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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

            (Mark One)

For the quarterly period ended June 30, 2002

or

FOR THE TRANSITION PERIOD FROM ___________ TO ___________ .

Commission File Number: 000-27765

SYMYX TECHNOLOGIES, INC.

(408) 764-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [   ]

As of August 2, 2002, Registrant had outstanding 30,842,004 shares of Common Stock, $.001 par value.

Table of Contents

TABLE OF CONTENTS

				PAGE
Part I: Financial Information
Item 1.		Financial Statements (unaudited):
		Condensed Consolidated Statements of Operations for the Three and Six Month Periods   Ended June 30, 2002 and 2001		2
		Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001		3
		Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended   June 30, 2002 and 2001		4
		Notes to Condensed Consolidated Financial Statements		5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		24
Part II: Other Information
Item 1.		Legal Proceedings		25
Item 2.		Changes in Securities and Use of Proceeds		25
Item 3.		Defaults Upon Senior Securities		25
Item 4.		Submission of Matters to a Vote of Security Holders		25
Item 5.		Other Information		26
Item 6.		Exhibits and Reports on Form 8-K		26
		Signatures		26
		Exhibit 99.1		28

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SYMYX TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

				Three Months Ended								Six Months Ended
				June 30								June 30
				2002				2001				2002				2001
Revenues:
	Service revenues from research collaborations and grants			$	9,391			$	10,633			$	18,091			$	20,460
	Product sales				3,331				3,905				8,932				7,204
	License fees and royalties				1,263				832				1,474				1,719
		Total revenues			13,985				15,370				28,497				29,383
Operating expenses:
	Cost of products sold				794				1,829				1,439				4,115
	Research and development				9,630				9,998				19,861				20,303
	Sales, general and administrative				3,232				3,003				6,693				5,877
		Total operating expenses			13,656				14,830				27,993				30,295
Income (loss) from operations					329				540				504				(912	)
Interest income (expense), net					871				1,426				1,890				3,093
Income before income tax expense					1,200				1,966				2,394				2,181
Income tax expense					516				259				1,101				294
Net income				$	684			$	1,707			$	1,293			$	1,887
Basic net income per share				$	0.02			$	0.06			$	0.04			$	0.06
Diluted net income per share				$	0.02			$	0.05			$	0.04			$	0.06
Shares used in computing basic net income per share					30,577				29,776				30,492				29,639
Shares used in computing diluted net income per share					31,792				31,172				31,806				31,086

See accompanying notes to condensed consolidated financial statements.

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SYMYX TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)

				June 30,				Dec 31,
				2002				2001
				(Unaudited)				(Note 1)
ASSETS
Current assets:
	Cash and cash equivalents			$	60,099			$	15,621
	Available-for-sale securities				57,730				97,705
	Accounts receivable				3,491				454
	Inventories				3,835				2,192
	Prepaid expenses				1,038				955
	Interest receivable and other current assets				1,351				1,571
		Total current assets			127,544				118,498
Property and equipment, net					26,923				28,532
Deferred tax assets					2,046				2,046
Other assets					2,081				1,994
		Total assets		$	158,594			$	151,070
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable and other accrued liabilities			$	4,662			$	3,934
	Accrued compensation and employee benefits				1,207				1,118
	Income taxes payable				3,427				3,068
	Deferred rent				932				842
	Deferred revenue				10,537				6,637
	Warranty expense accrual				985				974
		Total current liabilities			21,750				16,573
Commitments Stockholders’ equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, issuable in series; no shares issued and outstanding					—				—
Common stock, $0.001 par value, 100,000,000 shares authorized and 30,837,937 and 30,613,967 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively					31				31
Additional paid-in capital					149,588				148,366
Stockholder notes receivable					(410	)			(410	)
Deferred stock compensation					(188	)			(335	)
Accumulated other comprehensive income					201				516
Accumulated deficit					(12,378	)			(13,671	)
		Total stockholders’ equity			136,844				134,497
		Total liabilities and stockholders’ equity		$	158,594			$	151,070

See accompanying notes to condensed consolidated financial statements.

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SYMYX TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

				Six Months Ended
				June 30
				2002				2001
Operating activities
Net income				$	1,293			$	1,887
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization				5,436				4,367
	Deferred compensation amortization				98				270
	Changes in assets and liabilities:
		Accounts receivable			(3,037	)			(158	)
		Inventories			(1,643	)			1,971
		Prepaid expenses			(83	)			333
		Interest receivable and other current assets			220				145
		Other long-term assets			(299	)			(10	)
		Accounts payable and other accrued liabilities			728				1,801
		Accrued compensation and employee benefits			89				(284	)
		Income taxes payable			359				36
		Deferred rent			90				128
		Deferred revenue			3,900				(697	)
		Warranty expense accrual			11				336
Net cash provided by operating activities					7,162				10,125
Investing activities
Purchase of property and equipment, net					(2,685	)			(6,999	)
Purchase of available-for-sale securities					(6,133	)			(41,233	)
Proceeds from maturities of available-for-sale securities					44,730				54,214
Proceeds from sale of available-for-sale securities					—				4,793
Net cash provided by investing activities					35,912				10,775
Financing activities
Proceeds from issuance of common stock, net of repurchases					1,404				2,578
Principal payments on equipment and facility loans					—				(1,995	)
Net cash provided by financing activities					1,404				583
Net increase in cash and cash equivalents					44,478				21,483
Cash and cash equivalents at beginning of period					15,621				10,624
Cash and cash equivalents at end of period				$	60,099			$	32,107
Supplemental disclosure of cash flow information
Interest paid				$	—			$	313
Income taxes paid				$	745			$	272

See accompanying notes to condensed consolidated financial statements.

