   |
| Additions for tax positions of prior years                    |   | — |   |
| Reductions for tax positions of prior years                   |   | 958    |   |
| Settlements                                                   |   |   | — |   |
| Balance at December 31, 2007                             |   | $      | — |   |

 

Due to the existence of the valuation allowance, futurechanges in our unrecognized tax benefits will not impact the Company’s effectivetax rate.

 

TheCompany is subject to taxation in the U.S. and state jurisdictions.  The Company’s tax years for 2002 and forwardare subject to examination by the U.S. and California tax authorities due tothe carryforward of unutilized net operating losses and research anddevelopment credits.  The Company iscurrently not under examination by any taxing authorities.

 

TheCompany’s practice is to recognize interest and/or penalties related to incometax matters in income tax expense. During the twelve months ended December 31, 2007, the Company didnot recognize any interest or penalties. Upon adoption of FIN 48 on January 1, 2007, the Company did notrecord any interest or penalties.

 

The adoption of FIN 48 did not impact the Company’s financialcondition, results of operations or cash flows. At December 31, 2007, the Company had net deferred tax assets of$12.1 million.  These deferred 

 

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tax assets are primarilycomposed of capitalized research and development costs, deferred revenue andstock compensation expense.  Due touncertainties surrounding the Company’s ability to generate future taxableincome to realize these assets, a full valuation has been established to offsetthe net deferred tax asset. Additionally, the future utilization of the company’snet operating loss and research and development credit carryforwards to offsetfuture taxable income may be subject to an annual limitation as a result ofownership changes that may have occurred previously or that could occur in thefuture.  The Company has not yetdetermined whether such an ownership change has occurred; however the Companyis in the process of completing a Section 382 analysis regarding thelimitation of the net operating loss and research and development credits.Until this analysis has been completed the Company has removed the deferred taxassets associated with these carryforwards from its deferred tax asset scheduleand has recorded a corresponding decrease to their valuation allowance. Whenthe Section 382 analysis is completed, the Company plans to update itsunrecognized tax benefits under FIN 48. The Company expects the Section 382 analysis to be completed withinthe next twelve months.

 

Significant components ofthe Company’s net deferred tax assets at December 31, 2007 and 2006 areshown below (in thousands). A valuation allowance of $12.1 million and $45.5million has been established to offset the net deferred tax assets as of December 31,2007 and 2006, respectively, as realization of such assets is uncertain.

 
| ** **                                  | ** ** | **Years ended  December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                | ** ** | **2006** | ** ** |
|                                        |       |                                    |       |   |   |
| Deferred tax assets:                        |       |                                    |       |   |   |
| Net operating loss carryforwards            |       | $                                       | —     |   | $ | 33,465 |   |
| Capitalized research and development        |       | 4,777                                   |       | 3,976 |   |
| Research and development credits            |       | —                                  |       | 3,830 |   |
| Deferred revenue                            |       | 2,738                                   |       | 2,128 |   |
| Stock compensation                          |       | 2,889                                   |       | 1,176 |   |
| Other, net                                  |       | 1,695                                   |       | 889 |   |
|                                        |       |                                    |       |   |   |
| Total deferred tax assets                   |       | 12,099                                  |       | 45,464 |   |
|                                        |       |                                    |       |   |   |
| Total deferred tax liabilities              |       | —                                  |       | — |   |
|                                        |       |                                    |       |   |   |
| Net deferred tax assets                     |       | 12,099                                  |       | 45,464 |   |
| Valuation allowance for deferred tax assets |       | (12,099                                 | )          | (45,464 | ) |
|                                        |       |                                    |       |   |   |
| Net deferred tax assets                     |       | $                                       | —     |   | $ | — |   |

 

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Theprovision for income taxes on earnings subject to income taxes differs from thestatutory federal rate at December 31, 2007, 2006 and 2005, due to thefollowing (in thousands):

 
| ** **                                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal income taxes at 35%                        |       | $        | (7,640     | )        | $          | (8,070   | )          | $ | (6,940 | ) |
| State income tax, net of federal benefit           |       | (1,254   | )          | (1,324   | )          | (963     | )          |
| Tax effect on non-deductible expenses and  credits |       | 374      |       | 890      |       | 459      |       |
| Increase in valuation allowance (1)                |       | 8,520    |       | 8,504    |       | 7,444    |       |
|                                               |       | $        | —     |     | $          | —   |       | $ | — |   |

 

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(1) The removal of thevaluation allowance related to the net operating losses and research anddevelopment credits is not included in the increase in the valuationallowance.  See above for explanation.

