UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

   (Mark One)

For the quarterly period ended September 30, 2004

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý No o

As of October 29, 2004, Registrant had outstanding 32,161,515 shares of Common Stock, $.001 par value.

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SYMYX TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to condensed consolidated financial statements

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SYMYX TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements

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SYMYX TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements

3

SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Business and Basis of Presentation

     Symyx Technologies, Inc. (the “Company” or “Symyx”) develops and applies high-throughput experimentation for the discovery of innovative materials for chemical and petrochemical, pharmaceutical development, electronics, consumer goods, and automotive customers. Symyx works with companies seeking to transform their search for better products and processes through research collaborations, Discovery Tools® sales, and the license of materials, intellectual property, and software.

     Symyx® was incorporated in California on September 20, 1994 and completed a reincorporation in the state of Delaware in February 1999. Symyx’s headquarters and mailing address is 3100 Central Expressway, Santa Clara, California, 95051, and the telephone number at that location is (408) 764-2000. Our SEC filings are available free of charge through our website at www.symyx.com. Our common stock trades on the Nasdaq National Market under the symbol “SMMX”.

     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 September 30, 2004 and results of operations and cash flows for all periods presented have been made. The consolidated condensed balance sheet at December 31, 2003 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 2003 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2004.

Principles of consolidation

     These condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Symyx Technologies AG, incorporated in Switzerland and Symyx Discovery Tools, Inc., incorporated in California. All significant inter-company balances and transactions have been eliminated on consolidation.

Reclassifications

     Certain reclassifications have been made to prior period amounts to conform to the current period presentations. Segment revenue for prior periods has been reclassified to conform to the current period presentations. Amounts received from a related party reported as accounts payable and deferred revenue in the previous period have been reclassified as an advance from a related party.

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 entail adjustments to be made to the Company’s financial statements if system failures or the cost to repair systems differ from what the Company has used in estimating the warranty expense accrual.

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue Recognition

     The Company generates revenue from services provided under research collaborations, the sale of products, licensing of software, support and maintenance services and the license of intellectual property. It is possible for our customers to work with us in multiple areas of our business and contracts may include multiple elements of service revenue, product revenue and license revenue. In determining the basis for revenue recognition, the Company first determines the fair value of any extended warranty services and defers this revenue to be recognized over the service period. For those contracts that involve multiple element deliverables, the Company identifies all deliverables, determines the units of accounting and allocates revenue between the units of accounting in accordance with the Emerging Issues Task Force consensus on Issue 00-21, “Multiple-Deliverable Revenue Arrangements.” (“EITF 00-21”).

     Service Revenue

     The Company recognizes service revenue from research collaboration agreements and support and maintenance agreements 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 is not successful. Direct costs associated with these contracts 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 such milestone events. Because payments under the Company’s service agreements are not typically structured with reference to milestones, milestone payments to date have been immaterial.

     Product Sales

     Product sales revenue includes sales of Discovery Tools hardware and the license of associated software and intellectual property. The Company’s Discovery Tools systems are typically delivered under multi-element arrangements, which include hardware, software and intellectual property licenses, and maintenance. A determination is made for each system delivered as to whether software is incidental to the system as a whole. If software is not incidental to the Discovery Tools system as a whole, revenue from these arrangements is recognized in accordance with American Institute of Certified Public Accountants Statement of Position 97-2, Software Revenue Recognition (“SOP 97-2”), as amended. If software is incidental to the Discovery Tools system, revenue from the sale of the Discovery Tools system is earned and recognized 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 twelve 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.

     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.

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     Software License Fees

     Amounts received from third parties for licenses to the Company’s software are recognized when earned under the terms of the agreements. For software licensed on an annual right to use basis, the revenue is recognized straight line over the term of the license. For revenue allocable to the software portion of a multiple element arrangement or licensed on a perpetual basis, the Company recognizes revenue upon delivery of the software product to the end-user and commencement of the license, unless the Company has ongoing obligations for which fair value cannot be established or the fee is not fixed or determinable or collectibility is not probable. The Company considers all arrangements with payment terms longer than twelve 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, provided all the other revenue recognition criteria have been met. 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.

     Revenue allocable to support and maintenance is recognized on a straight-line basis over the period the support and maintenance is provided. 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.

     Intellectual Property License Fees

     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 twelve months not to be fixed or determinable. If there is a 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.

     Royalties

     Royalty revenue is recorded based on reported sales by third-party licensees of products containing the Company’s software and intellectual property. If there are extended payment terms, royalty revenues are recognized as these payments become due. Non-refundable royalties, for which there are no further performance obligations, are recognized when due under the terms of the agreements.

     Amounts received from third parties for options to license certain technology or enter collaborative arrangements upon specified terms are not recognized as revenue 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)

Concentration of Revenue

     For the three and nine months ended September 30, 2004 and 2003, the following customers contributed more than 10% of the Company’s total revenue (in thousands):

     The revenue from the above three customers has been included in the following reportable segments for the three and nine months ended September 30, 2004 and 2003 (in thousands):

     The revenue from the above three customers has been included in the Condensed Consolidated Statements of Operations as follows (in thousands):

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Inventories

     Work in process inventory consists of customized Discovery Tools systems in the process of being built. Finished goods inventory consists of Discovery Tools systems that have been finished but are pending shipment to customers. Inventories are carried at the lower of cost or market, determined on a specific identification basis. The following table summarizes the components of the Company’s inventory balance (in thousands):

Warranty expense accrual

     The Company offers a warranty on each Discovery Tools System shipped. The specific terms and conditions of these warranties vary depending upon the product sold and country in which the Company does business. However, such warranties typically include coverage for parts and labor and software bug fixes for a specified period (typically one year). The Company estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts, as necessary.

     Changes in the Company’s product warranty expense accrual during the nine months ended September 30, 2004 are as follows (in thousands):

Income Taxes

     Income taxes have been provided using the liability method. Deferred tax assets or liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that 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)

Stock-Based Compensation

     Compensation expense for options to purchase the Company’s common stock granted to non-employees has been determined in accordance with SFAS 123 and EITF 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for options to purchase the Company’s common stock granted to non-employees is periodically re-measured as the underlying options vest.

     The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair market value of the shares on the date of grant. As allowed under the Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for stock awards to employees. Accordingly, no compensation expense is recognized in the Company’s financial statements in connection with stock options granted to employees with exercise prices not less than fair market value. Deferred compensation for options granted to employees is determined as the difference between the deemed fair market value of the Company’s common stock on the date options were granted and the exercise price. For purposes of the pro-forma disclosure, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting periods.

     Pro forma information under SFAS 123 is as follows (in thousands, except per share data).

* Less than $0.01 per share

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

     The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. The Company uses projected data for expected volatility and expected life of its stock options based upon historical and other economic data trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, in management’s opinion, the existing valuation models do not provide a reliable measure of the fair value of the Company’s employee stock options. Under the Black-Scholes option pricing model, the weighted-average estimated fair values of employee stock options granted during the three and nine months ended September 30, 2004 were $9.47 and $11.12 per share, respectively, and for the three and nine months ended September 30, 2003 were $10.61 and $7.28 per share, respectively.

