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

Form 10-K

Commission file number 000-27765

Symyx Technologies, Inc.
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value

        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.    ý Yes    o No

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý

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

        The approximate aggregate market value of the registrant's common stock held by non-affiliates as of June 30, 2004 (the last business day of the registrant's most recently completed second fiscal quarter) was $731,671,000, based on the closing price for the common stock on the Nasdaq National Market on such date.

        As of February 24, 2005, 32,524,058 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain sections of the Proxy Statement to be filed in connection with the 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.

TABLE OF CONTENTS

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PART I

Item 1.    Business

        This discussion and other parts of this Annual Report on Form 10-K ("Report"), including the "Management's Discussion and Analysis of Financial Condition and Results of Operation," contain forward-looking statements that involve risks and uncertainties, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements typically may be identified by the use of forward-looking words or phrases such as "may," "will," "believe," "expect," "plan," "intend," "goal," "anticipate," "should," "planned," "estimated," "potential," and "continue," or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. The cautionary statements made in this Annual Report on Form 10-K should be read as being applicable to all related forward-looking statements whenever they appear in this Annual Report on Form 10-K.

        Forward-looking statements include, without limitation, statements regarding: the statement regarding our belief that we can transform the chemical and petrochemical, pharmaceutical, electronics, consumer goods, and automotive companies by discovering break-through new materials faster and more cost effectively than by using traditional methods; the statement regarding our ability to transform how our customers perform research, by providing Discovery Tools, software, and patented methods that they can apply to increase their research productivity; the statement that we continue to expand our capabilities through the development of new instruments and software and enhanced versions of existing systems; the statement regarding our intent to continue to enter into new strategic alliances and collaborative arrangements; the statement regarding our expectations that new collaborations will come from existing partners extending programs and undertaking new research initiatives as well as from new partners; the statement that we have created a growing pipeline of materials that have emerged from our discovery platform; the statement regarding our expectation to receive royalties from the sale of sensors, or that we could become a supplier of sensors; the statement regarding our belief that our proprietary database will emerge as a powerful tool in accelerating materials discovery by enabling our scientists to benefit from the cumulative effect of our research; the statement that we will realize a revenue backlog in the fiscal year 2005 and beyond; the statement regarding our intent to augment the already committed revenue base with new and extended collaborations, new tools sales, and new intellectual property and software licenses; the statement regarding our belief that our future success depends in part upon our continued ability to hire and retain qualified personnel; the statement regarding our expectations that ExxonMobil, Dow, and a select list of other companies will in aggregate continue to account for a substantial portion of our revenue 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 statement regarding our belief that we are well positioned to capitalize on our investment in the technology, instrumentation and informatics necessary to pursue high throughput discovery of materials; the statement regarding our belief that the drivers of our near term growth and profitability, including the credibility and commitment afforded by our alliances, a visible improvement in chemical industry spending levels, the near-term growth potential of our royalty income stream and the expansion of our software business, are already in place; the statement that Dow will make payments to us over the five-year term of approximately $120 million; the statement regarding our expectations that approximately 40% of this revenue will be service revenue, 30% product revenue and 30% license revenue; the statement regarding our expectations to receive royalties from the sale of polymers produced by Dow beginning in the first quarter of 2005; the statement regarding our expectations to receive royalties from the sale of electronic materials containing polymers produced by JSR Corporation, beginning in the first quarter 2005; the statement regarding our anticipation of an effective income tax rate of approximately 40% in 2005; the statement regarding our anticipation that our headcount will continue to increase to meet the mix and level staffing required by the ExxonMobil and Dow alliances and by the expansion of our business; the statement regarding our expectation that we will continue to make significant investments in research and development to enhance our technologies; the statement regarding our expectation to receive over $200 million in revenue from ExxonMobil and over $120 million in revenue from Dow during the 5-year term of each of the alliances; the

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statement regarding our belief that revenue from our strategic alliances will greatly contribute to our expected growth in Industry Collaborations revenue in 2005 through 2009; the statement regarding our belief that expanding our customer base will contribute to our expected growth of Discovery Tools revenue; the statement regarding our belief that the demonstrated acceptance of our high-throughput experimentation technology by our customers will lead to the expected growth in our license fee revenue in future years; the statement regarding our belief that commercialized materials from Dow, JSR Corporation and Agfa, will contribute to our growth in Intellectual Property Licensing revenue in the future; the statement regarding our expectation to continue to devote substantial resources to research and development; the statement regarding our expectation that research and development expenses will continue to increase; the statement regarding our expectation that our sales, general and administrative expenses will increase; the statement regarding our anticipation that our interest income in 2005 will be slightly greater than 2004 due to the impact of recent interest rate increases and our positive cash flows from operating and financing activities will continue to increase our average investment balance; the statement regarding our anticipation that the adoption of certain accounting standards will not have a material impact on our consolidated financial statements; the statement regarding our expectation that we will continue to generate positive cash flow from our operating activities in the near future; the statement regarding our expectation to continue to make significant investments in the purchase of property and equipment to support our expanding operations; the statement regarding our belief that our current cash, available-for-sale securities balances and the cash flows generated by operations will be sufficient to satisfy our anticipated cash needs; the statement regarding our entry into an agreement to acquire Synthematix, Inc. which expects to close in early April 2005; the statement regarding management's belief that our insurance protection is reasonable in view of the nature and scope of our operations; the statement regarding our expectation to retain future earnings, if any, to support the development of our business and that we do not anticipate that we will pay any cash dividends in the foreseeable future.

        The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statement. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. Among the factors that could cause actual results to differ materially are the factors detailed under the heading "Risk Factors." All forward-looking statements and risk factors included in this document are made as of the filing date hereof, based on information available to Symyx as of the filing date hereof, and Symyx assumes no obligation to update any forward-looking statement or risk factor. You should also consult the risk factors listed from time to time in the Company's Reports on Form 10-Q and other SEC filings.

General

        Symyx Technologies, Inc. (the "Company" or "Symyx") develops and applies high-throughput experimentation to the discovery of innovative materials for chemical and petrochemical, pharmaceutical development, electronics, consumer goods, and automotive customers. We work together 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."

        In November 2004, we completed the acquisition of Symyx IntelliChem, Inc. ("IntelliChem"), formerly IntelliChem, Inc., an Oregon-based leading provider of intelligent electronic lab notebooks (iELN) for customers in the pharmaceutical, biotechnology, and chemical industries.

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        We are the pioneer of high-throughput materials discovery and have developed broad proprietary technologies and methodologies to increase research productivity for ourselves and our customers. Through our innovation, we have built a comprehensive intellectual property portfolio of over 240 issued patents and over 390 patent applications covering methodology, composition of matter, instrumentation, and software.

        Our diversified business model provides complementary ways for us to work with our customers and to further our innovation and growth. We perform research for our customers, sell high throughput automated instruments called Discovery Tools, license our Renaissance® and IntelliChem® software, and license our discovered materials and some of our intellectual property:

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We typically perform research for customers on a collaborative basis in exclusive fields for which we receive research funding and royalties or other payments from the commercialization of materials we discover. In these collaborations and in our internal research efforts, we seek to discover a broad range of materials, including catalysts for the manufacturing of chemicals and plastics, polymers for a range of industrial applications, and phosphors and other electronic materials.