 

As a result of the adoptionof SFAS 123R the Company recognizes windfall tax benefits associated with theexercise of stock options directly to stockholders’ equity only whenrealized.  Accordingly, deferred taxassets are not recognized for net operating loss carryforwards resulting fromwindfall tax benefits occurring from January 1, 2006 onward.  At December 31, 2007 deferred tax assetsdo not include excess tax benefits from stock-based compensation ofapproximately $1.1 million.

 

At December 31, 2007,the Company had federal and California tax net operating loss carryforwards ofapproximately $106.5 million and $23.8 million, respectively.  The federal and California tax losscarryforwards will begin to expire in 2019 and 2009, respectively, unlesspreviously utilized.

 

The Company also had federaland California research and development tax credit carryforwards ofapproximately $2.9 million and $2.2 million, respectively. The federalcredit carryforward will begin to expire in 2019 unless previously utilized andthe California credit will carry forward indefinitely until utilized.

 

Pursuant to Internal RevenueCode Sections 382 and 383, use of the Company’s net operating losscarryforwards  and R & D creditcarryforwards may be limited if a cumulative change in ownership of more than50% occurs within a three-year period.

 

**7. Summary of Quarterly FinancialData (unaudited)**

 

The following is a summaryof the unaudited quarterly results of operations for the years ended December 31,2007 and 2006 (in thousands, except per share amounts):

 
| ** **                                  | ** ** | **Year Ended December 31, 2007** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **First  Quarter**                                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| **Selected Quarterly Financial Data:**      |       |                                                 |       |   |   |   |   |   |   |
| Revenues                                    |       | $                                                    | 3,067      |   | $ | 3,737 |   | $ | 5,053 |   | $ | 6,363 |   |
| Total operating expenses                    |       | 10,563                                               |       | 10,427 |   | 10,667 |   | 11,789 |   |
| Net loss                                    |       | (6,596                                               | )          | (5,835 | ) | (4,762 | ) | (4,638 | ) |
| Basic and diluted net loss per common share |       | $                                                    | (0.22      | ) | $ | (0.19 | ) | $ | (0.16 | ) | $ | (0.15 | ) |

 

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| ** **                                  | ** ** | **Year Ended December 31, 2006** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **First  Quarter**                                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| **Selected Quarterly Financial Data:**      |       |                                                 |       |   |   |   |   |   |   |
| Revenues                                    |       | $                                                    | 2,411      |   | $ | 3,215 |   | $ | 3,204 |   | $ | 3,400 |   |
| Total operating expenses                    |       | 9,913                                                |       | 10,321 |   | 9,246 |   | 9,648 |   |
| Net loss                                    |       | (6,628                                               | )          | (6,159 | ) | (5,015 | ) | (5,255 | ) |
| Basic and diluted net loss per common share |       | $                                                    | (0.22      | ) | $ | (0.21 | ) | $ | (0.17 | ) | $ | (0.17 | ) |

 

**8. Subsequent Event**

 

On January 3, 2008 the Company announced thatthe Company entered into a Collaborative Research, Development,Commercialization and License Agreement with Firmenich SA for novel flavoringredients intended to provide a cooling taste effect.  Under the termsof the agreement, Firmenich has agreed to pay the Company research funding forup to three years based on research progress during the collaborativeperiod.  In addition, the Company is eligible to receive milestonepayments upon achievement of specific product discovery and development goals.The combined total of research funding and milestone payments could exceed $3.5million if all milestones are met. Upon commercialization, the Company willreceive royalty payments based on sales of products containing new flavoringredients developed under the agreement. 

 

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**Item 9.    *Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure***

 

There were no changes in ordisagreements with Ernst & Young LLP on accounting and financialdisclosure required to be reported under this Item 9.

 

**Item 9A.    *Controls and Procedures***

 

**Conclusion Regarding the Effectiveness of Disclosure Controlsand Procedures**

 

Underthe supervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of our disclosure controls and procedures, as such term is definedunder Rule 13a-15(e) promulgated under the Securities Exchange Act of1934, as amended, or the Exchange Act. Based on this evaluation, our principalexecutive officer and our principal financial officer concluded that ourdisclosure controls and procedures were effective as of the end of the periodcovered by this annual report.

 

**Management’s Report on Internal Control Over FinancialReporting**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).Under the supervision and with the participation of our management, includingour President and Chief Executive Officer and our Senior Vice President andChief Financial and Business Officer, we conducted an evaluation of theeffectiveness of our internal control over financial reporting based on theframework in *Internal Control - IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on our evaluation under the framework in *Internal Control — Integrated Framework*,our management concluded that our internal control over financial reporting waseffective as of December 31, 2007.

 

**Changes in Internal Control Over Financial Reporting**

 

Therewas no change in our internal control over financial reporting during our mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal controls over financial reporting.

 

**Report of IndependentRegistered Public Accounting Firm**

** **

TheBoard of Directors and Stockholders of Senomyx, Inc.