     The fair value of shares of common stock relating to the Employee Stock Purchase Plan is estimated on the issuance date using the Black-Scholes model and the following weighted average assumptions for issuances made in 2004 and 2003:

Effect of New Accounting Pronouncements

     In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 in an entity known as a special purpose entity. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period ending after March 15, 2004 for all other variable interest entities. There was no impact upon our financial condition or results from operations from the adoption of FIN 46.

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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 nine months ended September 30, 2004 and 2003 are as follows (in thousands):

     The following table illustrates shares subject to outstanding stock options that the Company has excluded from the calculation of diluted net income per share for the three and nine months ended September 30, 2004 and 2003 because all such securities are anti-dilutive for the respective periods (in thousands).

3. Related Party Transactions

     As of September 30, 2004, the Company owns approximately 37.0% of shares outstanding of Ilypsa, Inc. (“Ilypsa”), formerly known as Symyx Therapeutics, Inc.

     The Company accounts for its ownership interest in Ilypsa on the equity method as the Company and its affiliates do not control the strategic, operating, investing and financing activities of Ilypsa. As the Company’s investment in Ilypsa has no cost basis for accounting purposes under generally accepted accounting principles, the Company has not recorded any proportionate share of Ilypsa’s operating losses in its financial statements since the completion of Ilypsa’s initial financing.

     On May 6, 2003, the Company entered into an 18-month Collaborative Research and License Agreement with Ilypsa. Under the terms of this Agreement, Ilypsa pays research funding to the Company in consideration for direct costs incurred by the Company specifically attributable to, or specifically used in furtherance of, the research program. Research funding payments are due to the Company at the start of each month, with an adjustment at the end of each month for the difference between forecast and actual costs incurred. Revenue resulting from work performed under this Agreement during the three and nine months ended September 30, 2004 amounted to

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

$7,000 and $1,168,000, respectively, and during the three and nine months ended September 30, 2003 amounted to $595,000 and $1,030,000, respectively. The revenue has been classified as related party revenue. The amount receivable from Ilypsa was $7,000 as of September 30, 2004 and $0 as of December 31, 2003. The amount received under this Agreement in advance of the services being provided was $0 at September 30, 2004 and $137,000 at December 31, 2003 and has been classified as an advance from a related party.

     The Company has no repurchase rights with respect to either the licensed technology or the results of research conducted under the Collaborative Research and License Agreement.

4. Comprehensive Income

     The components of other comprehensive income consist of unrealized gains and losses on available-for-sale securities and a foreign currency translation adjustment.

     The components of comprehensive income, net of tax, for the three and nine months ended September 30, 2004 and 2003 are as follows (in thousands):

     The components of accumulated other comprehensive income (loss), net of tax, at September 30, 2004 and December 31, 2003 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

12

SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

assessing performance. Symyx’s 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.

     Symyx provides research services to its partners through its Industry Collaborations program, offers access to select proprietary instruments and associated software and intellectual property through its Discovery Tools operation and licenses discovered materials and methodology patents through its Intellectual Property Licensing program.

     The disaggregated financial information reviewed by the CODM can be reconciled to the revenue disclosed in the Condensed Consolidated Statements of Operations as follows (in thousands):

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SYMYX TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Geographic Area Data

     All significant long-lived assets were geographically located in the United States for all periods presented. All revenue is generated in the United States for all periods presented. Revenue is attributed to the following geographic locations based on the physical location of Symyx’s customers (in thousands).

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

Cautionary Statements

     This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. In this Report, for example, our forward-looking statements include, without limitation, statements regarding: (1) our opinion that all adjustments to condensed consolidated financial information necessary to present fairly the financial position at September 30, 2004 and results of operations and cash flows for all periods presented have been made; (2) our expectation that our cash flows and revenue for 2004 will be comprised in large part of payments and revenue under existing and possible future research and development collaborations, product revenue from our Discovery Tools operation and license fees from our Intellectual Property Licensing program; (3) our expectation that our fourth quarter revenue will be higher than our third quarter revenue in 2004 and that our 2005 revenue will be higher than our 2004 revenue; (4) our expectation that we will continue to devote substantial resources to research and development, including the development of new instruments and software, to enhance our technologies; (5) our expectation that we will expand our staffing, equipment and facilities and make significant investments in the purchase of property and equipment to support our expanding operations; (6) statements regarding fluctuation in the cost of products sold being driven by the variability of product mix and sales volume in each period; (7) our expectation that we will expand our business development and administrative staff, and improve our existing laboratory and engineering facilities; (8) our anticipation that our interest income in 2004 will be slightly greater than 2003 due to the impact of the recent interest rate increase and as our positive cash flows from operating and financing activities continue to increase our average investment balance; (9) our anticipation that we will be able to record deferred tax assets for temporary differences that arise in the current year; (10) our expectation that we will recognize approximately $21 million of committed but unrecognized revenue in the remainder of fiscal 2004; (11) our intention to augment the already committed revenue base with new and extended collaborations, new tools sales, and new intellectual property and software licenses; (12) our plans to satisfy obligations under operating leases and our commitments to purchase inventory and fixed assets as they become due over the next seven years; (13) our belief that our current cash, cash equivalents and available-for-sale securities balances and the cash flows generated by operations will be sufficient for at least the coming year; (14) our belief that our insurance protection is reasonable in view of the nature and scope of our operations; (15) our belief that our ability to achieve our objectives and maintain or increase the profitability of our business will depend in large part on acceptance by potential customers of our high-throughput screening technology and methodology as an effective tool in the discovery of new materials and acceptance that our technology and capabilities justify outsourcing part of their basic research and discovery programs; (16) our expectation that ExxonMobil and a select list of other companies will in aggregate continue to account for a substantial portion of our revenues for the foreseeable future; (17) our belief that our approach can help chemical, pharmaceutical, electronics, consumer goods and automotive companies increase the efficiency of their research and development activities; (18) our anticipation that our development candidates have commercial potential; (19) our belief that our collaborative agreements are structured in a manner to enable us to minimize conflicts with our collaborators relating to rights to potentially overlapping leads; (20) our anticipation that our revenues will grow; (21) our belief that our Industry Collaborations, Discovery Tools and Intellectual Property Licensing businesses complement each other; (22) our intention to expand our international presence in order to increase our export sales; (23) our opinion that a large portion of our expenses are relatively fixed in nature; (24) statements regarding the field of high-throughput materials science being increasingly competitive and an emerging field; and (25) our expectation that the ultimate costs to resolve legal proceedings, claims, and litigation will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

     Actual results could differ materially from those projected in any forward-looking statement for the reasons and factors detailed below under the sub-heading “Risk Factors” and in other sections of this Report. All forward-looking statements included in this Form 10-Q are based on information available to us on the date of this Report, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. See the section below captioned “Risk Factors,” as well as such other risks and uncertainties as are detailed in our Securities and Exchange Commission reports and filings for a discussion of the factors that could cause actual results to differ materially from the forward-

15

looking statements. Such factors include but are not limited to the following: (1) the market may not accept our products and services; (2) ExxonMobil and a select list of other companies account for a substantial portion of our revenues, and the loss of one or more of such customers or partners would harm our business; (3) we have concentrated reliance on certain major collaborators to successfully commercialize products; (4) we depend on a limited number of suppliers and our manufacture of products may be delayed if shipments from these suppliers are interrupted; (5) the pace, quality or number of our discoveries of new materials may be inadequate; (6) uncertainties exist as to patent protection and litigation; (7) our future growth strategy, including impact of acquisitions, mergers or other changes in business strategy, could result in large one-time charges or disrupt our business if integration or execution of such strategies are unsuccessful; (8) assumptions underlying our critical accounting policies and system of internal or disclosure controls may be incorrect, and there can be no assurance that such systems will succeed in achieving their goals of preventing misstatements, errors or fraud; (9) general economic conditions in the United States and in major European and Asian markets; (10) exposure to risks associated with export sales and operations; and (11) natural disasters, power failures and other disasters. Given these uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements.