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Our Discovery Tools operation focuses on providing automated instruments to pharmaceutical companies for use in pharmaceutical pre-clinical testing, including pre-formulations, formulation and process chemistry, as well as to chemical and petrochemical companies for use in catalyst discovery, optimization, and formulation.



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Our software includes Renaissance software and IntelliChem electronic notebook software to create integrated end-to-end coverage of the research process, for both high-throughput and conventional one-at-a-time experimentation. This software enables scientists to design experiments, automate their execution, capture and analyze the results of the experiments, and store the data for future mining, all on a single, integrated platform.



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We license the materials we discover for others to commercialize, in return for royalties. Some of these materials are discovered under our collaborations programs and some in internal research efforts. We also license some of our intellectual property, including sensors and methodology patents, in return for royalties or license fees.

        We also work with customers in alliances, under which our customers work with us across all of our business offerings under a substantial, multi-year commitment. To date, we have such alliances in place with the Exxon Mobil Corporation ("ExxonMobil") and the Dow Chemical Company ("Dow"). Under the ExxonMobil alliance effective April 1, 2003, we are contracted to provide research services, develop and sell Discovery Tools Systems, and license our software and intellectual property. The ExxonMobil alliance provides us with an expected five-year revenue stream of over $200 million (of which $59.6 million has been recognized as of December 31, 2004) from currently planned alliance activities, purchases of Discovery Tools systems, and licensing fees. In addition, we are also entitled to receive royalties from the commercialization of materials, processes, and products based on discoveries made in the fields of agreement. Under the Dow alliance effective January 1, 2005, we are contracted to perform research in a number of exclusive areas, develop and provide Symyx Discovery Tools, and license our Renaissance suite of software as well as certain intellectual property. Dow is obligated to make payments to us over the five-year term of approximately $120 million. In addition, we are entitled to receive royalties on commercialized discoveries resulting from the collaborative research.

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        For the fiscal years ended December 31, 2004, 2003, and 2002, the following customers contributed more than 10% of our total revenue (in thousands):

        For the fiscal years ended December 31, 2004, 2003, and 2002, approximately 20%, 15%, 12% of our total revenue was generated from sales to customers located in foreign countries.

Industry Background

        Materials and their diverse properties contribute in vital ways to many of the products in every day use. Examples include the catalysts used in the manufacture of major chemicals, pharmaceuticals, plastics and rubbers, the plastics in many of our household and office goods, and luminescent materials in lighting and computer and television screens.

        Traditional materials discovery relies on an expensive and time-consuming process of trial and error: making one material; testing it; then making a different material; testing it and so on. Traditional discovery methods are not fast enough to keep pace with today's growth expectations and the trend to shorter product life cycles.

        We believe that we can transform chemical and petrochemical, pharmaceutical, electronics, consumer goods, and automotive companies by discovering break-through new materials faster and more cost-effectively than by using traditional methods. We can also transform how our customers perform research, by providing Discovery Tools, software, and patented methods that they can apply to increase the research productivity of their own labs.

Symyx Solution

        Our technologies include the rapid creation of large directed libraries of materials that are then synthesized and tested using our fully integrated high-throughput primary and secondary screens. During primary screening, unconventional methods are used to carry out experiments in large phase space — chemicals, temperatures, pressures, etc. — so that researchers can identify the smaller areas to focus on. During secondary screening, more experiments are carried out to make a more detailed evaluation of the focused areas. In conventional terms, creating and testing a single material is considered one experiment. Using our miniaturized, automated technology to execute hundreds to thousands of experiments at a time, our scientists can dramatically increase the probability of success and reduce the time and costs per experiment to discover new materials. For example, using traditional trial and error methods, a team consisting of a chemist plus a technician could perform 500 to 1,000 experiments per year. In our labs, that same team could perform up to 50,000 experiments per year. As a result, our scientists would generate significantly more data, increase the possibility of successful discoveries within that timeframe, and reduce the associated costs per experiment dramatically.

        To achieve these efficiencies, we require extensive capabilities in materials synthesis, screening, and data analysis. A particular challenge is the ability to screen materials for a wide range of properties. For example, to discover a new catalyst, we need to screen how well it performs a specific chemical reaction,

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and to discover a new polymer, we need to screen for physical and mechanical properties such as molecular weight and toughness.

        As the pioneer in high-throughput materials science, we found no existing technology capable of meeting our synthesis, screening, and data analysis requirements. To address this challenge, we assembled a multi-disciplined team of people with expertise in the fields of inorganic, physical, polymer, and organic chemistries, physics, engineering, and software programming. This team has successfully designed, built, and validated a powerful array of highly specialized proprietary instruments and software. Our scientists can synthesize a wide range of materials and screen for properties including catalytic, chemical, physical, mechanical, electronic, and optical properties. In addition, we continue to expand our capabilities through the development of new instruments and software and enhanced versions of existing systems.

Symyx Offerings

        We are committed to retaining our position as a leading company using and supplying high-throughput technologies for the discovery of new materials with commercially valuable properties. We have developed several complementary offerings in support of that objective, including Industry Collaborations, Discovery Tools, Software Licensing, and Intellectual Property Licensing.

    Industry Collaborations

        Our Industry Collaborations program contributes greatly toward the development of our intellectual property, including patents covering methodology, composition of matter, instrumentation, and software. In our Industry Collaborations, we perform research for customers typically in exclusive fields, for which we receive research funding and rights to downstream royalties or other payments on materials we may discover.

        We provide the platform technologies and effort, and our partners acquire rights to develop and commercialize resulting materials within their defined field of license. Typically, we enter into collaborative arrangements to discover materials that require considerable investment in product development and manufacturing, as well as extensive marketing efforts. Our collaborative partners have already developed the infrastructure to support these requirements, and may therefore be in a strong position to commercialize our discoveries.

        Much of our collaborative research is focused on the chemicals industry, where we apply proprietary high-throughput technologies aimed at making break-through discoveries leading to improved commercial processes and materials. Our technology innovations can help chemical companies address the rising costs and manufacturing challenges presented by low-cost competing producers overseas. We are working with BP, Celanese, Dow, ExxonMobil, and other leading companies to discover catalysts for the manufacture of polyolefins and a variety of other commodity chemicals. The range of new technologies developed in these research collaborations — including instruments, software, methods, and materials — results in a growing portfolio of intellectual property that creates downstream value for Symyx.

        We receive funding from our collaborative partners typically through quarterly research payments. These payments are made over the term of the research contract, which is generally one to five years. If a new material is discovered and commercialized, we typically receive rights to royalties or other payments.

        Under the typical collaborative arrangement, we own or control all inventions pertaining to high-throughput methodology conceived and reduced to practice in connection with activities under the agreements and all know-how and intellectual property rights related thereto. Our collaborative partners typically receive exclusive rights in the defined field of their collaborative agreement. The agreements are typically cancelable only in the event of breach by either party or for other defined, limited reasons.

        We do not track or allocate actual costs by collaboration or project, as the requirement from our collaborative partners is to staff the various projects on a full-time-equivalent ("FTE") employee basis.