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies

Business and Basis of Presentation

     Symyx Technologies, Inc. (the “Company” or “Symyx”), was formed to research, develop, manufacture and market products through the application of combinatorial technologies in the area of materials science. To date, the Company’s operations have involved research and development activities, a significant portion of which has been funded by collaborative partners, product revenues related to the sale of Discovery Tools systems and license fees and royalties from Proprietary Materials and Technology Licensing.

     The accompanying unaudited condensed consolidated financial information has been prepared by management, in accordance with generally accepted accounting principles for interim financial information and pursuant to instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at June 30, 2002 and results of operations and cash flows for all periods presented have been made. The consolidated condensed balance sheet at December 31, 2001 has been derived from the audited financial statements at that date.

     These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as included in the Company’s 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The results of operations for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2002.

Principles of consolidation

     These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Symyx Technologies AG, incorporated in Switzerland. All significant intercompany balances and transactions have been eliminated on consolidation.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to exercise judgment in making estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from these estimates.

     The actual results with regard to warranty expenditures could have a material unfavorable impact on the Company if system failures or the cost to repair a system is greater than what the Company has used in estimating the warranty expense accrual.

Reclassifications

     Certain reclassifications have been made to prior period amounts to conform to the current period presentations. Revenue reported in previous quarters as product and license revenue is now reported separately as revenue from product sales and revenue from license fees and royalties.

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Revenue Recognition

     Collaborations and Grants

     The Company recognizes revenues from research collaboration agreements and government grants as earned based upon the performance requirements of the agreements. Payments received prior to performance are deferred and recognized as revenue when earned over future performance periods. Collaboration agreements generally specify minimum levels of research effort required to be performed by the Company. Payments received under research collaboration agreements are not refundable if the research effort is not successful. Direct costs associated with these contracts and grants are reported as research and development expense.

     Non-refundable up-front payments received in connection with research and development collaboration agreements, including technology access fees, are deferred and recognized on a straight-line basis over the relevant periods specified in the agreement, generally the research term. Revenue from milestone payments, which are substantially at risk until the milestones are completed, is recognized upon completion of these milestone events. Milestone payments to date have been immaterial.

     Product

     Product revenues include sales of Discovery Tools hardware and associated software licenses and maintenance. Revenue from the sale of Discovery Tools systems is recognized when earned. Revenue is earned when persuasive evidence of an arrangement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable, and collectibility is probable. This is generally upon shipment, transfer of title to and acceptance by the customer of the hardware and associated software and licenses to intellectual property, unless there are extended payment terms. The Company considers all arrangements with payment terms extending beyond 12 months not to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. In multiple element arrangements, the Company uses the residual method to allocate revenue to delivered elements once it has established fair value for all undelivered elements. Payments received in advance under these arrangements are recorded as deferred revenue until earned.

     The Company’s product related software licenses may provide for technical support, bug fixes and rights to unspecified upgrades on a when-and-if-available basis for periods defined within the contract. Revenue related to this post contract customer support is deferred and recognized over the term of the contracted support.

     An accrual is established for warranty expenses at the time the associated revenue is recognized. Shipping and insurance costs associated with the sale of discovery tools systems are not material and are included in sales, general and administrative costs.

     License and Royalty

     Amounts received from third parties for licenses to the Company’s intellectual property are recognized when earned under the terms of the agreements. Generally revenue is recognized upon transfer of the license unless the Company has continuing obligations for which fair value cannot be established, in which case the revenue is recognized over the period of the obligation. If there are extended payment terms, license fee revenue is recognized as these payments become due. The Company considers all arrangements with payment terms extending beyond 12 months not to be fixed or determinable. If there is provision in the licensing agreement for a variable fee in addition to a non-refundable minimum amount, the amount of the non-refundable minimum guarantee is recognized upon transfer of the license unless the Company has continuing obligations for which fair value cannot be established and the amount of the variable fee in excess of the guaranteed minimum is recognized as revenue when it is fixed and determinable.

     Royalty revenues are recorded based on reported sales by third party licensees of products containing the Company’s software, intellectual property and know-how.

     Amounts received from third parties for options to license certain technology or enter collaborative arrangements upon specified terms are deferred until either the option is exercised or the option right expires.

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Concentration of Revenue

     The following customers contributed more than 10% of the Company’s total revenue for the six month periods ended June 30, 2002 or June 30, 2001 (in thousands):

     The revenue from the above customers has been included in the following reportable segments for the three and six month periods ended June 30, 2002 and 2001 (in thousands):

Inventories

     Work in process is the only component of inventories for all periods presented and comprises customized Discovery Tool systems in the process of being built. Inventories are carried at the lower of cost or market, determined on a specific identification basis.