     The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Report on Form 10-K, filed with the Securities and Exchange Commission on March 8, 2004 (SEC File No. 000-27765).

     All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the three and nine months ended September 30, 2004, are not necessarily indicative of the results that may be expected for any subsequent quarter or for the full fiscal year.

Overview

     Our revenue and cash flows from operations have come from research collaborations, sale of instruments, and licensing of intellectual property, materials, software and technologies. We develop and apply high-throughput experimentation to the discovery of innovative materials for chemical, pharmaceutical, electronics, consumer goods and automotive industries. We expect that our cash flows and revenue for 2004 will be comprised in large part of payments to be made and revenue to be earned under research and development collaborations together with product sales and license fees and royalties.

     We have invested heavily in establishing the technology, instrumentation and informatics necessary to pursue high-throughput discovery of materials. These materials include catalysts to manufacture commodity chemicals and polyolefins, polymers and phosphors for pharmaceutical and industrial applications, and specialized 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.

     In the quarter ended September 30, 2004, our revenue increased 35% to approximately $19.6 million from $14.5 million for the same period in 2003. This increase resulted largely from the expansion of revenue under the alliance with Exxon Mobil Corp., the commencement of new research services agreements with a major healthcare company and a major petrochemical company, shipment of newly developed Discovery Tools to ExxonMobil and Discovery Tools Core(X)™ modules to two pharmaceutical companies, the start of a new software pilot with an existing customer, and the execution of a license agreement with UOP LLC. In addition, the original collaboration with BP was extended through the end of 2005. In September, the Dow Chemical Company announced commencement of commercial production of VERSIFY Plastomers and Elastomers, a family of products manufactured using Symyx discovered catalysts. VERSIFY polymers are designed to improve optics, sealing performance, elasticity, flexibility, and softness for packaging producers, manufacturers of thermoplastic elastomers and olefins, and converters in the consumer products sector. We expect to receive royalties from the sale of these polymers beginning in the first quarter of 2005.

     In the future, we may incur operating losses as we continue to expand our staffing, equipment and facilities. See further discussion of this issue in the section below entitled “Risk Factors.”

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Critical Accounting Policies

     Symyx’s financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Note 1 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q describes the significant accounting policies and methods used in the preparation of the Condensed Consolidated Financial Statements. 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, determining when technical feasibility for our software products has been achieved 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 Condensed Consolidated Financial Statements.

Source of Revenue and Revenue Recognition Policy

     We generate revenue from services provided under research collaborations, the sale of products, licensing of software, support and maintenance services and the license of intellectual property. It is possible for our customers to work with us in multiple areas of our business and contracts may include multiple elements of service revenue, product revenue and license revenue. In determining the basis for revenue recognition, we first determine the fair value of any extended warranty services and defer this revenue to be recognized over the service period. For those contracts that involve multiple element deliverables, we identify all deliverables and allocate revenue between the units of accounting in accordance with the Emerging Issues Task Force consensus on Issue 00-21, or EITF 00-21, “Multiple-Deliverable Revenue Arrangements.” In multiple element arrangements, we use the residual method to allocate revenue to delivered elements once we have established fair value for all undelivered elements.

     Service revenue consists of research and development funding received from collaborative partners, as well as support and maintenance or extended warranty agreements. Product revenue consists of payments from customers for Discovery Tools systems, comprising hardware, associated software and intellectual property licenses and consumables. License fees and royalties include fees for licensing of our software, intellectual property, proprietary materials and technology license payments and royalties on laboratory instruments and software sold under license by third parties.

     Service Revenue

     We recognize revenue from research collaboration agreements and support and maintenance agreements as earned upon performance of the services specified in the agreements. Payments received that are related to future performance are deferred and recognized as revenue as the performance requirements are fulfilled.

     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 such milestone events. Because payments under our service agreements are not typically structured with reference to milestones, milestone payments to date have been immaterial.

     Product Sales

     We recognize revenue from the sale of Discovery Tools, and all related costs of products sold are expensed, once delivery has occurred and 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 twelve months not to be fixed or determinable. Accordingly, the cost of products sold as a percentage of product 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. Payments received in advance under these arrangements are recorded as deferred revenue until earned.

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     Software License Fees

     For software licensed on an annual right to use basis, revenue is recognized straight line over the term of the license. For revenue allocable to the software portion of a multiple element arrangement or licensed on a perpetual basis, we recognize revenue upon delivery of the software product to the end-user and commencement of the license, unless we have ongoing obligations for which fair value cannot be established or the fee is not fixed or determinable or collectibility is not probable, in which case we recognize revenue only when each of these criteria has been met. We consider all arrangements with payment terms longer than twelve 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.

     Revenue allocable to support and maintenance is recognized on a straight-line basis over the period the support and maintenance is provided. Our 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.

     Intellectual Property License Fees

     We recognize license fee revenue 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 twelve months not to be fixed or determinable. In certain licensing arrangements provision is made 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.

     Royalties

     We recognize royalty revenue based on reported sales by third-party licensees of products containing our materials, software and intellectual property. If there are extended payment terms, royalty revenues are recognized as these payments become due. Non-refundable royalties, for which there are no further performance obligations, are recognized when due under the terms of the agreements.

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

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 and establishes the accrual based, in part, by reference to actual warranty costs incurred on similar systems. The actual results with regard to warranty expenditures could entail adjustments to be made to our financial statements if system failures or the costs to repair systems differ from our estimates.

Research and Development Costs

     We account for research and development costs in accordance with several accounting pronouncements, including SFAS 2, “Accounting for Research and Development Costs”, and SFAS 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. SFAS 86 specifies that costs incurred internally in creating a computer software product should be charged to expense when incurred as research and development until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to customers. Judgment is required in determining when the technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established are not material, and accordingly, we expense research and development costs when incurred.

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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.

Accounting for Income Taxes

     Income taxes have been provided using the liability method. 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 that will be in effect when these differences reverse. We provide 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. Establishing this valuation allowance involves significant judgment because we have a limited history of profitability and the period over which the potential future benefit from the deferred tax assets may be realized is quite long. We review our need for a valuation allowance on a quarterly basis and adjust our estimated annual effective income tax rate as appropriate.

Employee Stock Options

     We generally grant stock options to our employees for a fixed number of shares with an exercise price equal to the fair market value of the shares on the date of grant. As allowed under the Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), we have elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for stock awards to employees. Accordingly, no compensation expense is recognized in our financial statements in connection with stock options granted to employees with exercise prices not less than fair market value. Deferred compensation for options granted to employees is determined as the difference between the deemed fair market value of our common stock on the date options were granted and the exercise price. In the event the Financial Accounting Standards Board requires that the value of stock options granted to employees be treated as a compensation expense, as is currently being considered, our net income would be adversely affected as described in Note 1 to the Notes to Condensed Consolidated Financial Statements included in this Form 10-Q.