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Accordingly, we track the assignment of these FTE's to each project over time. Based on the analysis of these FTE's, for the twelve months ended December 31, 2004, approximately 81% of the Company's research effort, determined based on employee hours charged to a project, was on research for collaborative projects funded by our partners. The remaining 19% of research effort was on our internally funded research and development. The focus of our internally funded programs in 2004 was largely on development of our proprietary sensor technology, on industrial polymer applications, and the next generation of Discovery Tools. In 2003 and 2002 approximately 65% and 63%, respectively, of our research effort was for collaborative projects funded by our partners with approximately 35% and 37%, respectively, being our internally funded research.

        In order to expand our technologies and grow our product pipeline, we intend to continue to enter into new collaborative arrangements, including alliances. As a result of these new arrangements, and the conclusion of existing collaborations, our portfolio of collaborations will change over time. We expect that new collaborations will come from existing partners extending current programs and undertaking new research initiatives as well as from new partners.

    Discovery Tools

        Through our Discovery Tools operation, we leverage the power of our inventions by selling automated instruments to pharmaceutical companies to speed and improve preclinical testing of drug candidates, and to chemical and petrochemical companies for catalyst and other research. Our Discovery Tools may include high-throughput reactors, screening systems, robots and analytical equipment, all integrated with our Renaissance software, a suite of software designed to facilitate the process of designing, executing, and evaluating chemical and material research and development.

        Companies that purchase Discovery Tools systems from us are able to implement high-throughput technologies at a great time and cost savings compared to taking a license to operate from us and then developing and building a system internally. These complete Discovery Tools systems, aimed at accelerating research as well as product optimization and process development, enable scientists to increase their research productivity up to 100-fold.

        We primarily sell our Discovery Tools systems and workflows to pharmaceutical and chemical companies. Pharmaceutical companies use our instrumentation and workflows to automate and improve pre-clinical research, including drug polymorph, solubility studies and process optimization. The systems we sell to pharmaceutical companies include pre-formulation workflows, solubility workflows, high pressure, or HiP reactors, and Parallel Pressure Reactors, or PPR®. Chemical companies use our Discovery Tools systems and workflows to automate and integrate their material discovery and research and development processes. The systems we sell to chemical companies include our PPR system, fixed bed reactors, and high-temperature rapid GPC system, as well as a variety of workflows designed to test polymer physical properties.

    Software Licensing

        We license our Renaissance and IntelliChem software to enhance experiment design, laboratory automation, data capture, data analysis and visualization, and data communication in high-throughput and traditional research environments. The Renaissance software suite is a highly integrated suite of software designed to facilitate the process of designing, executing, and evaluating chemical and material research and development. Renaissance consists of several different software applications, each focused on users and specific to the actual day-to-day tasks of laboratory research, all sharing a common environment for data storage — the Renaissance Application Server (RAS). IntelliChem software has been integrated into our software offering as a result of our acquisition of IntelliChem in November 2004. It provides a powerful and flexible set of intelligent electronic lab notebooks for recording, utilizing, and managing the knowledge generated in laboratories. It allows pharmaceutical and chemical companies to replace paper

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lab notebooks with intelligent electronic lab notebooks and provides decision-support tools to help scientists and engineers make better decisions.

        Customers for our software include chemical, petrochemical, and pharmaceutical customers, as well as other industrial customers seeking to improve and integrate their research data management. Chemical, petrochemical and other industrial companies may use our software broadly across their research groups. Our Renaissance software is useful to pharmaceutical companies to support their pre-clinical research activities. IntelliChem electronic laboratory notebook software is used by several pharmaceutical customers, mostly for pre-clinical research although it also has utility in pharmaceutical discovery research and chemicals research.

    Intellectual Property Licensing

    Discovered Materials

        We discover and patent a range of materials in our Industry Collaborations and internal research programs. These discovered materials provide the foundation for our potential future royalties.

        Our portfolio of discovered materials provides us with an array of licensing opportunities, and offers a significant path to commercialization of new materials. Our discoveries demonstrate the ability of our high-throughput research technologies to address a range of materials for use in a variety of chemical and other industrial applications. As a result, we have created a growing pipeline of materials that have emerged from our discovery platform. At the time of this filing, our discoveries include 3 commercialized materials, 12 development candidates and 12 emerging development candidates.

    Sensors

        We have developed a solid-state mechanical resonator ("sensor") technology for use in our own labs to test polymer viscosity, density, and other properties. We have determined that these sensors have many potential applications outside of the lab, and we began an active program to license these sensors to industrial companies. The first announced sensor license was to Hella KG, a leading supplier to the automotive industry. Hella KG is now beginning to commercialize this novel sensor technology for in-situ real-time monitoring of motor oil quality in automobiles. Our sensors and technologies are also licensed and in development at other companies, including an oil exploration company and Univation, for use in monitoring Unipol reactors. We expect to receive royalties from the sale of these sensors, or, in some cases, we could become a supplier of the sensors themselves.

    Patents

        Launched in mid-2002, our patent licensing program leverages our established capabilities in the field of high-throughput materials discovery, including our broad-based research capabilities, validated instruments and software, and extensive know-how. Created to give companies selective access to our broad methodology patents, this program offers a constructive way to uphold the value of our intellectual property portfolio while expanding the ways in which we can work with potential customers.

        We developed our patent licensing program to accommodate companies that want to implement high-throughput materials research on a smaller scale — generally increasing their research productivity by approximately 10-fold. Because our patent licenses typically are for a limited number of experiments or for a limited number of scientists' use, this licensing approach complements our other business offerings by targeting research programs that are generally too small to warrant investment in Industry Collaborations or Discovery Tools. In this manner, companies can benefit from our inventions by licensing our patents and patent applications for a fee.

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Technology

        Our scientists begin the discovery process by working with our collaborative partners or our own business development staff to define a research objective in terms of the specific properties a new material should have to meet the needs of a given application. We then apply the components of our combinatorial process — synthesis, screening and informatics — to seek to discover materials that match these criteria.

    Synthesis

        The materials research process begins with chemists' theories about what elements from the periodic table of elements might be combined to create new materials with desired properties. However, while chemists working in traditional labs have to choose the few experiments they will perform on a given day, our chemists have the ability to perform hundreds or thousands of experiments during the same time frame. Our chemists are therefore able to pursue their theories both broadly, across a wide range of elements, and comprehensively, creating materials with the same components, in different ratios.

        A Symyx chemist initiates the synthesis process by using our Renaissance software suite's Library Studio® software application, a computer software package created by our programmers to design the group, or "library," of materials to be synthesized. These instructions, or "recipes," are then relayed to synthesis instruments automated with our Renaissance software suite's Impressionist® or Epoch® software applications, each being computer software packages that direct automated equipment functions. These instruments create the library on a single substrate such as a three-inch diameter silicon wafer or a 96-well plate. The quantity of each compound synthesized is very small, generally ranging from micrograms to hundreds of milligrams. This contrasts dramatically with traditional synthesis, where grams to kilogram quantities of a material are usually necessary. Libraries synthesized on silicon wafers may range from a few hundred different candidate materials to several thousand, depending on the type of material and the type of analysis to be done.

        Each material synthesized represents a unique experiment and potential discovery. The desired end result of these experiments is defined at the outset of the experiment as a target material having specific performance properties. Our scientists, in conjunction with our collaborative partners, or independently for our proprietary discovery programs, set the specific performance properties and define the desired performance attributes of the target material for a given application or applications. Generally, these criteria are well beyond the performance attributes of currently used materials.