Income Taxes

     Income taxes have been provided using the liability method in accordance with FASB Statement 109, “Accounting for Income Taxes”. In accordance with FASB Statement 109, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2. Earnings Per Share

     Basic net income per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net income (loss) per share has been calculated based on the shares used in the calculation of basic net income per share and the dilutive effect of stock options and shares subject to repurchase. The computation of the weighted average number of shares outstanding for the three and six months periods ended June 30, 2002 and 2001 are as follows (in thousands):

3. Deferred Compensation

     The amortization of deferred stock compensation, combined with the expense associated with stock options granted to non-employees, has been included in the following items in the accompanying statements of operations (in thousands):

4. Comprehensive Income (Loss)

     The Company has adopted Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”. The only components of other comprehensive income (loss) are unrealized gains and losses on available-for-sale securities and a foreign currency translation adjustment.

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

     The components of comprehensive income, net of tax, for the three and six month periods ended June 30, 2002 and 2001 are as follows (in thousands):

     The components of accumulated other comprehensive income, net of tax, at June 30, 2002 and December 31, 2001 are as follows (in thousands):

5. Segment Disclosure

     Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131), requires disclosures of certain information regarding operating segments, products and services, geographic areas of operation and major customers. The method for determining what information to report under SFAS 131 is based upon the “management approach,” or the way that management organizes the operating segments within a company, for which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM) in deciding how to allocate resources and in assessing performance. Symyx’ CODM is the Chief Executive Officer. The CODM evaluates the performance of the Company based on consolidated profit or loss from operations before income taxes. For the purpose of making operating decisions, the CODM primarily considers financial information presented on a consolidated basis accompanied by disaggregated information about revenues. Revenue is defined as revenues from external customers.

     Symyx allocates research personnel time to each collaboration arrangement on a full-time-equivalent basis but does not allocate actual research and development expenses to each collaboration or business segment. The Company does not assess segment performance below the revenue level or allocate sales, general or administrative expenses or assets to the individual segments and, therefore, financial performance including depreciation and amortization and capital expenditures is not reported on a segment basis.

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

     Symyx provides research services to its partners through its Industry Collaborations business, seeks to license discovered materials and technologies through its Proprietary Materials and Technology Licensing programs, and offers selective access to its proprietary technologies, including instruments, software and intellectual property, through its Discovery Tools business.

     The disaggregated financial information reviewed by the CODM is as follows. The Company segregates Industry Collaboration revenue into four categories for purposes of internal management reporting: Chemicals, Electronic Materials, Life Sciences and Industrial Polymers.

Geographic Area Data

     All revenue is generated in the United States for all periods presented. Revenues are attributed to the following geographic locations based on the physical location of Symyx’ customers.

     All significant long-lived assets were geographically located in the United States for all periods presented.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. These statements typically may be identified by the use of forward-looking words or phrases such as “believe,” “expect,” “intend,” “anticipate,” “should,” “planned,” “estimated,” and “potential,” among others. All forward-looking statements included in this document are based on our current expectations, and we assume no obligation to update any such forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for such forward-looking statements. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, and results of our businesses include but are not limited to (1) market acceptance of our products and services; (2) uncertainties relating to the pace, quality or number of discoveries of new materials; (3) the dependence on collaborators to successfully commercialize products; (4) uncertainties of patent protection and litigation; (5) future growth strategy; (6) general economic conditions in the United States and in major European and Asian markets; (7) earthquakes, power failures and other disasters; and (8) other factors that might be described from time to time in our periodic filings with the Securities and Exchange Commission and include those set forth in this filing as “Factors Affecting Future Results” and “Other Risk Factors”.

     All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the three and six month periods ended June 30, 2002, are not necessarily indicative of the results that may be expected for the full fiscal year.

Overview

     To date, our revenues and cash flows from operations have come from research collaborations with large chemical, life science and electronics companies, license of proprietary materials, sale of instruments, licensing of intellectual property and software, and government grants. We currently have a number of life science, chemical and electronics collaborative partners and customers worldwide, including such leading companies as Celanese, Dow Chemical, Eli Lilly and Company, ExxonMobil Chemical, Merck & Co., Rhodia and Unilever. We expect that our cash flows and revenue for 2002 will be comprised in large part of payments to be made and revenue to be earned under these and new agreements together with product revenue from our Discovery Tools business and license fees from our Intellectual Property Licensing business.

     We have invested heavily in establishing the technology, instrumentation and informatics necessary to pursue high throughput discovery for proprietary materials. These materials include:

	•		polymers, phosphors and catalysts for life science applications;
	•		catalysts to manufacture commodity chemicals and polyolefins; and
	•		new materials for electronics applications.

     We expect to continue to make significant investments in research and development, including the development of new instruments and software, to enhance our technologies. In addition, an important part of our strategy is to expand our operations and employee base, and to build our resources for research and development, business development and marketing.

     As of June 30, 2002, our accumulated deficit was approximately $12.4 million. We may incur additional operating losses as we continue to expand staffing, equipment and facilities. See “Factors Affecting Future Results.”

Critical Accounting Policies

     Symyx’ financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements and related disclosures requires management to exercise judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Estimates are used for, but not limited to, revenue recognition, establishing the warranty expense accrual, establishing slow-moving, obsolete and excess inventory reserves and accounting for income taxes. The following critical accounting policies, among others, are impacted significantly by judgments, estimates and assumptions used in the preparation of the Consolidated Financial Statements.