Stock-Based Compensation

     Deferred compensation for options granted to employees has been determined as the difference between the deemed fair market value of our common stock on the date options were granted and the exercise price. Deferred compensation for options granted to consultants has been determined in accordance with Statement of Financial Accounting Standards No. 123 as the fair value of the equity instruments issued. Deferred compensation for options granted to consultants is periodically re-measured as the underlying options vest.

Results of Operations

Revenue

     Our total revenue for the three months ended September 30, 2004 was $19.6 million, compared to $14.5 million from the same period in 2003. This increase was primarily due to the expansion of revenue under the alliance with ExxonMobil, the commencement of new research agreements with a leading pharmaceutical company and a major petroleum company, shipment of newly developed Discovery Tools to ExxonMobil and Core(X)™ modules to two pharmaceutical companies, and license fees paid by UOP LLC. Revenue for the nine months ended September 30, 2004 increased 31% to approximately $58.0 million from $44.3 million for the same period in 2003. This increase was primarily due to increased funding from ExxonMobil and an increase in product sales. Given our expectation with respect to new and extended collaborations, new tools sales, and new intellectual property and software licenses, together with our existing backlog of revenue to be recognized, we expect that our fourth quarter revenue will be higher than our third quarter revenue in 2004 and that our 2005 revenue will be higher than our 2004 revenue.

     ExxonMobil, Merck and an Undisclosed Partner accounted for 55%, 6% and 1% of total revenue, respectively, for the three months ended September 30, 2004, and for 44%, 7% and 14% of revenue, respectively, for the same period in 2003. ExxonMobil, Merck and an Undisclosed Partner accounted for 50%, 6% and 4% of total revenue,

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respectively, for the nine months ended September 30, 2004, and for 32%, 13% and 12% of revenue, respectively, for the same period in 2003. We expect that, at least for the remainder of fiscal 2004, a significant portion of our total revenue will continue to be generated from a few key customers.

     We segregate revenue by Industry Collaborations, Discovery Tools and Intellectual Property Licensing.

     Industry Collaboration Revenue

     The Industry Collaboration group generates revenue primarily from the research services it provides to our collaboration partners.

     The increases in Industry Collaboration revenue for the three and nine months ended September 30, 2004 over the same periods in 2003 resulted primarily from increased funding received in 2004 under the ExxonMobil alliance, partially offset by the reduced revenue resulting from the conclusion of the research collaboration we had with Celanese in 2003. Related party revenue resulting from our Research Agreement with Ilypsa, Inc. for the three and nine months ended September 30, 2004 was $7,000 and $1,168,000, respectively. Related party revenue for the three and nine months ended September 30, 2003 was $595,000 and $1,030,000, respectively. We recorded related party revenue for the funding we received in consideration of the direct costs of research services relating to our research agreement with Ilypsa, Inc. Changes in such direct costs are further discussed in the “Research and Development Expenses” section.

     Discovery Tools Revenue

     The Discovery Tools group generates revenue primarily from the sale of Discovery Tools and associated software and intellectual property.

     Discovery Tools revenue for the three and nine months ended September 30, 2004 was mainly attributable to the sale of Discovery Tools systems to chemical and pharmaceutical companies. Discovery Tools revenue for the three and nine months ended September 30, 2003 was mainly attributable to the shipment of Discovery Tools systems to research institutes, chemical and pharmaceutical companies and to payments received from The Dow Chemical Company, ExxonMobil and Merck.

     Intellectual Property Licensing Revenue

     Intellectual Property Licensing Group generates revenue primarily from the licensing fees received from licensing of our software and intellectual property and from royalties paid by third party licensees for sale of products containing our materials, software and intellectual property.

     Intellectual Property Licensing revenue for the three and nine months ended September 30, 2004 increased primarily due to payments received from ExxonMobil and UOP in 2004. The main components of Intellectual Property Licensing revenue for the nine months ended September 30, 2004 were amounts received from ExxonMobil, General Electric, Hella and UOP, and for the nine months ended September 30, 2003 were payments received from Bayer, ExxonMobil, General Electric and Hella.

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Cost of Products Sold

     Cost of products sold was approximately $1.4 million, or 28% of product sales revenue for the three months ended September 30, 2004, compared to $154,000, or 16% of product sales revenue for the same period in 2003. Cost of products sold was $5.1 million, or 33% of product sales revenue for the nine months ended September 30, 2004, compared to $2.0 million, or 21% of product sales revenue for the same period in 2003. The fluctuations in the cost of products sold are primarily due to the change in the product mix shipped in the respective quarters.

     The cost of products sold will be driven by the variability of product mix and sales volume in each period. The product sales margin is expected to fluctuate from period to period because the majority of our Discovery Tools systems are built to order or to particular specifications. For systems which include a significant development component prior to their commercial build, or systems delivered to the customers as a prototype, the development costs incurred prior to the commercial build are expensed as development costs, which results in a lower cost of products sold and higher margin in the quarter in which such a system is delivered to the customer.

     The cost of products sold will also be affected by the adjustment of warranty reserve for the pre-existing sales. When actual warranty costs are lower than our estimates, the difference will have a favorable impact to cost of products sold at the time the warranty expires for the systems.

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.

     Total research and development expenses for the three months ended September 30, 2004 were $9.9 million, a decrease of approximately 5% from the same period in 2003. The decrease was primarily due to the decrease in direct costs of research service relating to our research agreement with Ilypsa, Inc., a related party, which totaled $7,000 and $1,168,000 for the three and nine months ended September 30, 2004 and $595,000 and $1,030,000 for the three and nine months ended September 30, 2003, respectively. Direct costs of research services relating to Ilyspa decreased significantly, largely the result of employees transitioning to Ilypsa, Inc. at the time it moved into its own facilities in May 2004. Total research and development expenses for the nine months ended September 30, 2004 were approximately $31.1 million, an increase of approximately 4% from the same period in 2003. This increase was primarily due to an increase in technical headcount and related expenses under our alliance with ExxonMobil.

     Research and development expenses represented 50% and 54% of total revenue in the three and nine months ended September 30, 2004, respectively, and 72% and 68% of total revenue for the same periods in 2003, respectively. Our core offerings are research to discover new materials, the sale of instruments and licensing of related software and licensing of intellectual property and materials discovered in our collaborative and internal research programs. Accordingly, we expect to continue to devote substantial resources to research and development.

     ExxonMobil is the only customer contributing greater than 10% of collaborative research revenue for the three and nine months ended September 30, 2004. Our alliance with ExxonMobil primarily focuses on catalysts for certain commodity chemicals including olefins. The contract term runs through May 2008.

     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 80% of research and development efforts in the first nine months of 2004 were undertaken for collaborative projects funded by our partners, approximately 9% of research and development efforts were on our own internally funded research and approximately 11% of research and development efforts were 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.

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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 September 30, 2004 were $4.4 million, an increase of 26% from $3.5 million for the same period in 2003. Sales, general and administrative expenses for the nine months ended September 30, 2004 were $12.8 million, an increase of 18% from $10.9 million for the same period in 2003. The increase was due primarily to an increase in salary related costs resulting from business development headcount increases in 2004, increased sales commissions and increased professional service fees.