    Screening

        Once created, the library of materials is analyzed for desired properties. As with synthesis, our technical staff has designed and built a broad array of instruments and software to evaluate different properties under a wide variety of process conditions. These properties include catalytic, physical, mechanical, thermal, chemical, electronic, and optical properties. In general, a Symyx chemist can design, synthesize, and screen a library in a single day.

        To reach the point of commercialization, a candidate material must progress through an increasingly stringent set of requirements, progressing from a hit to a lead to a development candidate. First, we screen materials to identify those materials that have a limited set of properties defined for the target discovery, called "hits." Hits are subjected to additional testing and optimization, to find a larger number of desired properties. Hits may also identify areas that merit further exploration, and new libraries are created using this information. Candidate materials that continue to meet or exceed the defined criteria are then classified as "leads." Leads are then transferred to a partner or processed internally for additional testing and scale up. Leads are tested on a larger scale, as bulk samples of, e.g. 1 to 100 grams, to confirm that the materials still perform at this "bench scale" level. Once a lead has passed this bench scale testing by either a collaborative partner or us, it may become a development candidate. Finally, if all is successful, the decision may be made to commercialize the material. Once a material has been identified as a

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development candidate, the time to the first sale or commercial usage may be as short as one to two years. For industrial catalysts to produce high volume commodity chemicals, on the other hand, it may require five to seven or more years to reach the market because of the extensive process development, customer evaluation, and capital investment involved.

    Informatics

        A critical factor in our discovery process is the ability to retain and access the huge amounts of data generated by our synthesis and screening activities. Given the broad acceptance of high-throughput combinatorial discovery in pharmaceuticals, a number of software applications exist to support organic chemistry. However, those software applications were not sufficient to address the storage and retrieval needs of our diverse array of inorganic, organometallic, and polymer chemistries. To that end, we have devoted considerable resources to build a proprietary database capable of addressing these needs. Our chemists can query this database to identify materials screened in the past that possess the property or properties specified. We believe that this database will emerge as a powerful tool in accelerating materials discovery by enabling our scientists to benefit from the cumulative effect of all of our research.

Intellectual Property and Other Proprietary Rights

        Our success depends upon our proprietary technology. The risks associated with patents and intellectual property are more fully discussed in the "Risk Factors" section contained in Item 1 of this Annual Report on Form 10-K. There are five general areas that may be patented using our high-throughput approach:

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library synthesis methods;



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the libraries themselves;



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screening or characterization methods;



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equipment and software; and



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new materials and their uses.

        During 2004, we were issued 75 patents worldwide. Our patent portfolio as of year end 2004 consisted of 235 issued patents, including 198 U.S. patents, 18 European patents, and 19 patents in other countries, and more than 390 patent applications pending worldwide. These patents and applications cover composition of matter, instruments, and methodology, and include issued patents with broad claims in high-throughput combinatorial methodologies. We co-own with Lawrence Berkeley National Laboratory, on behalf of The Regents of the University of California, 10 of the issued United States patents and 6 of the issued patents in other countries. We have an exclusive license to these patents and patent applications from Lawrence Berkeley National Laboratory, which was agreed to upon our formation. In addition to patents, we rely on copyright, trademark and trade secret rights, confidentiality procedures, and licensing arrangements to establish and protect our proprietary rights.

Markets

        Symyx provides chemical and petrochemical, pharmaceutical development, electronics, consumer goods, and automotive customers with materials and chemical solutions to increase their research and development productivity by achieving better results with shorter timelines and lower costs. We realize value through collaborative research, the sale of Discovery Tools, and the license of intellectual property, software, and materials. Our market opportunities fall into two primary areas: our customers' research and development expenditures and the market for sales of materials.

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    Research and Development ("R&D") Expenditures Market

        Our customers in the various industries we serve have an aggregate R&D expenditure in excess of $10 billion annually and need to achieve an increased return on their R&D investments. These investments include personnel costs in basic research and discovery, purchases of instruments, workflows and tools, and deployment of supporting informatics and software environments.

    Material Markets

        The materials we discover cover a broad range of applications, including catalysts for the manufacture of plastics and commodity chemicals, polymers for industrial, consumer goods and life science applications, and diverse electronic materials. Each of these materials typically may generate annual worldwide sales for our customers in the range of $100 million to $500 million.

Competition

        We are aware of some chemical companies with internal high-throughput materials discovery programs. In addition, two European based companies, Avantium Technologies and HTE, may also use high-throughput approaches to materials discovery. Furthermore, certain instrument manufacturers, including Chemspeed, Zinsser, and others, offer instruments that may compete with our Discovery Tools business. Because high-throughput materials experimentation is an emerging field, competition for our Industry Collaborations and Discovery Tools businesses could increase. In addition, other companies may be addressing the same materials targets as we do and would represent competition for our discovered materials.

Backlog of Committed Revenue

        As of December 31, 2004, our customers have contractually committed approximately $83 million for the purchase of Discovery Tools systems, licenses to our intellectual property, and funding for research and development under collaborative agreements in 2005. We also have an additional $226 million in revenue backlog expected 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.

Employees

        As of December 31, 2004, we had a total of 275 employees, including 189 scientific and technical employees and 86 people in business development, legal, and general and administrative services. Our headcount increased significantly during 2004 because of the acquisition of IntelliChem in November 2004 and hiring of scientific and technical employees to fulfill the needs under our Exxon alliance entered into in 2003 and our Dow alliance entered into in 2004. The headcount has not changed significantly after the end of fiscal 2004 to date but is expected to continue to grow in 2005. None of our employees are represented by a labor union, and we consider our employee relations to be good. We believe that our future success depends in part upon our continued ability to hire and retain qualified personnel.

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Executive Officers of the Registrant

        Set forth below is information regarding our executive officers as of February 24, 2005:

(1)

Before joining Symyx in 1998, Mr. Goldby served as Chief Executive Officer for more than ten years at MDL Information Systems, Inc., the enterprise software company that pioneered scientific information management. Earlier, Mr. Goldby held various management positions at ALZA Corporation, including President of Alza Pharmaceuticals. Mr. Goldby received a B.S. degree in chemistry from the University of North Carolina and a law degree from Georgetown University Law Center.

(2)

Mr. Goldwasser has been with Symyx since its founding and was appointed President and Chief Operating Officer in 1998. He is responsible for Symyx's business development efforts. Mr. Goldwasser received a B.S. degree in chemical engineering from the Massachusetts Institute of Technology and an M.S. degree in chemical engineering from Stanford University.

(3)

Prior to joining Symyx in 1997, Ms. Hilleman served as Vice President Finance and Chief Financial Officer with two public biotechnology companies, Geron Corporation and Cytel Corporation. Ms. Hilleman received her A.B. degree from Brown University and an M.B.A. from the Wharton Graduate School of Business. She was selected as a 1999 Crown Fellow by the Aspen Institute.

(4)

Mr. Nowak joined Symyx in June 2004. Prior to Symyx, Mr. Nowak has held a variety of positions with VWR International, including most recently as President and Chief Operating Officer of VWR International, and Chief Executive Officer and President-North America of VWR Scientific Products Corporation. Mr. Nowak received a B.S. degree in biology from the State University of New York.