 

Wehave audited Senomyx Inc.’s internal control over financial reporting as of December 31,2007, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Senomyx Inc.’s management is responsible for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control Over Financial Reporting.Our responsibility is to express an opinion on the company’s internal controlover financial reporting based on our audit.

 

We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we

 

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considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Inour opinion, Senomyx Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2007, basedon****the COSO criteria**.**

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the balance sheets as of December 31,2007 and 2006, and the related statements of operations, stockholders’ equityand cash flows for each of the three years in the period ended December 31,2007 of Senomyx, Inc. and our report dated February 11, 2008expressed an unqualified opinion thereon.

 

 
|                    | /s/ Ernst &  Young LLP |
|-------------------------|---------------------------------|
|                    |                            |
|                    |                            |
| San  Diego, California  |                            |
| February 11,  2008 |                            |

 

 

**Item 9B.    *Other Information***

 

None.

 

85

----

 

**PART III**

 

Certain information requiredby Part III of this Form 10-K is omitted from this report becauseregistrant will file a definitive Proxy Statement within 120 days after the endof its fiscal year pursuant to Regulation 14A for its 2008 Annual Meeting ofShareholders to be held on May 28, 2008, referred to as the ProxyStatement, and the information included therein is incorporated herein byreference.

 

**Item 10.    *Directors, Executive Officers and CorporateGovernance***

 

The information with respectto executive officers required by this item is set forth in Part I of thisreport.

 

We have adopted a Code ofBusiness Conduct and Ethics Policy that applies to our directors and employees(including our principal executive officer, principal financial officer,principal accounting officer and controller), and have posted the text of thepolicy on our website (www.senomyx.com) in connection with “Investor Relations”materials. In addition, we intend to promptly disclose (i) the nature ofany amendment to the policy that applies to our principal executive officer,principal financial officer, principal accounting officer or controller, orpersons performing similar functions and (ii) the nature of any waiver,including an implicit waiver, from a provision of the policy that is granted toone of these specified individuals, the name of such person who is granted thewaiver and the date of the waiver on our website in the future.

 

The other informationrequired by this item is incorporated by reference to the Proxy Statement underthe sections entitled “Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance.”

 

**Item 11.    *ExecutiveCompensation***

 

The information required bythis Item is incorporated herein by reference to the information from the ProxyStatement under the sections entitled “Executive Compensation,” “CompensationCommittee Report” and “Compensation Committee Interlocks and InsiderParticipation.”

 

**Item 12.    *Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters***

 

The information required bythis Item is incorporated herein by reference to the information from the ProxyStatement under the sections entitled “Security Ownership of CertainBeneficial Owners and Management” and “Securities Authorized for Issuance underEquity Compensation Plans.”

 

**Item 13.    *CertainRelationships and Related Transactions, and Director Independence***

 

The information required bythis Item is incorporated herein by reference to the information from the ProxyStatement under the sections entitled “Election of Directors” and “CertainRelationships and Related Transactions.”

 

**Item 14.    *PrincipalAccountant Fees and Services***

 

The information required bythis Item is incorporated herein by reference to the information from the ProxyStatement under the section entitled “Principal Accountant Fees andServices.”

 

86

----

 

**PART IV**

 

**Item 15.    *Exhibitsand Financial Statement Schedules***

 

**(a)**           **1.*****Financial Statements***

 

See Index to FinancialStatements in Item 8 of this annual report on Form 10-K, which isincorporated herein by reference.

 

**2.*****Financial Statement Schedules***

 

All schedules have beenomitted because they are not applicable or required, or the informationrequired to be set forth therein is included in the Financial Statements ornotes thereto included in Item 8 of this annual report on Form 10-K.

 