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Source of Revenues and Revenue Recognition Policy

     Revenue from collaborations and grants consists of research and development funding received from collaborative partners as well as government grants received for proprietary materials research. Product revenue consists of payments from customers for products including proprietary materials, Discovery Tools systems and consumables. License fees and royalties include license fees from the licensing of our intellectual property and software and technology license payments and royalties on manual laboratory instruments and software sold under license by third parties.

     We recognize revenue from research collaboration agreements and government grants as earned upon performance of the services specified in the agreements and grants. Payments received that are related to future performance are deferred and recognized as revenue as the performance requirements are achieved. At June 30, 2002, we had deferred revenues of approximately $10.5 million, compared to $6.6 million at December 31, 2001. The terms of our collaboration agreements generally require us to perform minimum levels of research.

     We recognize revenue from the sale of Discovery Tools, and all costs of manufacture are expensed, once customer acceptance has been achieved. A warranty expense accrual is established at the time of customer acceptance. If there are extended payment terms, we recognize product revenue as these payments become due. We consider all arrangements with payment terms extending beyond 12 months not to be fixed or determinable. Accordingly, the cost of products sold as a percentage of product and license revenue will fluctuate from one period to the next based on the timing of when extended payments are due as well as the mix of products sold.

     We recognize license fee revenues for licenses to our intellectual property when earned under the terms of the agreements. Generally, revenue is recognized upon transfer of the license unless we have continuing obligations for which fair value cannot be established, in which case the revenue is recognized over the period of the obligation. If there are extended payment terms, we recognize license fee revenue as these payments become due. We consider all arrangements with payment terms extending beyond 12 months not to be fixed or determinable. In certain licensing arrangements there is provision for a variable fee as well as a non-refundable minimum amount. In such arrangements, the amount of the non-refundable minimum guarantee is recognized upon transfer of the license unless we have continuing obligations for which fair value cannot be established and the amount of the variable fee in excess of the guaranteed minimum is recognized as revenue when it is fixed and determinable.

     We recognize royalty revenues based on reported sales by third party licensees of products containing our software, intellectual property and know-how.

     Our sources of potential revenue for the next several years are likely to be:

	•		payments under existing and possible future collaborative arrangements;
	•		royalties from our partners based on revenues received from any products commercialized under those agreements;
	•		sales of Discovery Tools and other instruments;
	•		licensing of software and intellectual property; and
	•		government research grants.

     See Note 1 of Notes to Financial Statements for a further discussion of our revenue recognition policies.

Inventories

     We carry our inventories at the lower of cost or market, cost being determined on a specific identification basis. We apply judgment in determining the provisions for slow-moving, excess and obsolete inventories based on historical experience and anticipated product demand.

Warranty Expense Accrual

     A warranty expense accrual is established at the time of customer acceptance of a Discovery Tool system and is included as a cost of product sold. Management is required to exercise judgment in establishing the appropriate level of warranty expense accrual for each Discovery Tool system delivered. The actual results with regard to warranty expenditures could have a material unfavorable impact on us if system failures or the cost to repair a system is greater than what we have used in estimating the warranty expense accrual.

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Results of Operations

Revenues

     Our total revenue for the three months ended June 30, 2002 was $14.0 million, a decrease of 9% from the same period in 2001. For the first six months of fiscal 2002, total revenue was $28.5 million, a decrease of 3% from the same period in 2001. These decreases were due to the decreased revenue generated by our Industry Collaborations business, which generated $8.7 million and $17.4 million of revenue in the three and six month periods ended June 30, 2002, respectively, down from $10.6 million and $20.5 million for the same periods in 2001, respectively. Revenue from collaborations decreased mainly due to the conclusion of the technology access fees paid under the 1999 Bayer and Dow collaboration contracts and recognized over the life of those contracts. Product revenue for the three months ended June 30, 2002 included revenue from the sale of a Discovery Tools Solubility System to Lilly and payments from The Dow Chemical Company and ExxonMobil Chemical. Product revenue for the six months ended June 30, 2002 included revenue from the sale of a Discovery Tools Solubility System to Merck, two Discovery Tools Solubility Systems to Lilly and payments from Sumitomo Chemical, The Dow Chemical Company and ExxonMobil Chemical. License fee and royalties revenue for the three and six month periods ended June 30, 2002 included an initial payment from General Electric and a payment from an undisclosed licensee for the license of certain intellectual property, together with royalty payments and license fees from third parties commercializing products and bench-top instruments licensed under our intellectual property.

     Bayer, ExxonMobil, The Dow Chemical Company and an undisclosed partner accounted for 0%, 25%, 18%, and 14% of total revenue for the three months ended June 30, 2002, and 13%, 10%, 16% and 4% of revenue for the same period in 2001. Bayer, ExxonMobil, The Dow Chemical Company and an undisclosed partner accounted for 0%, 20%, 14% and 11% of total revenue for the six months ended June 30, 2002, and 13%, 17%, 15% and 6% of revenue for the same period in 2001.