(5)

Dr. Weinberg joined Symyx in 1996, and also remains an Adjunct Professor at the University of California, Santa Barbara. Dr. Weinberg is a member of the National Academy of Engineering and is widely known for his work on aspects of surface chemistry and physics, heterogeneous catalysis, and combinatorial materials science. Dr. Weinberg obtained a B.S. degree in chemical engineering from the University of South Carolina, and a Ph.D. in chemical engineering from the University of California, Berkeley.

        There is no family relationship between any of the foregoing executive officers or between any of such executive officers and any of the members of our Board of Directors. Our executive officers serve at the discretion of the Board.

Environmental Matters

        Our U.S. operations are subject to federal, state, and local environmental laws and regulations. We have a number of proactive programs underway to minimize our impact on the environment, and we believe that we are in substantial compliance with environmental laws and regulations.

Risk Factors

        Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results

11

contemplated by the forward-looking statements contained in this Annual Report on Form 10-K. 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 54% of our total revenue for the year ended December 31, 2004. Our largest three customers accounted for 64% of our total revenue in 2004. We expect that ExxonMobil, Dow, 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 or Dow 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 would 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.

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        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.

We are dependent on the research and development activities of companies in the chemical and petrochemical, 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 and petrochemical, 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 and petrochemical, 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 and software 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. 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.

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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

        We have recently engaged in an acquisition, and in the future, we may engage in additional acquisitions and expand our business focus in order to exploit technology or market opportunities. In the event of any future acquisitions, we may issue stock that would dilute our current stockholders' percentage ownership, pay cash, incur debts, or assume liabilities. We may not be able to successfully integrate any acquired business into our existing business in a timely and non-disruptive manner or at all. In addition, 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, increased general and administrative expenses, and the loss of key employees. 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.

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.

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.

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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 and software 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.

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, especially in the San Francisco Bay Area, where we are headquartered. Further, as we form new alliances with other collaboration partners, we may need personnel with specific skill sets that may be difficult to locate or attract. 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.

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 technologies for materials discovery. Because high-throughput materials science is an emerging field, competition from additional entrants may increase. Our Discovery Tools and software business groups are facing increasing competition from a number of instrument manufacturing and software companies. To the extent these companies develop competing technologies, our own technologies, methodologies, systems and workflows, and software could be

15

rendered obsolete or noncompetitive. We would then experience a decline in our revenues and operating results.

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 that 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.

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        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 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 are 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.

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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;



•

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 both software and 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;



•

inaccurate assessment of demand for our products and services, including our software;



•

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.

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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;



•

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.

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. 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

19

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 will also reduce our profitability

        The Financial Accounting Standards Board issued SFAS No. 123(R) which we are required to adopt no later than July 1, 2005. This statement will require us to treat the value of stock options granted to employees as an expense. When we are required to expense stock option grants, it will reduce the attractiveness of granting stock options because the additional expense associated with these grants will 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, once we are required to expense stock option grants, our profitability will be reduced. We may need to reevaluate the use of 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

        Each year we are required to document and test 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 Registered Public Accounting Firm addressing these assessments. During the course of our testing we may identify deficiencies that 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.

If our products contain software defects, it could harm our revenues and expose us to litigation

        The software products we offer are internally complex and, despite extensive testing and quality control, may contain errors or defects, especially when we first introduce them. We may need to issue corrective releases of our software products to fix any defects or errors. Any defects or errors could also cause damage to our reputation and result in loss of revenues, product returns or order cancellations, or lack of market acceptance of our products. Accordingly, any defects or errors could have a material and adverse effect on our business, results of operations and financial condition.

        Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in our license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. Although we have not experienced any product liability claims to date, sale and support of our products entails the risk of such claims, which could be substantial in light of our customers' use of such products in mission-critical applications. If a claimant brings a product liability claim against us, it could have a material adverse effect on our business, results of operations and financial condition. Our products interoperate with many parts of complicated computer systems, such as mainframes, servers, personal computers, application software, databases, operating systems and data transformation software. Failure of any one of these parts could cause all or large parts of computer systems to fail. In such circumstances, it may be difficult to determine which part failed, and it is

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likely that customers will bring a lawsuit against several suppliers. Even if our software is not at fault, we could suffer material expense and material diversion of management time in defending any such lawsuits.

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.

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 have recently established operations in certain parts of Europe and Asia. We intend to continue to expand our international presence in order to increase our export sales. Export sales to international customers and operating in foreign countries 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;



•

greater difficulties on maintaining and enforcing U.S. accounting and public reporting standards;



•

greater difficulties in staffing and managing foreign operations;



•

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



•

other factors beyond our control.

        We are also subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, terrorism, potential hostilities, changes in diplomatic and trade relationships, and disease outbreaks. 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.

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

21

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 approximately 36% 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 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;

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•

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 66²/3% of our outstanding capital stock.

Item 2.    Properties

        Our facilities currently consist of an aggregate of approximately 113,000 square feet of office, research, and laboratory space in several locations in California, New Jersey, Oregon, and other states and countries. We own the 39,000 square foot building at 3100 Central Expressway, Santa Clara, California and lease the remaining office spaces under lease agreements that expire from April 2006 to September 2010.

Item 3.    Legal Proceedings

        We are currently not a party to any legal proceedings that we believe to be material.

        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, management does not 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 4.    Submission of Matters to a Vote of Security Holders

        None

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common stock is traded on the Nasdaq National Market System under the symbol of "SMMX." The following table sets forth, for the period indicated, the low and high bid prices per share for our common stock as reported by the Nasdaq National Market.

        As of February 24, 2005, there were approximately 150 holders of record of our common stock.

        No dividends have been paid on our common stock since our inception and we currently intend to retain all future earnings, if any, for use in our business and do not anticipate paying any cash dividends in the foreseeable future.

        We have not repurchased any of our common stock during the year ended December 31, 2004.

Equity Compensation Plan Information

        The following table provides information as of December 31, 2004 with respect to our shares of common stock that may be issued under our existing equity compensation plans.

(1)

Consists of the 1996 Stock Option Plan, 1997 Stock Option Plan and the 1999 Employee Stock Purchase Plan.

(2)

Consists of IntelliChem, Inc. 2003 Stock Option Plan assumed in connection with the acquisition of IntelliChem on November 30, 2004 and the 2001 Non-statutory Stock Option Plan. A description of these plans is available in Note 4 to the Notes to Consolidated Financial Statements.

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(3)

Excludes purchase rights accruing under our 1999 Employee Stock Purchase Plan which has a stockholder approved reserve of 1,390,883 shares as of December 31, 2004. Under the 1999 Employee Stock Purchase Plan, each eligible employee may purchase up to a maximum of 10,000 shares per annum of common stock at semi-annual intervals on the last U.S. business day of April and October each year at a purchase price per share equal to 85% of the lower of (i) the closing selling price per share of common stock on the employee's entry date into the two-year offering period in which that semi-annual purchase date occurs or (ii) the closing selling price per share on the semi-annual purchase date. Eligible employees may defer up to 10% of their salary, but not to exceed $25,000, in any calendar year, to purchase shares under this Plan.