**3.*****Exhibits***

** **
| **Exhibit  Footnote** | ** ** | **Exhibit Number** | ** ** | **Description of Document**                                                                                                                                                                                 | ** ** |
|-----------------------|------------|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| (1)                   |       | 3.1                     |       | Amended and Restated Certificate of Incorporation as currently in  effect.                                                                                                                                  |       |
| (2)                   |       | 3.2                     |       | Amended and Restated Bylaws as currently in effect.                                                                                                                                                         |       |
| (3)                   |       | 3.3                     |       | Certificate of Designation of Series A Junior Participating  Preferred Stock, as filed with the Secretary of State of Delaware on February 14,  2005.                                             |       |
| (1)                   |       | 4.1                     |       | Form of Common Stock Certificate.                                                                                                                                                                      |       |
| (1)                   |       | 4.2                     |       | Fourth Amended and Restated Investor Rights Agreement dated November 14,  2001, as amended February 27, 2002, between the Registrant and certain  of its stockholders.                            |       |
| (3)                   |       | 4.3                     |       | Form of Rights Certificate.                                                                                                                                                                            |       |
| (3)                   |       | 4.4                     |       | Rights Agreement, dated February 14, 2005 by and between the  Registrant and Mellon Investor Services LLP.                                                                                             |       |
| (1)                   |       | 10.1+                   |       | Form of Indemnity Agreement.                                                                                                                                                                           |       |
| (1)                   |       | 10.2+                   |       | Amended and Restated 2004 Equity Incentive Plan and Form of  Stock Option Agreement thereunder.                                                                                                        |       |
| (1)                   |       | 10.3+                   |       | 2004 Employee Stock Purchase Plan and Form of Offering Document  thereunder.                                                                                                                           |       |
| (1)                   |       | 10.4+                   |       | Employment letter agreement dated February 21, 2000 between the  Registrant and Mark Zoller, Ph.D.                                                                                                     |       |
| (1)                   |       | 10.5+                   |       | Employment letter agreement dated June 2, 2003 between the  Registrant and Kent Snyder.                                                                                                                |       |
| (1)                   |       | 10.6+                   |       | Employment letter agreement dated August 25, 2003 between the  Registrant and Harry Leonhardt, Esq.                                                                                                    |       |
| (1)                   |       | 10.7+                   |       | Employment letter agreement dated September 8, 2003 between the  Registrant and John Poyhonen.                                                                                                         |       |
| (1)                   |       | 10.8*                   |       | Exclusive License and Bailment Agreement dated March 10, 2000 between  the Registrant and the Regents of the University of California.                                                                 |       |
| (1)                   |       | 10.9*                   |       | Collaborative Research and License Agreement dated November 1,  2000, as amended April 16, 2002, between the Registrant and Aurora  Biosciences Corporation.                                      |       |
| (1)                   |       | 10.10*                  |       | Collaborative Research and License Agreement dated March 28,  2001, as amended July 26, 2002, November 5, 2002 and February 19,  2004 between the Registrant and Campbell Soup Company. |       |
| (1)                   |       | 10.11*                  |       | Collaborative Research and License Agreement dated April 18,  2002, as amended October 23, 2003, between the Registrant and Nestec,  Ltd.                                                         |       |
| (1)                   |       | 10.12*                  |       | Collaborative Research, Development, Commercialization and License  Agreement dated April 22, 2002 between the Registrant and the Coca-Cola  Company.                                                  |       |
| (1)                   |       | 10.13+                  |       | 1999 Equity Incentive Plan and Form of Stock Option Agreement  thereunder.                                                                                                                             |       |
| (3)                   |       | 10.14*                  |       | Collaborative Research and License Agreement, dated October 26,  2004, between the Registrant and Nestec Ltd.                                                                                          |       |
| (4)                   |       | 10.15*                  |       | Second Amendment to the Collaborative Research and License Agreement                                                                                                                                        |       |

 