     We segregate revenue by Industry Collaborations, Discovery Tools and Proprietary Materials and Technology Licensing. Industry Collaboration revenue is further segregated into four categories for purposes of internal management reporting: Chemicals, Electronic Materials, Life Sciences and Industrial Polymers.

Industry Collaboration Revenue

     The decrease in Chemicals revenue for the three months ended June 30, 2002 resulted primarily from the conclusions of the technology access fees paid under the 1999 Bayer and Dow collaboration contracts and recognized over the life of those contracts. The increase in Electronic materials revenue resulted from the addition of an undisclosed collaborative partner. The decrease in Life sciences revenue was due mainly to the conclusion of the research phase of the ABI collaboration partially offset by the expansion of the Merck collaboration and the addition of the Lilly collaboration. The decrease in Industrial polymers revenue for the three months ended June 30, 2002 resulted primarily from the expiration of the BASF and ICI collaborations.

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     The decrease in Chemicals revenue for the six months ended June 30, 2002 resulted primarily from the conclusions of the technology access fees paid under the 1999 Bayer and Dow collaboration contracts and recognized over the life of those contracts. The increase in Electronic materials revenue resulted from the addition of an undisclosed collaborative partner. The increase in Life sciences revenue was due mainly to the expansion of the Merck collaboration and the addition of the Lilly collaboration, partially offset by the conclusion of the research phase of the ABI collaboration. The decrease in Industrial polymers revenue for the six months ended June 30, 2002 resulted primarily from the expiration of the BASF and ICI collaborations.

Discovery Tools Revenue

     The Discovery Tools revenue was attributable to the shipment of a Discovery Tools Solubility System to Lilly and payments received from The Dow Chemical Company and ExxonMobil Chemical during the three months ended June 30, 2002.

     The increase in Discovery Tools revenue for the six months ended June 30, 2002 was attributable to the shipment of Discovery Tools Solubility Systems to Merck and to Lilly and payments received from Sumitomo Chemical, The Dow Chemical Company and ExxonMobil Chemical.

Proprietary Materials and Technology Licensing Revenue

     The increase in Proprietary Materials and Technology Licensing revenue for the three and six month periods ended June 30, 2002 was due to the licensing of intellectual property to General Electric and an undisclosed licensee, partially offset by the expiration of the ABI contract at December 31, 2001 which had provided for advance royalty payments during the contract term.

Cost of Products Sold

     Cost of products sold was $794,000, or 6% of total revenue for the three months ended June 30, 2002 compared to $1.8 million, or 12% of total revenue for the same period in 2001. The decrease in the cost of products sold was due to the change in the product mix shipped in the respective quarters. For the six months ended June 30, 2002, the cost of products sold was $1.4 million, down from $4.1 million for the same period in 2001. In the June 30, 2001 quarter, we delivered a Discovery Tools Polyolefins System to ExxonMobil Chemical Company, which had a significantly higher cost of manufacture than the three Discovery Tools Solubility Systems delivered to Merck and Lilly in the six months ended June 30, 2002.

     We have limited sales of Discovery Tools systems and consumables to date, and the cost of products sold is expected to fluctuate from period to period and will be driven by the variability of product mix and sales volumes in each period.

Research and Development Expenses

     Our research and development expenses consist primarily of:

	•		salaries and other personnel-related expenses;
	•		facility costs;
	•		supplies; and
	•		depreciation of facilities and laboratory equipment.

     Research and development expenses for the three months ended June 30, 2002 were $9.6 million, a decrease of 4% from the same period in 2001. For the six months ended June 30, 2002, research and development expenses decreased 2% to $19.9 million from $20.3 million for the same period in 2001. These decreases were due primarily to a reduction in payments to third parties to undertake research on our behalf and a reduction in the use of outside consultants.

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     Research and development expenses represented 69% and 70% of total revenue in the three and six month periods ended June 30, 2002, respectively, and 65% and 69% of total revenue for the same periods in 2001, respectively. Our core businesses are research to discover new materials and the sale of instruments and related software licenses. Accordingly, we have entered into a number of research and development collaborations to perform research for customers in exclusive fields. The major collaborative arrangements all have similar contractual terms. Under the collaborative arrangements, we are responsible for performing research at levels of either full time equivalent staffing or number of experiments as defined in the agreements. The collaborative partner is entitled to develop and commercialize materials discovered in or under collaboration within the defined field. We typically receive research and development funding at specified amounts per full time equivalent employee working on the project or on a per experiment fee basis and are entitled to receive royalties on the sale of any products commercialized under the agreement or payments on the achievement of specified research milestones by us or our collaborative partners. The agreements also contain procedures by which we and our customers will determine royalty rates for the sale or license of products under the agreements.

     The table below indicates the major collaborative partners, defined as those contributing greater than 10% of collaborative research revenue in the six months ended June 30, 2002, for whom we conducted research and development, together with the primary focus of the collaborations and the date upon which the current contract ends. Contracts may only be extended by mutual agreement between Symyx and the collaborative partner.