(4)

Consists of shares available for future issuance under our 1996 Stock Option Plan, 1997 Stock Option Plan and the 1999 Employee Stock Purchase Plan. As of December 31, 2004, an aggregate of 1,390,883 shares of common stock were available for issuance under the 1999 Employee Stock Purchase Plan and 481,547 shares of common stock were available for issuance under the 1996 Stock Option Plan and 1997 Stock Option Plan. The 1999 Employee Stock Purchase Plan provides for annual increases in the number of shares available for issuance under the Plan on the first day of each fiscal year, equal to the lesser of 1% of the outstanding shares of common stock on the first day of the fiscal year, 350,000 shares, or a lesser amount as determined by our Board of Directors. The 1997 Stock Option Plan provides for an annual increase in the number of shares of common stock reserved for issuance equal to the lesser of 1,500,000 shares, 4% of the outstanding shares on the date of the annual increase, or a lesser amount as determined by our Board of Directors.

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Item 6.    Selected Financial Data

        The following selected historical information has been derived from our audited financial statements. The financial information as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 are derived from audited financial statements included elsewhere in this Annual Report on Form 10-K. The table should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation," and Item 8, "Financial Statements and Supplementary Data."

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operation

        All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the year ended December 31, 2004, are not necessarily indicative of the results that may be expected for future fiscal years. The following discussion and analysis should be read in conjunction with our historical financial statements and the notes to those financial statements that are included in Item 8 of Part II of this Annual Report on Form 10-K.

Overview

        We have been a public company for five years, and have built upon our broad technology platform to establish ourselves as a profitable company with several complementary operating businesses. Since our initial public offering in 1999, our revenue has increased at a compounded average annual rate of 22%, and we have been profitable since the first quarter of 2001.

        Since our inception, 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 life science and industrial applications, and specialized materials for electronics applications. We believe we are now well positioned to capitalize on this investment. We believe that the drivers of our near term growth and profitability are already in place, namely:

•

the credibility and commitment afforded by our alliances with ExxonMobil and Dow,



•

a visible improvement in chemical industry spending levels,



•

the near-term growth potential of our royalty income stream, and



•

the expansion of our software business.

Current Year Developments

        Our major achievements in 2004 and their impact on our business are highlighted below:

•

Alliance — In December 2004, we entered into a five-year strategic alliance agreement with The Dow Chemical Company to enhance research and development activity within Dow through high-throughput experimentation technologies and informatics solutions provided by us. This alliance agreement enables a company-wide commitment by Dow to high-throughput research and R&D informatics solutions. Under the terms of the agreement, we are obligated to perform research in a number of exclusive areas, develop and provide Discovery Tools, and license our Renaissance suite of software as well as certain intellectual property. Dow is obligated to make payments to us over the five-year term of approximately $120 million. We expect that approximately 40% of this revenue will be service revenue, 30% product revenue, and 30% license revenue. In addition, we are also entitled to receive royalties on commercialized discoveries resulting from the collaborative research. This alliance, along with the similar alliance we entered into with ExxonMobil in 2003, demonstrates the ability of our technologies to transform our customers' R&D and has secured over $300 million revenue for us to recognize within the term of the agreements.



•

Acquisition — In November 2004, we completed the acquisition of IntelliChem, an Oregon-based leading provider of intelligent electronic lab notebooks (iELN) for customers in the pharmaceutical, biotechnology, and chemical industries. This acquisition not only expanded our software into non-high-throughput markets but also enhanced our software offering so that our informatics framework can support each step of experimentation.



•

Material Commercialization — In September 2004, Dow announced the commencement of commercial production of VERSIFY Plastomers and Elastomers, a family of products

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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 December 2004, Tokyo-based JSR Corporation announced that it had begun commercial sales of new electronic materials containing polymers made under a license from us. We expect to earn royalties from the sale of these products beginning in the first quarter of 2005. As of December 31, 2004, we had a total of three commercialized materials.

•

CORE(x)™ — We adopted a modular approach to selling Discovery Tools to facilitate more timely customer purchases. This modular approach allows customers to build up full combinatorial high-throughput experimentation capability over time by acquiring stand-alone portions of the systems. This approach showed its potential in 2004 through the delivery of multiple units of CORE(x) systems to pharmaceutical companies.

        In the year ended December 31, 2004, we generated total revenue of $83.2 million, with operating income of $13.7 million, net income of $12.9 million and diluted earnings per share of $0.38. Our earnings were impacted by purchase accounting adjustments associated with the IntelliChem acquisition and variability in our effective income tax rate. Included in the 2004 operating income and net income were approximately $2.5 million of purchase accounting adjustments and other special charges arising from the acquisition of IntelliChem, including an in-process research and development charge of $2.3 million, the amortization of intangible assets and other merger related expenses. For 2004, we had an effective income tax rate of 21%, compared to 18% in 2003. The 2004 effective rate reflected the recognition in the fourth quarter of 2004 of over $4.3 million in benefits from certain of our deferred tax assets, which previously had been reserved. In 2003, $1.3 million in tax benefits was recognized. Based on our current forecast for 2005, we anticipate an effective income tax rate of approximately 40%.

        During 2004, we generated positive cash flow from operations and ended the year with $136.5 million in cash, cash equivalents and available-for-sale securities after paying a net $26.9 million to acquire IntelliChem.

        Our total headcount increased from 213 employees at the end of 2002 to 235 employees at the end of 2003 and to 275 employees at the end of 2004 primarily as the result of IntelliChem acquisition as well as meeting the mix and level of staffing promised to ExxonMobil in particular. We anticipate that our headcount will continue to increase to meet the mix and level of staffing required by the ExxonMobil and Dow alliances and by the expansion of our business.

        As of December 31, 2004, our retained earnings were approximately $10.2 million. However, we may return to the state of accumulated deficits as we continue to expand staffing, equipment, and facilities, and due to the requirement to expense employee stock options after July 1, 2005. See "Risk Factors."

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

Critical Accounting Policies

        Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Note 1 to the Consolidated Financial Statements included under Item 8 in this Annual Report on Form 10-K, describes the significant accounting policies and methods used in the preparation of the 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

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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 determining the useful life of intangible assets. The following critical accounting policies, among others, are impacted significantly by judgments, estimates and assumptions used in the preparation of the Consolidated Financial Statements.

    Source of Revenue and Revenue Recognition Policy

        We recognize revenue in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, SAB No. 104, Revenue Recognition, the American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, Financial Accounting Standards Board Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts, and other authoritative accounting literature. We generate revenue from services provided under research collaborations, the sale of products, license of software, provision of 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 an arrangement that includes software that is more than incidental to the products or services as a whole, we recognizes revenue from the software and software-related elements, as well as any non-software deliverable(s) for which a software deliverable is essential to its functionality, in accordance with SOP 97-2.

        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. Royalties and license fees 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, software consulting, 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 these milestone events. Milestone payments to date have been immaterial.

        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.

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    Product Sales

        We recognize revenue from the sale of Discovery Tools hardware and the license of associated software, 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. 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. If there are extended payment terms, we recognize product revenue as these payments become due. We consider all arrangements with payment terms extending beyond 12 months not to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. In multiple element arrangements, we use the residual method to allocate revenue to delivered elements once it has established fair value for all undelivered elements.