87

----

 
|   |   |   |   | dated April 18, 2002, as amended October 23, 2003, between  the Registrant and Nestec, Ltd.                                                                                                                                                        |   |
|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| (5)    |   | 10.16+ |   | Summary Description of Senomyx, Inc. Incentive Cash Bonus Program.                                                                                                                                                                                      |   |
| (6)    |   | 10.17* |   | Lease Agreement between ARE-NEXUS CENTRE II, LLC and Registrant.                                                                                                                                                                                             |   |
| (7)    |   | 10.18* |   | Fourth Amendment to the Collaborative Research and License Agreement  dated March 28, 2001, as amended July 26, 2002, November 5,  2002, February 19, 2004 and February 24, 2006 between the  Registrant and Campbell Soup Company. |   |
| (7)    |   | 10.19* |   | Third Amendment to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003, April 17,  2005 and March 22, 2006 between the Registrant and Nestec, Ltd.                                       |   |
| (7)    |   | 10.20* |   | Collaborative Research, Development, Commercialization and License  Agreement dated March 23, 2006 between the Registrant and Ajinomoto Co., Inc.                                                                                                  |   |
| (8)    |   | 10.21  |   | Statement dated June 9, 2006 re: extension of Collaborative  Research and License Agreement dated October 26, 2004 between the  Registrant and Nestec, Ltd.                                                                                        |   |
| (9)    |   | 10.22  |   | Description of director compensation provided to Jay Short.                                                                                                                                                                                                  |   |
| (10)   |   | 10.23+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and Kent Snyder.                                                                                                                                                      |   |
| (10)   |   | 10.24+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and Mark J. Zoller, Ph.D.                                                                                                                                             |   |
| (10)   |   | 10.25+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and Harry J. Leonhardt, Esq.                                                                                                                                          |   |
| (10)   |   | 10.26+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and John Poyhonen.                                                                                                                                                    |   |
| (11)   |   | 10.27* |   | First Amendment to the Collaborative Research, Development,  Commercialization and License Agreement dated March 23, 2006 between the  Registrant and Ajinomoto Co., Inc.                                                                          |   |
| (11)   |   | 10.28* |   | Collaborative Research, Commercialization and License Agreement dated  October 6, 2006 between the Registrant and Ajinomoto Co., Inc.                                                                                                              |   |
| (11)   |   | 10.29* |   | License Agreement between the Registrant and The Regents of the  University of California dated October 11, 2006.                                                                                                                                       |   |
| (11)   |   | 10.30* |   | Letter Agreement between the Registrant and The Regents of the  University of California dated October 11, 2006.                                                                                                                                        |   |
| (11)   |   | 10.31+ |   | Employment letter agreement dated March 14, 2006 between the  Registrant and Sharon Wicker.                                                                                                                                                             |   |
| (11)   |   | 10.32+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and Sharon Wicker.                                                                                                                                                    |   |
| (11)   |   | 10.33  |   | Statement dated January 9, 2007 re: extension of Collaborative  Research and License Agreement dated October 26, 2004 between the  Registrant and Nestec, Ltd.                                                                                     |   |
| (12)   |   | 10.34+ |   | Amended  and Restated 2004 Equity Incentive Plan and Form of Stock Option  Agreement thereunder.                                                                                                                                                        |   |
| (12)   |   | 10.35* |   | First  Amendment dated February 7, 2007 to the License Agreement between  Senomyx, Inc. and The Regents of the University of California dated October 11,  2006.                                                                              |   |
| (12)   |   | 10.36  |   | Statement  dated April 12, 2007 re: extension of Collaborative Research and License  Agreement dated October 26, 2004 between Senomyx, Inc. and Nestec,  Ltd.                                                                                 |   |
| (13)   |   | 10.37* |   | Collaborative  Research, Development, Commercialization and License Agreement between  Senomyx, Inc. and Solae, LLC dated April 23, 2007.                                                                                                          |   |
| (13)   |   | 10.38* |   | Second  Amendment dated April 24, 2007 to the Collaborative Research,  Development, Commercialization and License Agreement dated March 23,  2006 between Senomyx, Inc. and Ajinomoto Co., Inc.                                          |   |
| (14)   |   | 10.39* |   | Third  Amendment dated August 1, 2007 to the Collaborative Research,  Development, Commercialization and License Agreement dated March 23,  2006 between Senomyx, Inc. and Ajinomoto Co., Inc.                                           |   |
|   |   | 10.40+ |   | Consulting Agreement dated October 5, 2007 between the Registrant and  Harry J. Leonhardt, Esq.                                                                                                                                                              |   |

 

88

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|   |   | 23.1 |   | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                |   |
|--------|--------|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   | 24.1 |   | Power of Attorney. Reference is made to the signature page.                                                                                                                                                                                                                              |   |
|   |   | 31.1 |   | Certification of Kent Snyder, Chief Executive Officer, pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                  |   |
|   |   | 31.2 |   | Certification of John Poyhonen, Chief Financial and Business Officer,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   |   |
|   |   | 32.1 |   | Certification of Kent Snyder, President, Chief Executive Officer and  Director, and John Poyhonen, Senior Vice President and Chief Financial and  Business Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |   |

 

----

**+             **Indicates management contract or compensatoryplan.

 

*              Confidential treatment has beenrequested with respect to certain portions of this exhibit. Omitted portionshave been filed separately with the Securities and Exchange Commission.

 

(1)           Filed as an exhibit to RegistrationStatement File No. 333-113998 and incorporated herein by reference.

 

(2)           Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on December 20,2007 and incorporated herein by reference.

 

(3)           Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended September 30, 2004 andincorporated herein by reference.

 

(4)           Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2005 andincorporated herein by reference.

 

(5)           Filedas an exhibit to our Current Report on Form 8-K filed with the Securitiesand Exchange Commission on June 5, 2007 and incorporated herein byreference.

 

(6)           Filedas an exhibit to our Annual Report on Form 10-K for the year ended December 31,2005 and incorporated herein by reference.

 

(7)           Filedas an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31,2006 and incorporated herein by reference.

 

(8)           Filedas an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30,2006 and incorporated herein by reference.

 

(9)           Filedas our Current Report on Form 8-K filed with the Securities and ExchangeCommission on July 13, 2006 and incorporated herein by reference.

 

(10)         Filedas an exhibit to our Current Report on Form 8-K filed with the Securitiesand Exchange Commission on October 13, 2006 and incorporated herein byreference.

 

(11)         Filedas an exhibit to our Annual Report on Form 10-K for the year ended December 31,2006 and incorporated herein by reference.