     We do not track fully burdened research and development costs or capital expenditures by project. However, we estimate based on Full Time Equivalent (“FTE”) effort, that approximately 64% of research and development efforts in the second quarter of 2002 were undertaken for collaborative projects funded by our partners, and approximately 36% of research effort was on our own internally funded research including development costs related to our Discovery Tools business. Due to the nature of our research and our dependence on our collaborative partners to commercialize the results of the research, we cannot predict with any certainty whether any particular collaboration or research effort will ultimately result in a commercial product and therefore whether we will achieve future milestones or royalty payments under our various collaborations.

Sales, General and Administrative Expenses

     Our sales, general and administrative expenses consist primarily of personnel costs for business development, legal, general management, finance and human resources, as well as payment of commissions to our foreign sales agents and professional expenses, such as legal and accounting. Sales, general and administrative expenses for the three months ended June 30, 2002 were $3.2 million, an increase of 8% from $3.0 million for the same period in 2001. For the six months ended June 30, 2002, sales, general and administrative expenses increased 14% to $6.7 million from $5.9 million for the same period in 2001. These increases were due primarily to the payment of sales commissions on Discovery Tools sales in Japan in the first quarter of 2002 and increased business development costs in the first and second quarters of 2002.

     Sales, general and administrative expenses represented 23% of total revenue for both the three and six month periods ended June 30, 2002, compared with 20% of total revenue for each of the three and six month periods ended June 30, 2001, respectively. We expect that our sales, general and administrative expenses will increase in absolute dollar amounts as we:

	•		continue to expand our business development and administrative staff;
	•		support existing and expanded laboratory and engineering facilities; and
	•		incur escalating costs related to being a public company, such as directors’ and officers’ insurance, and increasing professional fees.

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Net Interest Income (Expense)

     Net interest income (expense) represents interest income earned on our cash and available-for-sale securities net of interest expense on equipment financing loans. Interest income was approximately $871,000 and $1.9 million for the three and six month periods ended June 30, 2002, respectively, down from $1.6 million and $3.4 million for the same periods in 2001. These decreases were due to the impact of lower average interest rates in the three and six month periods ended June 30, 2002 respectively. We anticipate that our interest income in 2002 will be significantly lower than 2001, due to our higher yielding securities being progressively replaced, on either maturity or sale, with securities yielding substantially lower interest rates in 2002. There was no interest expense for the three month period ended June 30, 2002. Interest expense decreased to $9,000 for the six month period ended June 30, 2002 from $313,000 for the same period in 2001. This decrease was due to the repayment of all amounts owing under our equipment and facility loans effective December 31, 2001.

Provision for Income Taxes

     We recorded an income tax expense of $516,000 and $1.1 million for the three and six month periods ended June 30, 2002, respectively and $259,000 and $294,000 for the same periods in 2001, respectively. Our effective income tax rates for the six month periods ended June 30, 2002 and 2001, were 46% and 13% respectively. The increase in our effective tax rate in 2002 is due to the fact that we had largely utilized our net operating loss carryforwards as of December 31, 2001. We do not have a sufficient history of profitability to fully benefit all our deferred tax assets at this time. The largest single component of our unbenefited deferred tax assets arises because our depreciation expense for accounting purposes is substantially higher than our tax depreciation expense. Until we have a more established history of profitability, we will not be more certain than not of receiving the benefit of these future income tax deductions. We review the need for a valuation allowance each quarter.

Liquidity and Capital Resources

     We had positive cash flows from operations, investing and financing activities for the six months ended June 30, 2002. Cash and cash equivalents and available-for-sale securities were $117.8 million as of June 30, 2002, an increase of $4.5 million from December 31, 2001.

     In prior years, we had financed our operations primarily through research and development funding from collaborative partners, net proceeds from our initial public offering of $81.4 million and, prior to the initial public offering, private placements of preferred stock totaling $52.2 million, and to a lesser extent, equipment financing loans. During 2001, we completely paid off the remaining $6.7 million of debt that was incurred to fund capital expenditures in the early years of operation.

     Our operating activities provided $7.2 million and $10.1 million of cash during the six months ended June 30, 2002 and 2001, respectively. The sources of cash for these periods were primarily the receipt of research and development funding from collaborative partners, revenue from product sales, revenue from license fees and royalties and interest income, partially offset by operating expenses.

     Net cash provided by investing activities was $35.9 million during the six months ended June 30, 2002 and $10.8 million for the same period in 2001. The fluctuations from period to period are due primarily to the timing of purchases, sales and maturity of investment securities and purchases of property and equipment. Purchases of property and equipment were $2.7 million for the six months ended June 30, 2002 and $7.0 million in the same period in 2001. We expect to continue to make significant investments in the purchase of property and equipment to support our expanding operations.

     Financing activities provided cash of $1.4 million during the six months ended June 30, 2002 and provided $583,000 in the same period in 2001. These amounts are primarily the proceeds from the exercise of stock options and sale of stock under the Employee Share Purchase Plan in both 2002 and 2001, offset by partial repayments of equipment and leasehold improvement loan financings in 2001. The fluctuations from period to period are due primarily to the fact that during the fourth quarter of 2001 we repaid all remaining amounts outstanding under loan financings.

     Current liabilities increased by approximately $5.2 million at June 30, 2002 as compared to December 31, 2001. This increase was due primarily to an increase in deferred revenue, income taxes payable and accrued compensation and employee benefits. Deferred revenue increased by approximately $3.9 million at June 30, 2002 as compared to December 31, 2001. This increase was due primarily to the timing of the receipt of advance payments under collaborative research programs and advance deposits for Discovery Tools systems.