    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. If evidence of the fair value of one or more undelivered elements does not exist, the total revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.

    Intellectual Property License Fees and Royalties

        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 12 months not to be fixed or determinable. In certain licensing arrangements there is provision for a variable fee as well as a non-refundable minimum amount. In such arrangements, the amount of the non-refundable minimum guarantee is recognized upon transfer of the license unless we have continuing obligations for which fair value cannot be established and the amount of the variable fee in excess of the guaranteed minimum is recognized as revenue when it is fixed and determinable.

        We recognize royalty 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 Consolidated Financial Statements for a further discussion of our revenue recognition policies.

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    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, on reference to actual warranty costs incurred on similar systems. The actual results with regard to warranty expenditures could have a material impact on our financial statements. When actual warranty costs are anticipated to be higher than our original estimates, an additional expense is charged to cost of products sold in the period in which such a determination is made. When actual warranty costs are lower than our original estimates, the difference will have a favorable impact to cost of products sold at the time the warranty expires for the systems. For the years ended December 31, 2004, 2003, and 2002, we have recorded a favorable adjustment of approximately $1.0 million, $0.3 million, and $0, respectively.

    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, no amounts are capitalized. We expense all research and development costs when incurred.

    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.

    Intangible Assets

        We amortize intangible assets over their estimated economic lives. Determining the estimated economic life of intangible assets requires judgment on the part of management. For example, if we determined that the estimated economic lives of these assets were one year less than those reported in Note 7 of the Notes to the Consolidated Financial Statements, the amortization expense of intangibles for 2004 would have been increased by $107,000. We will conduct impairment reviews of intangible assets annually or when circumstances indicate the impairment of intangible assets. We will also review the estimated economic life of intangible assets when circumstances indicate the change of economic life of intangible assets.

    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 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

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to employees with exercise prices not less than fair 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. Had we elected to expense stock options based on their fair value in accordance with SFAS 123, we would have reported a loss of approximately $135,000, $9.4 million, and $16.8 million, respectively, for the years ended December 31, 2004, 2003, and 2002.

Business Combination

        On November 30, 2004, we acquired 100% of the outstanding capital stock of IntelliChem, a provider of intelligent electronic lab notebooks (iELN) for customers in the pharmaceutical, biotechnology, and chemical industries. The results of IntelliChem's operations have been included in the consolidated financial statements since that date.

        IntelliChem offers iELN software as well as consulting, education, and support services. In considering the merger, we determined that the merger would provide us with a product for integrating and unifying chemical research and development data, enabling improvements in the efficiency of research in the pharmaceutical and chemical industries. The integration of IntelliChem's iELN solutions and our suite of Renaissance software provides the basis for a unified set of tools for high-throughput and conventional research. The resulting integrated suite of applications will allow companies to replace paper laboratory notebooks with an electronic, searchable system. It will also provide scientists with a robust, broad, and easy-to-use set of time-saving and enabling tools for planning and executing experiments, and provide the entire enterprise with real-time collaborative decision-support and analysis capabilities to help scientists, engineers and project managers make better decisions. In accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, we allocated the purchase price to the tangible assets, deferred compensation, liabilities, and intangible assets acquired, as well as in-process research and development, based on their estimated fair values. The excess purchase price over the fair values was recorded as goodwill. The fair value assigned to intangible assets acquired was based on estimates and assumptions determined by management. The acquired goodwill was assigned entirely to our software segment. Purchased intangibles with finite lives are amortized on a straight-line basis over their respective useful lives.

        The total purchase price for this acquisition was $30.6 million, consisting of approximately $29.3 million in cash, $1.0 million in fair value of assumed stock options to purchase 44,126 shares of our common stock, and $0.3 million in transaction costs, consisting of legal and other professional service fees. The intrinsic value of these options, totaling approximately $0.7 million, has been recorded as deferred stock compensation.

        The purchase price allocation is as follows (in thousands):

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        The allocation of the consideration for the acquisition of IntelliChem to its individual assets and liabilities was based on management's analysis and estimates of the fair values of the acquired assets and liabilities. In addition to the value assigned to in-process research and development ("IPR&D") projects, and IntelliChem's tangible assets, specific intangible assets were identified and valued. The identifiable intangible assets included customer relationships, a trade name, and developed technology.

        The IPR&D project that IntelliChem has been working on was the development of next generation of IntelliChem software. That software has not yet been proven to be technologically feasible but has been developed to a point where it had value associated with potential future revenue. Because technological feasibility was not yet proven and no alternative future uses were believed to exist for the in-process technologies, the assigned value was expensed immediately upon the closing date of the acquisition, in accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.

        The value of IPR&D was determined by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value and then applying a percentage of completion to the calculated value as defined below. A discount rate of 28% was used which is higher than IntelliChem's computed weighted average cost of capital of 20% due to inherent risk surrounding the successful development of the IPR&D and the increase in projected financial results compared with historical results.

        In performing this purchase price allocation, we considered, among other factors, our intention for future use of the acquired assets, analyses of historical financial performance and estimates of future performance of IntelliChem's products. The fair value of intangible assets was primarily based on the income approach. The relief from royalty approach was also utilized when appropriate. The rates utilized to discount the net cash flows to their present values ranged from 24% to 28%. These discount rates were determined after consideration of our rate of return and the weighted average return on assets. Risks we identified and considered in this analysis included achieving anticipated levels of market acceptance and penetration, successful completion of development efforts, market growth rates, and risks related to the impact of potential changes in future target markets. At December 31, 2004, identifiable intangible assets purchased in the IntelliChem acquisition consisted of the following (in thousands, except for useful life) with a weighted average useful life of 5.2 years — no significant residual value is estimated for these assets:

Results of Operations

    Comparison of Years Ended December 31, 2004 and 2003

    Revenue

        Our total revenue in 2004 was $83.2 million, an increase of 32% from $63.0 million in 2003. This increase was attributable to expansion in all aspects of our business, especially the sale of our Discovery Tools systems. Our service revenue increased 9% from $38.7 million in 2003 to $42.3 million in 2004 (including $1.2 million and $1.7 million from a related party in 2004 and 2003, respectively). Our product sales increased 87% from $14.5 million in 2003 to $27.1 million in 2004. Our revenue from license fees and royalties increased 41% from $9.8 million in 2003 to $13.9 million in 2004 (including $150,000 from a related party in 2004) due to the expansion of our customer base in licensing of materials, software and technology, in particular ExxonMobil.

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        In the year ended December 31, 2004, we sold 13 Discovery Tools systems compared with 6 in 2003. The number of systems sold included both complex workflows as well as our CORE(x) modules.

        ExxonMobil, Merck, and an undisclosed partner accounted for 54%, 4%, and 3%, respectively, of revenue for the year ended December 31, 2004. ExxonMobil, Merck, and an undisclosed partner accounted for 35%, 13%, and 11%, respectively, of total revenue for the same period in 2003.

        We segregate revenue by the following segments (in thousands):

        The reconciliation of segment revenue above to the revenue disclosed in the Consolidated Income Statements is provided in Note 6 "Segment Disclosure" of Notes to the Consolidated Financial Statements.