     Sales, general and administrative expenses represented 22% of total revenue for both the three and nine months ended September 30, 2004. Sales, general and administrative expenses represented 24% of total revenue for both the three and nine months ended September 30, 2003. 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;
•		add to and improve our existing laboratory and engineering facilities; and
•		incur escalating costs related to being a public company, such as increasing professional fees.

Interest and Other Income (Expense), Net

     Interest and other income (expense), net, for the three months ended September 30, 2004 consisted of interest income of approximately $609,000 and a $1,000 gain from the sale of fixed assets. Interest and other income (expense), net, for the nine months ended September 30, 2004 consisted of interest income of approximately $1,689,000 and a $156,000 gain from the sale of fixed assets. Interest income represents interest income earned on our cash, cash equivalents and available-for-sale securities. Compared with interest income of $439,000 and $1,506,000 for the three and nine months ended September 30, 2003, respectively, interest income for the same periods in 2004 increased due to the impact of higher average interest rates in 2004. We anticipate that our interest income in 2004 will be slightly greater than 2003 due to the impact of the recent interest rate increase and as our positive cash flows from operating and financing activities continue to increase our average investment balance.

Provision for Income Taxes

     We recorded an income tax expense of $1.7 million and $4.3 million for the three and nine month periods ended September 30, 2004, respectively, and $206,000 and $1,021,000 for the same periods in 2003, respectively. The effective tax rate was 38% and 40%, respectively, for the three and nine month periods ended September 30, 2004, and 24% and 34%, respectively, for the same periods in 2003. In determining our effective tax rate in the three and nine month period ended September 30, 2004, we are anticipating that we will be able to record deferred tax assets for temporary differences that arise in the current year, and therefore, will not need to provide a valuation allowance for these new deferred tax assets. We do not, however, have a sufficient history of profitability to fully benefit all of our historical deferred tax assets at this time. The largest single component of our unbenefited deferred tax assets arises because our depreciation expense for accounting purposes has been substantially higher than our tax depreciation expense. Until we have a more established history of profitability, we will not be sufficiently confident of receiving the full benefit of these future income tax deductions. We review the need for a valuation allowance on a quarterly basis.

Recent Accounting Pronouncements

     In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period ending after December 15, 2003, to variable interest entities in which an enterprise holds

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a variable interest that it acquired before February 1, 2003 in an entity known as a special purpose entity. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period ending after March 15, 2004 for all other variable interest entities. There was no impact upon our financial condition or results from operations from the adoption of FIN 46.

Liquidity and Capital Resources

     This section discusses the effects of the changes in our balance sheets, cash flows, and commitments on our liquidity and capital resources.

Balance Sheet and Cash Flows

     We had positive cash flow from operations and financing activities and used cash in investing activities for the nine months ended September 30, 2004. At September 30, 2004 we had cash, cash equivalents and available-for-sale securities of approximately $152.8 million, an increase of $14.1 million from December 31, 2003.

     As of September 30, 2004, we had no long-term liabilities.

     Our operating activities provided $14.6 million and $18.7 million of cash during the nine months ended September 30, 2004 and 2003, respectively. The sources of cash for the nine month periods were primarily the receipt of research and development funding from collaborative partners and revenue from product sales and intellectual property licensing, partially offset by operating expenses. The fluctuations from period to period were due primarily to the timing of inventory build-up and receipts of payments that revolve around the shipments of Discovery Tools systems.

     Net cash used in investing activities during the nine months ended September 30, 2004 and 2003 were $24.6 million and $27.9 million, respectively. The fluctuations from period to period were due primarily to the timing of purchases, sales and maturity of securities and purchases of property and equipment. 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 $7.1 million and $5.9 million during the nine months ended September 30, 2004 and 2003, respectively. These amounts were primarily the proceeds from the exercise of stock options, the proceeds from our employee stock purchase plan and repayment of shareholder notes receivable.

     Current liabilities as of September 30, 2004 decreased by $0.5 million compared to December 31, 2003. The decrease was due primarily to a decrease in deferred revenue resulting from the shipment of a pre-formulation workflow to Pfizer in the quarter ended March 31, 2004, partially offset by an increase in income taxes payable.

Backlog

     Our revenue backlog remains strong. We expect to recognize committed but unrecognized revenue of approximately $21 million in the remainder of fiscal 2004 and approximately $54 million in fiscal 2005. We also have $121 million in revenue backlog to be realized in fiscal 2006 and beyond. We intend to augment the already committed revenue base with new and extended collaborations, new tools sales, and new intellectual property and software licenses.

Commitments

     As of September 30, 2004, our principal commitments were $11.7 million. Principal commitments consisted of our obligations under operating leases and our commitments to purchase inventory and fixed assets. We will satisfy these obligations as they become due over the next seven years.

     Future commitments under the operating leases for our facilities and purchase commitments for inventory and fixed assets as of September 30, 2004 are as follows (in thousands):

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     We believe that our current cash, cash equivalents and available-for-sale securities balances and the cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital, capital expenditures, investment requirements, stock repurchases and other liquidity requirements associated with our existing operations for at least the coming year. Nonetheless, we may need to 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 and licensing 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.

Contingencies

     We filed a complaint against a third party alleging infringement of certain high throughput experimentation patents in the first quarter of 2004. The dispute was settled in mid-August 2004.

     We carry insurance with coverage and coverage limits that we believe to be adequate. Although there can be no assurance that such insurance is sufficient to protect us against all contingencies, our management believes that our insurance protection is reasonable in view of the nature and scope of our operations.

Off Balance Sheet Financing and Related Party Transactions

     We have not entered into any off-balance sheet financing arrangements and have not established any special purpose entities as of September 30, 2004. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets. Transactions between Symyx and related parties during the three and nine months ended September 30, 2004 were:

•		revenue received for work performed under a Research Agreement with Ilypsa, Inc. during the three and nine months ended September 30, 2004 amounted to $7,000 and $1,168,000, respectively, for which we have received payment in full;
•		proceeds in the amount of approximately $227,000 received from Ilypsa for the sale of fixed assets with approximately $72,000 net book value;
•		full repayment of loans originally provided to certain executive officers for the exercise of stock options prior to our initial public offering in 1999 during the nine months ended September 30, 2004. As of September 30, 2004, we have no more outstanding balance of stockholder notes receivable; and
•		Mario M. Rosati, one of our directors, is also a member of Wilson Sonsini Goodrich & Rosati which provides legal services with respect to real estate issues, for which they receive compensation at normal commercial rates.

RISK FACTORS

     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-

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looking statements contained in this Quarterly Report. These are not the only risks and uncertainties facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Most of our revenue is generated from a small number of key customers and the loss of a key customer could substantially reduce our revenues and be perceived as a loss of momentum in our business

     Over time we have expanded our base of customers and collaborative partners, however, substantial portions of our revenues are generated from a small number of companies. In particular, ExxonMobil accounted for 55% and 50% of our revenue for the three and nine months ended September 30, 2004, respectively. We expect that ExxonMobil and a select list of other companies will in aggregate continue to account for a substantial portion of our revenues for the foreseeable future and the loss of one or more of these customers or collaborative partners would harm our business and operating results. The cancellation of the ExxonMobil strategic alliance or loss of another significant customer or collaborative partner could also be perceived as a loss of momentum in our business and an adverse impact on our financial results and this may cause the market price of our common stock to fall.