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     As of June 30, 2002, we had committed funding of approximately $41.7 million for the purchase by customers of Discovery Tools systems, licenses to our intellectual property and for research and development with existing collaborative partners, excluding milestone payments which are contingent upon the success of the research.

     As of June 30, 2002, our principal commitments were $16.2 million. Principal commitments consisted of our obligations under operating leases. We will satisfy these obligations as they become due over the next nine years.

     We believe that our current cash, available-for-sale securities balances and the cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the coming year. Nonetheless, we may raise additional funds through public or private financing, collaborative relationships or other arrangements. We cannot assure you that additional funding, if sought, will be available on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Collaborative arrangements may require us to relinquish our rights to some of our technologies or products. Our failure to raise capital when needed may harm our business and operating results.

     A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of such businesses, products or technologies.

Factors Affecting Future Results

     Set forth below and elsewhere in this Quarterly Report and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report. These are not the only risks and uncertainties facing Symyx. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

We may not be able to achieve continued or sustained profitability

     Our ability to continue profitability is dependent on our ability to extend current collaborations and add new ones, to secure new Discovery Tools customers, to add additional licensees of our intellectual property and to make discoveries that our partners choose to commercialize. We rely on our existing partners and potential new customers to provide a market for our businesses and our materials. To date, our partners have successfully commercialized only one of our discovered materials. In addition, we have only sold and installed approximately ten Discovery Tools and have only recently initiated our intellectual property licensing business. Our ability to achieve our objectives and maintain a profitable business will depend in large part on acceptance by customers of the products and services offered by our businesses, including materials we discover. We cannot assure you that we will achieve the levels of customer acceptance that will be necessary for us to maintain and grow a profitable business. In addition, current negative economic conditions affecting our current and prospective collaboration partners and other potential customers have caused many of these customers to reduce or curtail both internal and external research and development activities. Sustained reductions in research and development activities of our current and potential customers would harm our business and adversely affect our ability to maintain profitability.

We are dependent on the development activities of companies in the chemical, life sciences and electronics industries, and declines or reductions in research and development activities in these industries could harm our business

     The market for our discovery services and instrumentation within the chemical, life sciences and electronics industries depends on our customers’ ability and willingness to invest in research and development. A majority of our revenues are attributable to our research collaborations. Our future revenues are dependent on funding of our research collaborations, licensing of proprietary materials and sales of Discovery Tools.

     In particular, many companies in the chemical and pharmaceutical industries have, in the past several years, experienced declining profitability or even losses. In addition, many chemical products have become commodity products which compete primarily on the basis of price. As a result, some chemical companies have reduced their research and development activities. If commoditization of chemical products and other pressures affecting the industry continue in the future, more companies could adopt strategies that involve significant reductions in their research and development programs. Although we believe that our approach can help life science, chemical and electronics companies increase the efficiency of their research and development activities, our efforts to convince them of this value may be unsuccessful. To the extent that life science, chemical and electronics companies reduce their research and development activities, they would be less likely to do business with us. As a result of current negative economic conditions, a number of these companies have recently both reduced the size of their research and development budgets as well as the size of their workforces. Decisions by these companies to reduce their research and development activities could result in fewer or smaller scale collaborations with us as well as fewer sales of our Discovery Tools systems and related licenses and products, any of which could reduce our revenues and harm our business and operating results.

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We are dependent upon acceptance of our technology and approach by customers, and if we cannot achieve market acceptance from potential customers, we will be unable to develop a sustainable or profitable business

     Our ability to succeed is also dependent upon the acceptance by potential customers of our high throughput screening technology and methodology as an effective tool in the discovery of new materials. Historically, life science and chemical companies have conducted materials research and discovery activities internally using traditional manual discovery methods. In order for us to achieve our business objectives, we must convince these companies that our technology and capabilities justify outsourcing part of their basic research and discovery programs. If we cannot convince other companies of the effectiveness of our automated discovery methods, we may be unable to keep our existing customers or attract additional customers on acceptable terms or develop a sustainable, profitable business.

We cannot predict the pace, quality or number of discoveries we may generate, and any inability of ours to generate a significant number of discoveries would reduce our revenues and harm our business

     Our future revenues and profitability are dependent upon our ability to achieve discoveries. Because of the inherently uncertain nature of research activities, we cannot predict with a high level of precision the pace with which we may generate discoveries or the quality of any discoveries that we may generate. Due to the uncertain nature of materials discovery, in which several hundred thousand compounds must often be screened to identify a single development candidate, we may not generate the number of discoveries that we would expect to generate from a given number of experiments. In addition, our development candidates may not result in products having the commercial potential we or our collaborators anticipate. In either case, our future revenues from our research collaborations and from commercialization of products would likely decline. In addition, our existing and potential new customers may become reluctant to renew or enter into new agreements with us. As a result, our failure to generate discoveries and development candidates would reduce our revenues and harm our business and operating results.