 

(12)         Filedas an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31,2007 and incorporated herein by reference.

 

(13)         Filedas an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30,2007 and incorporated herein by reference.

 

(14)         Filedas an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30,2007 and incorporated herein by reference.

 

89

----

 

**(b) Exhibits**

 

See Item 15(a) above.

 

**(c) Financial StatementSchedules**

 

See Item 15(a) above.

 

90

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|                           | Senomyx, Inc. |
|--------------------------------|--------------------|
|                           | By:                | /S/ KENT SNYDER |   |
|                           |               | Kent Snyder |
|                           |               | President and  Chief Executive |
|                           |               | Officer |
|                           |               |   |
|                           |               |   |
| Dated: February 14,  2008 |               |   |

 

91

----

 

**POWER OFATTORNEY**

 

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Kent Snyder, MarkLeschly and John Poyhonen, and each of them, as his or her true and lawfulattorneys-in-fact and agents, with full power of substitution andresubstitution, for him or her and in his or her name, place, and stead, in anyand all capacities, to sign any and all amendments to this report, and to filethe same, with all exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents, and each of them, full power and authority to doand perform each and every act and thing requisite and necessary to be done inconnection therewith, as fully to all intents and purposes as he or she mightor could do in person, hereby ratifying and confirming that all saidattorneys-in-fact and agents, or any of them or their or his substitute or substituted,may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 
| **Signature**               | ** ** | **Title**                                         | ** ** | **Date**               | ** ** |
|-----------------------------|------------|---------------------------------------------------|------------|------------------------|------------|
|                        |       |                                              |       |                   |       |
| /S/ KENT SNYDER             |       | President ,  Chief Executive Officer and Director |       | February 14, 2008 |       |
| Kent Snyder                 |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
| /S/ JOHN POYHONEN           |       | Senior Vice  President and Chief Financial and    |       | February 14, 2008 |       |
| John Poyhonen               |       | Business Officer                                  |       |                   |       |
|                        |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
| /S/ MARK LESCHLY            |       | Chairman of the  Board of Directors               |       | February 14, 2008 |       |
| Mark Leschly                |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
| /S/ STEPHEN A. BLOCK        |       | Director                                          |       | February 14, 2008 |       |
| Stephen A. Block, Esq. |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
| /S/ MICHAEL E. HERMAN       |       | Director                                          |       | February 14, 2008 |       |
| Michael E. Herman           |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
| /S/ DENNIS F. O’BRIEN  |       | Director                                          |       | February 14, 2008 |       |
| Dennis F. O’Brien      |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
| /S/ JAY M. SHORT            |       | Director                                          |       | February 14, 2008 |       |
| Jay M. Short, Ph.D.    |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
|                        |       |                                              |       |                   |       |
| /S/ CHRISTOPHER TWOMEY      |       | Director                                          |       | February 14, 2008 |       |
| Christopher Twomey          |       |                                              |       |                   |       |

 

92

----

 