We may not be able to maintain and grow a profitable business

     Our ability to maintain or increase our rate of profitability and grow our business is dependent on our ability to:

•		make discoveries that our customers choose to commercialize that generate a substantial stream of royalties and other revenue;
•		extend current collaboration research and development arrangements and add new ones;
•		secure new Discovery Tools customers; and
•		add additional licensees of both our software and intellectual property.

     Our ability to achieve our objectives and maintain or increase the profitability of our business will depend in large part on acceptance by potential customers of our high-throughput screening technology and methodology as an effective tool in the discovery of new materials. Historically, pharmaceutical 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. 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. A failure to achieve the necessary customer acceptance and extend current collaborations and add new ones, secure new Discovery Tools customers, and add additional licensees of our software and intellectual property will adversely affect our revenue and profitability and may cause our stock price to decrease.

Failure to successfully commercialize our discoveries would reduce our revenues and profitability and harm our business

     For us to achieve and sustain a significant level of profitability, we must make discoveries with significant commercial potential.

     If we license our discovered materials or methodologies to other companies, we typically do not receive royalties on sales of products by our partners until they have commenced commercial sales of products containing our materials or produced using our methods. The failure of our partners to commercialize development candidates resulting from our research efforts would reduce our future revenue and would harm our business and operating results.

     In order for us to commercialize development candidates ourselves, 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.

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We are dependent on the research and development activities of companies in the chemical, pharmaceutical, electronics, consumer goods and automotive 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, pharmaceutical, electronics, consumer goods and automotive industries depends on our customers’ ability and willingness to invest in research and development. A majority of our revenues are attributable to our collaborative arrangements with chemical, pharmaceutical, electronics, consumer goods and automotive companies. These contracts generally expire after a fixed period of time. If we cannot renew existing contracts or enter into new collaborative arrangements, our business and operating results may be harmed.

     In particular, many companies in the chemical and pharmaceutical industries have, in the past several years, experienced declining profitability or even losses. As a result, some chemical and pharmaceutical companies have reduced their research and development activities. In addition, many chemical products have become commodity products that compete primarily on the basis of price. 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 chemical, pharmaceutical, electronics, consumer goods and automotive 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 these 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, fewer or smaller scale intellectual property licenses, fewer sales of our Discovery Tools systems and related licenses and products, or choosing not to work with Symyx, any of which could reduce our revenues and harm our business and operating results.

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, whether through collaborations with customers or through our own proprietary research, which our partners or we choose to commercialize. 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. As of September 30, 2004, our partners have commercialized only one of our discovered materials. 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, or any discoveries at all. In addition, our development candidates may not result in products having the commercial potential our collaborators or we anticipate. If this happens, our existing and potential new customers may not renew or enter into new agreements with us. Consequently, our future revenues from our research collaborations and from commercialization of our discovered materials would likely decline and harm our business and operating results.

We conduct research programs for our own account and for a number of collaborative partners, and any conflicts between these programs would harm our business

     Our strategy includes conducting research programs for our own account as well as for collaborative partners. We believe that our collaborative agreements are structured in a manner to enable us to minimize conflicts with our collaborators relating to rights to potentially overlapping leads developed through programs for our own account and through programs funded by a collaborator, or through programs funded by different collaborators. However, conflicts between a collaborator and us, or between collaborators, could potentially arise. In this event, we may become involved in a dispute with our collaborators regarding the material. Disputes of this nature could harm the relationship between us and our collaborators, and concerns regarding our proprietary research programs could also affect our ability to enter into new collaborative relationships and cause our revenues and operating results to decline.

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We have a limited number of contracts for the sale of Discovery Tools systems and for the licensing of intellectual property, software, technologies and materials to date, and we cannot assure you that we will be able to build a sustainable business related to either the sale of additional systems or the licensing of intellectual property, software, technologies and materials

     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.

     Sales of Discovery Tools systems and licensing of intellectual property, software, technologies and materials 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;

•

customers’ willingness to acknowledge the validity of our patent portfolio and their need to obtain a license to our intellectual property in order to undertake research using high-throughput combinatorial chemistry methods;

•

complexity of our systems and difficulties we may encounter in meeting individual customer specifications and commitments on a timely basis;

•

our ability to build new systems and design software and workflows to meet the demands of our customers;

•

the fact that there may be only a limited number of customers that are willing to purchase our larger systems or enter into licensing agreements with us;

•

a long sales cycle that involves substantial human and capital resources; and

•

potential downturns in general or in industry specific economic conditions.

     If we are unable to continue to build the infrastructure to support Discovery Tools and Intellectual Property Licensing, or if the sales or build cycles for Discovery Tools systems lengthen unexpectedly, our revenues may decline or not grow as anticipated and our results from operations may be harmed.

     Although we believe that our Industry Collaborations, Discovery Tools and Intellectual Property Licensing businesses complement each other, it is possible that these individual business lines could become competitive with one another or negatively impact one another’s revenue streams. This could harm our ability to grow particular aspects of our business and harm our business and operating results.

We are exposed to risks associated with export sales and operations that 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:

•

obtaining and enforcing intellectual property rights under a variety of foreign laws;

•

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;

•

currency exchange fluctuations;

•

the burdens of complying with a variety of foreign laws; and

•

other factors beyond our control.

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     We are also subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, terrorism, 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 have a material adverse effect on our business, financial condition and operating results or require us to modify our current business practices.

Our inability to adequately protect our proprietary technologies could harm our competitive position and have a material adverse effect on our business.

     The success of our business depends, in part, on our ability to obtain patents and maintain adequate protection of our intellectual property for our technologies and products in the U.S. and other countries. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting their proprietary rights in these foreign countries. These problems can be caused by, for example, a lack of rules and processes allowing for meaningfully defending intellectual property rights. If we do not adequately protect our intellectual property, competitors may be able to practice our technologies and erode our competitive advantage, and our business and operating results could be harmed.

     The patent positions of technology companies, including our patent positions, are often uncertain and involve complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We apply for patents covering our technologies and products as we deem appropriate. However, we may not obtain patents on all inventions for which we seek patents, and any patents we obtain may be challenged and may be narrowed in scope or extinguished as a result of such challenges. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Others may independently develop similar or alternative technologies or design around our patented technologies or products. These companies would then be able to offer research services and develop, manufacture and sell products, which compete directly with our research services and products. In that case, our revenues and operating results would decline.

     We rely upon trade secret protection for certain of our confidential information. We have taken measures to protect our confidential information. These measures may not provide adequate protection for our trade secrets or other confidential information. We seek to protect our confidential information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants may still disclose or misuse our confidential information, and we may not be able to meaningfully protect our trade secrets. In addition, others may independently develop substantially equivalent information or techniques or otherwise gain access to our trade secrets. Disclosure or misuse of our confidential information would harm our competitive position and could cause our revenues and operating results to decline.