We conduct proprietary research programs, and any conflicts with our collaborators or any inability to commercialize development candidates resulting from this research would harm our business

     Our strategy involves conducting proprietary research programs. These programs are focused on discovery of products for specialty markets that have fewer barriers to entry for an emerging company. A significant number of our collaborative research programs are focused on commodity chemical markets, which are larger than fine chemical and specialty chemical markets that are the focus of our proprietary programs. We believe that this differentiation of focus will enable us to minimize conflicts with our collaborators relating to rights to potentially overlapping leads developed through our proprietary programs and through programs funded by a collaborator. However, conflicts between us and a collaborator could potentially arise, particularly if we were to discover a material in one of our proprietary programs that was a potential target of one of our collaborative programs. In this event, we may become involved in a dispute with our collaborator regarding the material. Disputes of this nature could harm the relationship between us and our collaborator, and concerns regarding our proprietary research programs could also affect our ability to enter into new collaborative relationships. If circumstances surrounding our proprietary research programs were to affect our existing collaborative relationships or our ability to enter into new relationships, our revenues and operating results would decline.

     In addition, we will either commercialize development candidates resulting from our proprietary programs directly or through licensing to other companies. In order for us to commercialize these development candidates directly, we would need to develop, or obtain through outsourcing arrangements, the capability to manufacture, market and sell products. We do not have this capability, and we may not be able to develop or otherwise obtain the requisite manufacturing, marketing and sales capabilities. If we are unable to successfully commercialize products resulting from our proprietary research efforts, our revenues and operating results would decline.

We are dependent on our collaborations with major companies, and the failure of our collaborative partners to successfully commercialize products would reduce our revenues and harm our business

     To date, the majority of our revenues have come from collaborative arrangements with chemical, electronics and life science companies. These contracts generally expire after a fixed period of time. If they are not renewed or if we do not enter into new collaborative arrangements, our business and operating results may be harmed.

     For us to achieve and sustain a significant level of profitability, we must make discoveries with significant commercial potential, and our collaborators must successfully commercialize products based on our discoveries. Typically, we do not receive royalties on sales of products by our collaborators until the collaborator has commenced commercial sales of a product resulting from the collaboration. The failure of our partners to commercialize development candidates resulting from our research efforts would reduce our revenues and would harm our business and operating results.

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We have a limited number of contracts for Discovery Tools systems to date, and we cannot assure you that we will be able to build a sustainable business related to the sale of additional systems

     To date, we have a limited number of contracts for our Discovery Tools systems. Because of the high cost and complexity of these systems, the sales cycle for them has been and is likely to continue to be long. Sales of these systems will require us to educate our potential customers about the full benefits of these systems, which may require significant time. Due to these factors, sales of Discovery Tools systems will be subject to a number of significant risks over which we have little or no control, including:

	•		customers’ budgetary constraints and internal acceptance review procedures;
	•		complexity of our systems and difficulties we may encounter in meeting individual customer specifications and commitments on a timely basis;
	•		the fact that there may be only a limited number of customers that are willing to pay several million dollars for our systems;
	•		a long sales cycle that involves substantial human and capital resources; and
	•		potential downturns in general or in industry specific economic conditions.

     Because we expect future revenue growth from the sale of Discovery Tools, our revenues may decline or not grow as anticipated if we are unable to continue to build the infrastructure to support this business or if the sales or build cycles for Discovery Tools systems lengthens unexpectedly.

We are exposed to risks associated with export sales and operations which may limit our ability to generate revenue from our products and intellectual property

     We intend to continue to expand our international presence in order to increase our export sales. Export sales to international customers entail a number of risks, including:

	•		unexpected changes in, or impositions of, legislative or regulatory requirements;
	•		delays resulting from difficulty in obtaining export licenses for certain technology, and tariffs, quotas and other trade barriers and restrictions;
	•		longer payment cycles and greater difficulty in accounts receivable collection;
	•		potentially adverse taxes;
	•		obtaining and enforcing intellectual property rights under a variety of foreign laws;
	•		currency exchange fluctuations;
	•		the burdens of complying with a variety of foreign laws; and
	•		other factors beyond our control.

     We are also subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, potential hostilities and changes in diplomatic and trade relationships. Although we have not to date experienced any material adverse effect on our operations as a result of such regulatory, geopolitical and other factors, we cannot assure investors that such factors will not adversely affect our operations in the future or require us to modify our current business practices. We cannot assure investors that one or more of the foregoing factors will not have a material adverse effect on our business, financial condition and operating results or require us to modify our current business practices.

We depend on a limited number of suppliers and will be delayed in our manufacture or unable to manufacture our Discovery Tools if shipments from these suppliers are delayed or interrupted

     Key parts of our Discovery Tools systems are currently available only from a single source or a limited number of sources. In addition, components of our capital equipment are available from one or only a few suppliers. In the event that supplies from these vendors were delayed or interrupted for any reason, we may not be able to get equipment or components for Discovery Tools systems or our own research efforts in a timely fashion or in sufficient quantities or under acceptable terms.

     Even if alternative sources of supply are available, it could be time consuming and expensive for us to qualify new vendors and integrate their components into our Discovery Tools systems. In addition, we are dependent on our vendors to provide components of appropriate quality and reliability. Consequently, in the event that supplies from these vendors were delayed or interrupted for any reason, we could be delayed in our ability to develop and deliver products to our customers.

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