**EXHIBITINDEX**

 
| **Exhibit  Footnote** | ** ** | **Exhibit Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                   | ** ** |
|-----------------------|------------|-------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| (1)                   |       | 3.1                     |       | Amended and  Restated Certificate of Incorporation as currently in effect.                                                                                                                                                                                    |       |
| (2)                   |       | 3.2                     |       | Amended and  Restated Bylaws as currently in effect.                                                                                                                                                                                                          |       |
| (3)                   |       | 3.3                     |       | Certificate of  Designation of Series A Junior Participating Preferred Stock, as filed  with the Secretary of State of Delaware on February 14, 2005.                                                                                               |       |
| (1)                   |       | 4.1                     |       | Form of  Common Stock Certificate.                                                                                                                                                                                                                       |       |
| (1)                   |       | 4.2                     |       | Fourth Amended  and Restated Investor Rights Agreement dated November 14, 2001, as  amended February 27, 2002, between the Registrant and certain of its  stockholders.                                                                             |       |
| (3)                   |       | 4.3                     |       | Form of  Rights Certificate.                                                                                                                                                                                                                             |       |
| (3)                   |       | 4.4                     |       | Rights  Agreement, dated February 14, 2005 by and between the Registrant and  Mellon Investor Services LLP.                                                                                                                                              |       |
| (1)                   |       | 10.1+                   |       | Form of  Indemnity Agreement.                                                                                                                                                                                                                            |       |
| (1)                   |       | 10.2+                   |       | Amended and  Restated 2004 Equity Incentive Plan and Form of Stock Option Agreement  thereunder.                                                                                                                                                         |       |
| (1)                   |       | 10.3+                   |       | 2004 Employee  Stock Purchase Plan and Form of Offering Document thereunder.                                                                                                                                                                             |       |
| (1)                   |       | 10.4+                   |       | Employment  letter agreement dated February 21, 2000 between the Registrant and Mark  Zoller, Ph.D.                                                                                                                                                      |       |
| (1)                   |       | 10.5+                   |       | Employment  letter agreement dated June 2, 2003 between the Registrant and Kent  Snyder.                                                                                                                                                                 |       |
| (1)                   |       | 10.6+                   |       | Employment  letter agreement dated August 25, 2003 between the Registrant and Harry  Leonhardt, Esq.                                                                                                                                                          |       |
| (1)                   |       | 10.7+                   |       | Employment  letter agreement dated September 8, 2003 between the Registrant and John  Poyhonen.                                                                                                                                                          |       |
| (1)                   |       | 10.8*                   |       | Exclusive  License and Bailment Agreement dated March 10, 2000 between the  Registrant and the Regents of the University of California.                                                                                                                  |       |
| (1)                   |       | 10.9*                   |       | Collaborative  Research and License Agreement dated November 1, 2000, as amended April 16,  2002, between the Registrant and Aurora Biosciences Corporation.                                                                                        |       |
| (1)                   |       | 10.10*                  |       | Collaborative  Research and License Agreement dated March 28, 2001, as amended July 26,  2002, November 5, 2002 and February 19, 2004 between the Registrant  and Campbell Soup Company.                                                  |       |
| (1)                   |       | 10.11*                  |       | Collaborative  Research and License Agreement dated April 18, 2002, as amended October 23,  2003, between the Registrant and Nestec, Ltd.                                                                                                           |       |
| (1)                   |       | 10.12*                  |       | Collaborative  Research, Development, Commercialization and License Agreement dated April 22,  2002 between the Registrant and the Coca-Cola Company.                                                                                                    |       |
| (1)                   |       | 10.13+                  |       | 1999 Equity  Incentive Plan and Form of Stock Option Agreement thereunder.                                                                                                                                                                               |       |
| (3)                   |       | 10.14*                  |       | Collaborative  Research and License Agreement, dated October 26, 2004, between the  Registrant and Nestec Ltd.                                                                                                                                           |       |
| (4)                   |       | 10.15*                  |       | Second Amendment  to the Collaborative Research and License Agreement dated April 18,  2002, as amended October 23, 2003, between the Registrant and Nestec,  Ltd.                                                                                  |       |
| (5)                   |       | 10.16+                  |       | Summary  Description of Senomyx, Inc. Incentive Cash Bonus Program.                                                                                                                                                                                      |       |
| (6)                   |       | 10.17*                  |       | Lease Agreement  between ARE-NEXUS CENTRE II, LLC and Registrant.                                                                                                                                                                                             |       |
| (7)                   |       | 10.18*                  |       | Fourth Amendment  to the Collaborative Research and License Agreement dated March 28,  2001, as amended July 26, 2002, November 5, 2002, February 19,  2004 and February 24, 2006 between the Registrant and Campbell Soup  Company. |       |
| (7)                   |       | 10.19*                  |       | Third Amendment  to the Collaborative Research and License Agreement dated April 18, 2002,  as amended October 23, 2003, April 17, 2005 and March 22, 2006  between the Registrant and Nestec, Ltd.                                       |       |
| (7)                   |       | 10.20*                  |       | Collaborative  Research, Development, Commercialization and License Agreement dated March 23,  2006 between the Registrant and Ajinomoto Co., Inc.                                                                                                  |       |
| (8)                   |       | 10.21                   |       | Statement dated June 9,  2006 re: extension of Collaborative Research and                                                                                                                                                                                |       |

 