Failure to adequately enforce our intellectual property rights could harm our competitive position and have a material adverse effect on our business

     Our success depends on our ability to enforce our intellectual property rights through either litigation or licensing. To be successful in enforcing our intellectual property through litigation or licensing there are several aspects to consider, including maintaining the validity of our intellectual property, proving that others are infringing and obtaining a commercially significant outcome as a result of such infringement. Intellectual property litigation can be successful if our intellectual property withstands close scrutiny. If it does not withstand this scrutiny, we can lose part or all of our intellectual property position. In addition, we are involved in several administrative proceedings, such as opposition proceedings in the European Patent Office, that challenge the validity of the patents we have obtained there. If we lose part or all of our intellectual property position, whether through litigation or opposition proceedings, our business and operating results may be harmed.

     With regard to proving infringement of our intellectual property, our success depends in part on obtaining useable knowledge of what technologies others are practicing. If others do not publish or disclose the technologies that they are using, our ability to discover infringing uses and enforce our intellectual property rights will diminish. If we are unable to enforce our intellectual property rights or if the ability to enforce such rights diminishes, our

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revenues from intellectual property licensing and our operating results may decline.

     Our intellectual property must protect our overall business structure by allowing us to obtain commercially significant results from litigation, including compensation and/or relevant injunctions, without resulting in undue cost and expense. Enforcement of our intellectual property through litigation can result in significant expenses, distractions and risks that might cause us to lose focus or may otherwise harm our profitability and weaken our intellectual property position. Enforcement proceedings can adversely affect our intellectual property while causing us to spend resources on the enforcement proceedings. As our licensing activities have matured, we have become involved in arbitration and litigation to assert and defend our intellectual property. These matters may become material and more such matters may arise. Successful conclusion of these matters will assist our business, while unsuccessful conclusion of these matters will cost us time and money and possibly loss of rights. Our ability to manage the costs of these proceedings to obtain a successful result cannot be predicted.

Our business may be harmed if we are found to infringe proprietary rights of others

     Our commercial success also depends in part on ensuring we do not infringe patents or other proprietary rights of third parties. Others have filed, and in the future are likely to file, patent applications covering technologies that we may wish to utilize with our proprietary technologies, or products that are similar to products developed with the use of our technologies. If these patent applications result in issued patents and we wish to use the claimed technology, we would need to obtain a license from the third party and this would increase our costs of operations and harm our operating results.

     Third parties may assert that we are employing their proprietary technology without authorization. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes these patents. We could incur substantial costs and diversion of the time and attention of management and technical personnel in defending ourselves against any such claims. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief that could effectively block our ability to further develop, commercialize and sell products, and such claims could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products, or be required to cease commercializing affected products, which would harm our operating results.

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.

We expect that our quarterly results of operations will fluctuate, and this fluctuation could cause our stock price to decline, causing investor losses

     Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Revenues in future fiscal periods may be greater or less than revenues in the immediately preceding period or in the comparable period of the prior year. Some of the factors that could cause our operating results to fluctuate include:

•

expiration of research contracts with major collaborative partners, which may not be renewed or replaced with contracts with other companies;

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•

the success rate of our discovery efforts associated with milestones and royalties;

•

the timing and willingness of partners to commercialize our discoveries that would result in royalties;

•

developments or disputes concerning patent or other proprietary rights;

•

the size and timing of customer orders for shipments of, and payments related to Discovery Tools instrumentation;

•

the size and timing of license fees we receive from third parties who license our intellectual property;

•

the size and timing of royalties we receive from third parties, including those who license our laboratory instruments and software for resale;

•

the size and timing of internal research and development programs we undertake on an un-funded basis;

•

the size and timing of intellectual property licensing agreements we may enter into;

•

changes in estimates and underlying assumptions related to our warranty expense accrual, inventory valuation reserve, and income tax valuation allowance;

•

fluctuations in the market values of our cash equivalents and short and long-term investments and in interest rates, including any gains or losses arising on the sale of these investments;

•

changes in accounting rules and regulations, including those related to revenue recognition and accounting for stock options granted to employees; and

•

general and industry specific economic conditions, which may affect our customers’ capital investment levels and research and development investment decisions.

     A large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed in nature. Accordingly, in the event revenues decline or do not grow as anticipated due to expiration of research contracts, failure to obtain new contracts or other factors, we may not be able to correspondingly reduce our operating expenses. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results.

     Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. As a result of these possible fluctuations, it is difficult for our management to predict or estimate our quarterly or annual operating results and to give accurate guidance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would probably decline, and investors would experience a decline in the value of their investment.

Our stock price has been and may continue to be volatile

     The market price of our common stock since our initial public offering has been highly volatile. Volatility in the market price for our common stock will be affected by a number of factors, including the following:

•

decisions by significant stockholders to acquire or divest their stock holdings, given the relatively low average daily trading volumes we have historically experienced;

•

the announcement of new products or services by us or our competitors;

•

quarterly variations in our or our competitors’ results of operations;

•

failure to achieve operating results projected by securities analysts;

•

failure to achieve operating results within guidance provided by our senior management;

•

changes in earnings estimates or recommendations by securities analysts;

•

changes in management;

•

changes in investors’ beliefs as to the appropriate valuation ratios for us and our competitors;

•

speculation in the press or analyst community;

•

developments in our industry;

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•

changes in our growth rates; and

•

general market conditions, political influences and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

     These factors and fluctuations, as well as general economic, political and market conditions, may materially adversely affect the market price of our common stock. Securities class action litigation is often brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation, whether with or without merit, could result in substantial costs and divert management’s attention and resources, which could harm our business and financial condition, as well as the market price of our common stock. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options.

Future business activities such as the development of a new line of business or the acquisition of a company or technology could disrupt our business, affect our operating results and distract our management team.

     In the future, we may engage in acquisitions and expand our business focus in order to exploit technology or market opportunities. In the event that we acquire another company or business, we may not be able to successfully integrate the acquired business into our existing business in a timely and non-disruptive manner or at all. In addition, future acquisitions may adversely affect our operating results and could result in, among other things, large one-time charges associated with acquired in-process research and development, future write-offs of goodwill that is deemed to be impaired, restructuring charges related to consolidation of operations, charges associated with unknown or unforeseen liabilities of acquired businesses and increased general and administrative expenses. In the event that we develop a new line of business, our management’s attention may be diverted from normal daily operations of the business. Furthermore, an acquisition or business expansion may not produce the revenues, earnings or business synergies that we anticipate. The time, capital management and other resources spent on an acquisition or business expansion that fails to meet our expectations could cause our business and financial condition to be materially and adversely affected.

Difficulties we may encounter managing our growth may divert resources and limit our ability to successfully expand our operations.

     We have experienced a period of rapid and substantial growth that has placed, and our anticipated growth in the future will continue to place, a strain on our research, administrative and operational infrastructure. As our operations expand domestically and internationally, we will need to continue to manage multiple locations and additional relationships with various collaborative partners, suppliers and other third parties. Our ability to manage our operations and growth effectively requires us to continue to improve our reporting systems and procedures as well as our operational, financial and management controls. In addition, recent SEC rules and regulations have increased the internal control and regulatory requirements under which we operate. We may not be able to successfully implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.

Our investments could lose market value and consequently harm our ability to fund continuing operations.

     The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including government and corporate obligations and money market funds. These securities are generally classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of estimated tax. The market values of these investments may fluctuate due to market conditions and other conditions over which we have no control. Fluctuations in the market price and valuations of these securities may require us to record losses due to impairment in the value of the securities underlying our investment. This could result in future charges on our earnings. All securities are held in U.S. currency.

     Investments in both fixed rate and floating rate interest earning instruments carry varying degrees of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. In general, securities with longer maturities are subject to greater interest rate risk than those with shorter maturities.

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Although floating rate securities generally are subject to less interest rate risk than fixed rate securities, floating rate securities may produce less income than expected if interest rates decrease. Due in part to these factors, our investment income may fall short of expectations or we may suffer losses in principal if securities are sold that have declined in market value due to changes in interest rates.

Changes in accounting standards regarding stock option plans could limit the desirability of granting stock options, which could harm our ability to attract and retain employees, and could also reduce our profitability.

     The Financial Accounting Standards Board has issued an exposure draft that would require all companies to treat the value of stock options granted to employees as an expense. The U.S. Congress and other governmental and regulatory authorities have also considered requiring companies to expense stock options. If this change were to become mandatory, we and other companies would be required to record a compensation expense equal to the value of each stock option granted. This expense would likely be recognized over the vesting period of the stock option. Currently, we are generally not required to record compensation expenses in connection with stock option grants. If we are required to expense stock option grants, it would reduce the attractiveness of granting stock options because the additional expense associated with these grants would reduce our profitability. However, stock options are an important employee recruitment and retention tool, and we may not be able to attract and retain key personnel if we reduce the scope of our employee stock option program. Accordingly, in the event we are required to expense stock option grants, our profitability would be reduced, as would our ability to use stock options as an employee recruitment and retention tool.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

     We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our Independent Auditors addressing these assessments. During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could have a material adverse effect on our stock price.

We are exposed to general global economic and market conditions

     Our business is subject to the effects of general economic conditions in the United States, Europe, Asia and globally, and, in particular, market conditions in the pharmaceutical and chemical industries. In recent quarters, our ability to conclude Discovery Tools sale agreements and research and development collaborative arrangements have been adversely affected as a result of unfavorable economic conditions and reduced capital spending in the United States, Europe, and Asia. If the economic conditions in the United States and globally do not improve, or if we experience a worsening in the global economic slowdown, we may experience material adverse impacts on our business, operating results, and financial condition.

The loss of key personnel or the inability to attract and retain additional personnel could have a material adverse effect on our results of operations

     We believe our future success will depend upon our ability to attract and retain highly skilled personnel, including key scientific and managerial personnel. As we seek to expand our operations, the hiring of qualified scientific and technical personnel will be difficult, as the number of people with experience in high-throughput materials science is limited and we may face competition for qualified professionals. Failure to attract and retain personnel, particularly scientific and technical personnel, would impair our ability to grow our business and pursue new discovery initiatives and collaborative arrangements.

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Competition could increase, and competitive developments could render our technologies obsolete or noncompetitive, which would reduce our revenues and harm our business

     The field of high-throughput materials science is increasingly competitive. We are aware of companies that may apply their expertise in high-throughput chemistry to their internal materials research and development programs. In addition, there are companies focusing on aspects of high-throughput chemistry for the discovery of materials. In addition, academic and research institutions may seek to develop technologies that would be competitive with our systems for materials discovery. Because high-throughput materials science is an emerging field, competition from additional entrants may increase. Our Discovery Tools business is facing increasing competition from a number of instrument manufacturing companies. To the extent these companies develop competing technologies, our own technologies, methodologies, systems and workflows could be rendered obsolete or noncompetitive. We would then experience a decline in our revenues and operating results.

Any inability of ours to keep pace with technological advances and evolving industry standards would harm our business

     The market for our products is characterized by continuing technological development, evolving industry standards and changing customer requirements. Due to increasing competition in our field, it is likely that the pace of innovation and technological change will increase. Our success depends upon our ability to enhance existing products and services and to respond to changing customer requirements. Failure to develop and introduce new products and services, or enhancements to existing products, in a timely manner in response to changing market conditions, industry standards or other customer requirements would harm our future revenues and our business and operating results.

We use hazardous materials in our business, and any claims relating to improper handling, storage or disposal of these materials could subject us to significant liabilities

     Our business involves the use of a broad range of hazardous chemicals and materials. Environmental laws impose stringent civil and criminal penalties for improper handling, disposal and storage of these materials. In addition, in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials, we could be subject to civil damages due to personal injury or property damage caused by the release or exposure. A failure to comply with environmental laws could result in fines and the revocation of environmental permits, which could prevent us from conducting our business. Accordingly, any violation of environmental laws or failure to properly handle, store or dispose of hazardous materials could result in restrictions on our ability to operate our business and could require us to incur potentially significant costs for personal injuries, property damage and environmental cleanup and remediation.

Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other disaster could cause damage to our facilities and equipment and harm our business

     Our facilities are located in the Silicon Valley near known earthquake fault zones and are vulnerable to damage from earthquakes. In October 1989, a major earthquake that caused significant property damage and a number of fatalities struck this area. We are also vulnerable to damage from other types of disasters, including fire, floods, power outages or losses, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously, or potentially completely, impaired. In addition, the unique nature of our research activities and of much of our equipment could make it difficult for us to recover from a disaster. We do not carry earthquake insurance on the property that we own and the insurance we do maintain may not be adequate to cover our losses resulting from disasters or other business interruptions. Accordingly, an earthquake or other disaster could harm our business and operating results.

Some of our existing stockholders can exert control over us, and may not make decisions that are in the best interests of all stockholders

     Our officers, directors and principal stockholders (greater than 5% stockholders) together control a significant percentage of our outstanding common stock. As a result, these stockholders, if they act together, will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of

33

ownership may have the effect of delaying or preventing a change in control of Symyx and might affect the market price of our common stock, even when such a change may be in the best interests of all stockholders.

Provisions of our charter documents may have anti-takeover effects that could prevent a change in our control, even if this would be beneficial to stockholders

     Provisions of our amended and restated certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include:

•

a classified board of directors, in which our board is divided into three classes with three year terms with only one class elected at each annual meeting of stockholders, which means that a holder of a majority of our common stock will need two annual meetings of stockholders to gain control of the board;

•

a provision which prohibits our stockholders from acting by written consent without a meeting;

•

a provision which permits only the board of directors, the president or the chairman to call special meetings of stockholders; and

•

a provision which requires advance notice of items of business to be brought before stockholders meetings.

     These provisions can be amended only with the vote of the holders of 66 2/3% of our outstanding capital stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There have been no material changes in the reported market risks since December 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

(a)		Evaluation of disclosure controls and procedures
		As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934, our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
(b)		Changes in internal control
		As required by paragraph (d) of Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934, our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) to determine whether any changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, there was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that all control issues within the company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     During the first quarter of 2004, we filed a complaint against a third party alleging infringement of certain high-throughput experimentation patents. Although we filed the complaint in the United States District Court for the Northern District of California, the dispute was settled without having to serve the complaint in mid-August 2004.

     We do not believe that we are currently a party to any material pending legal proceedings. We may become subject to legal proceedings, claims, and litigation arising in the ordinary course of business. Although the outcome of these matters is currently not determinable, we do not currently expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None

ITEM 5. OTHER INFORMATION

     None

ITEM 6. EXHIBITS

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

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