93

----

 
|   |   |   |   | License  Agreement dated October 26, 2004 between the Registrant and Nestec, Ltd.                                                                                                                                                                                                    |   |
|--------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| (9)    |   | 10.22  |   | Description of  director compensation provided to Jay Short.                                                                                                                                                                                                                              |   |
| (10)   |   | 10.23+ |   | Change in  Control Agreement dated October 10, 2006 by and between the Registrant  and Kent Snyder.                                                                                                                                                                                  |   |
| (10)   |   | 10.24+ |   | Change in  Control Agreement dated October 10, 2006 by and between the Registrant  and Mark J. Zoller, Ph.D.                                                                                                                                                                         |   |
| (10)   |   | 10.25+ |   | Change in  Control Agreement dated October 10, 2006 by and between the Registrant and  Harry J. Leonhardt, Esq.                                                                                                                                                                           |   |
| (10)   |   | 10.26+ |   | Change in  Control Agreement dated October 10, 2006 by and between the Registrant  and John Poyhonen.                                                                                                                                                                                |   |
| (11)   |   | 10.27* |   | First Amendment  to the Collaborative Research, Development, Commercialization and License  Agreement dated March 23, 2006 between the Registrant and Ajinomoto Co., Inc.                                                                                                       |   |
| (11)   |   | 10.28* |   | Collaborative  Research, Commercialization and License Agreement dated October 6, 2006  between the Registrant and Ajinomoto Co., Inc.                                                                                                                                          |   |
| (11)   |   | 10.29* |   | License  Agreement between the Registrant and The Regents of the University of  California dated October 11, 2006.                                                                                                                                                                   |   |
| (11)   |   | 10.30* |   | Letter Agreement  between the Registrant and The Regents of the University of California dated October 11,  2006.                                                                                                                                                                    |   |
| (11)   |   | 10.31+ |   | Employment  letter agreement dated March 14, 2006 between the Registrant and Sharon  Wicker.                                                                                                                                                                                         |   |
| (11)   |   | 10.32+ |   | Change in  Control Agreement dated October 10, 2006 by and between the Registrant  and Sharon Wicker.                                                                                                                                                                                |   |
| (11)   |   | 10.33  |   | Statement dated January 9,  2007 re: extension of Collaborative Research and License Agreement dated October 26,  2004 between the Registrant and Nestec, Ltd.                                                                                                                  |   |
| (12)   |   | 10.34+ |   | Amended and Restated  2004 Equity Incentive Plan and Form of Stock Option Agreement  thereunder.                                                                                                                                                                                     |   |
| (12)   |   | 10.35* |   | First Amendment dated February 7,  2007 to the License Agreement between Senomyx, Inc. and The Regents of  the University of California dated October 11, 2006.                                                                                                            |   |
| (12)   |   | 10.36  |   | Statement dated April 12,  2007 re: extension of Collaborative Research and License Agreement dated October 26,  2004 between Senomyx, Inc. and Nestec, Ltd.                                                                                                               |   |
| (13)   |   | 10.37* |   | Collaborative Research,  Development, Commercialization and License Agreement between Senomyx, Inc.  and Solae, LLC dated April 23, 2007.                                                                                                                                       |   |
| (13)   |   | 10.38* |   | Second Amendment dated April 24,  2007 to the Collaborative Research, Development, Commercialization and  License Agreement dated March 23, 2006 between Senomyx, Inc. and  Ajinomoto Co., Inc.                                                                       |   |
| (14)   |   | 10.39* |   | Third Amendment dated August 1,  2007 to the Collaborative Research, Development, Commercialization and  License Agreement dated March 23, 2006 between Senomyx, Inc. and  Ajinomoto Co., Inc.                                                                        |   |
|   |   | 10.40+ |   | Consulting Agreement  dated October 5, 2007 between the Registrant and Harry J. Leonhardt, Esq.                                                                                                                                                                                           |   |
|   |   | 23.1   |   | Consent of  Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                |   |
|   |   | 24.1   |   | Power of  Attorney. Reference is made to the signature page.                                                                                                                                                                                                                              |   |
|   |   | 31.1   |   | Certification of  Kent Snyder, Chief Executive Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                  |   |
|   |   | 31.2   |   | Certification of  John Poyhonen, Chief Financial and Business Officer, pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   |   |
|   |   | 32.1   |   | Certification of  Kent Snyder, President, Chief Executive Officer and Director, and John  Poyhonen, Senior Vice President and Chief Financial and Business Officer,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |   |

 

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**+             **Indicates management contract or compensatory plan.

 

*              Confidential treatment has been requested with respectto certain portions of this exhibit. Omitted portions have been filedseparately with the Securities and Exchange Commission.

 

(1)           Filed as an exhibit to RegistrationStatement File No. 333-113998 and incorporated herein by reference.

 

(2)           Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on December 20,2007 and incorporated herein by reference.

 

(3)           Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended September 30, 2004 andincorporated herein by reference.

 

(4)           Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2005 andincorporated herein by reference.

 

(5)           Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on June 5,2007 and incorporated herein by reference.

 

(6)           Filed as an exhibit to our AnnualReport on Form 10-K for the year ended December 31, 2005 andincorporated herein by reference.

 

(7)           Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2006 andincorporated herein by reference.

 

(8)           Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended June 30, 2006 andincorporated herein by reference.

 

(9)           Filed as our Current Report on Form 8-Kfiled with the Securities and Exchange Commission on July 13, 2006 and incorporatedherein by reference.

 

(10)         Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on October 13,2006 and incorporated herein by reference.

 

(11)         Filed as an exhibit to our AnnualReport on Form 10-K for the year ended December 31, 2006 andincorporated herein by reference.

 

(12)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2007 andincorporated herein by reference.

 

(13)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended June 30, 2007 andincorporated herein by reference.

 

(14)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended September 30, 2007 andincorporated herein by reference.

 

95

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