    Industry Collaborations Revenue

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

        Industry Collaborations revenue increased 13% from $36.1 million in 2003 to $41.0 million in 2004. The increase in industry collaboration revenue in 2004 was primarily attributable to the funding received under the alliance agreement we entered into with ExxonMobil effective April 2003. The increase in Industry Collaboration revenue from ExxonMobil was partially offset by a decrease in the level of funding received from an undisclosed partner.

        We expect to receive over $200 million in revenue from ExxonMobil and over $120 million in revenue from Dow during the 5-year term of each of the alliances, through our research collaborations, Discovery Tools, and license of software and intellectual property. As of December 31, 2004, we have recognized approximately $59.6 million from ExxonMobil alliance, including approximately $37.3 million in Industry Collaborations revenue. We believe these two alliances will greatly contribute to our expected growth in Industry Collaborations revenue in 2005 through 2009.

    Industry Collaborations Revenue — Related Party

        Under an 18-month Collaborative Research and License Agreement entered in May 2003, Ilypsa, Inc., a related party (See Note 8 "Related Party Transactions" of Notes to the Consolidated Financial Statements.), paid us research funding in consideration for direct costs incurred by us specifically attributable to, or specifically used in furtherance of, the research program. Research funding payments were due to us 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 years ended December 31, 2004 and 2003 amounted to $1.2 million and $1.7 million, respectively, and has been classified as related party revenue.

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    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 increased 52% from $18.9 million in 2003 to $28.6 million in 2004. For the year ended December 31, 2004, Discovery Tools revenue included $25.7 million of product sales, $2.8 million of service revenue, and $31,000 of license revenue. For the year ended December 31, 2003, Discovery Tools revenue included $14.5 million of product sales and $4.4 million of service revenue. The increase in Discovery Tools revenue in 2004 was primarily due to increased shipments of Discovery Tools systems in 2004. During year 2004, we shipped 13 Discovery Tools systems, including our CORE(x) modules, to chemical, pharmaceutical, academic institution, and several other customers. We adopted our modular strategy to facilitate more timely customer purchases whereas purchase decision on a complete Discovery Tools system usually takes a long time to make. This modular approach allows our customers to build up full combinatorial high-throughput experimentation capability over time by acquiring stand-alone portions of the Discovery Tools systems. In 2004 we successfully sold several less expensive modules of our Discovery Tools systems to pharmaceutical companies.

        Under the ExxonMobil and Dow alliances, we are contracted to deliver multiple Discovery Tools systems in the next few years. We also negotiate with other chemical and pharmaceutical companies for the sale of Discovery Tools systems. We believe our expanding customer base will contribute to our expected growth of Discovery Tools revenue.

    Intellectual Property Licensing Revenue

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

        Intellectual Property Licensing revenue increased 8% from $3.9 million in 2003 to $4.2 million in 2004. The increase in licensing revenue in 2004 was primarily due to payments received from ExxonMobil and UOP. We believe that the demonstrated acceptance of our high-throughput experimentation technology by our customers will lead to the expected growth in our license fee revenue in future years.

        In September 2004, Dow announced the commencement of commercial production of the 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 December 2004, JSR Corporation announced the commencement of commercial sales of new electronic materials containing polymers made under a license from us. We expect to earn royalties from the sale of these products beginning in the first quarter of 2005. We believe that these two commercialized materials, along with the one commercialized by Agfa in 2003, will contribute to our growth in Intellectual Property Licensing revenue in the future.

    Software Revenue

        The Software group generates revenue primarily from the licensing of Renaissance and electronic laboratory notebook (iELN) software and provision of associated support, maintenance and consulting services.

        Software revenue increased 455% from $1.2 million in 2003 to $6.8 million in 2004. The increase in Software revenue in 2004 was primarily due to the increased revenue from ExxonMobil and Pfizer for software licenses, and associated maintenance and support. During 2004, we also initiated a couple of pilot programs for stand-alone software licensing with chemical and pharmaceutical companies.

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    Sensors Revenue

        The Sensors group offers development services and licenses for specific applications to our sensor technology. Our sensors revenue in both 2004 and 2003 consisted primarily of payments received from Hella KG.

    Cost of Products Sold

        Cost of products sold was $7.9 million, or 29% of product sales revenue for the year ended December 31, 2004, compared to $2.9 million, or 20% of product sales revenue for the year ended December 31, 2003. The increase in the cost of products sold was due to the increase of product sold. The increase in cost of products sold as a percentage of product revenue in 2004 was due to a change in the product mix shipped in the respective years, the development costs related to prototypes delivered being expensed as discussed below, and a favorable adjustment of warranty reserve of approximately $1.0 million.

        The cost of products sold will be driven by the variability of product mix and sales volume in each period. The cost of products sold as a percentage of product sales 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 that include a significant development component prior to their commercial build, or systems delivered to 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. When actual warranty costs are anticipated to be higher than our original estimates, an additional expense is charged to cost of products sold in the period in which such a determination is made.

    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.

        The table below indicates the major collaborative partners, defined as those contributing greater than 10% of collaborative research revenue in 2004, for whom we conducted research and development, together with the date upon which the current contract ends and the primary focus of the collaborations. Contracts may only be extended by mutual agreement between us and the collaborative partner.

        We do not track fully burdened research and development costs or capital expenditures by project. However, we estimate based on Full Time Equivalent ("FTE") effort. Approximately 81% of research and development effort in 2004 was undertaken for collaborative projects funded by our partners, and approximately 19% of research effort was on internally funded research including development costs related to our Discovery Tools business. This compares with approximately 65% of research and development effort undertaken for collaborative projects funded by our partners, and approximately 35% of research effort on internally funded research including development costs related to our Discovery Tools business during 2003. Because of the technical headcount committed to the ExxonMobil alliance, we significantly reduced the FTE effort for internally funded research projects. Due to the nature of our research and our dependence on our collaborative partners to commercialize the results of the research,

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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.

        Research and development expenses in 2004 were $41.1 million, including $1.2 million of direct costs of research services provided to a related party, compared with $40.1 million in 2003, including $1.7 million to a related party, an increase of $1.1 million or 3%. The increase in 2004 was due primarily to increases in salary related expenses due to the hiring of additional scientific and technical staff to work on research and development projects for ExxonMobil and increased headcount to develop our software platform, partially offset by the decrease in direct costs of research services provided to a related party.

        Research and development expenses represented 49% of total revenue in 2004 and 64% of total revenue in 2003. Research and development expenses as a percentage of total revenue decreased because the increase in research and development expenses lagged the significant increase in total revenue. Our core businesses 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, and we expect that research and development expenses will continue to increase in absolute dollars.

    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 payments of commissions to our sales agents and professional expenses, such as legal and accounting. Sales, general and administrative expenses in 2004 were $18.2 million, compared with $14.9 million in 2003, an increase of $3.3 million or 22%. The increase in 2004 was primarily due to an increase of personnel costs of approximately $2.9 million, mainly as a result of adding a number of business development staff to manage and support our growth, and an increase in auditing and tax related service fees of approximately $0.6 million, largely as a result of the requirements of the Sarbanes-Oxley Act, offset partially by the decrease in legal fees for intellectual property litigation.

        Sales, general and administrative expenses represented 22% of total revenue in 2004 and 24% of total revenue in 2003. We expect that our sales, general and administrative expenses will increase in absolute dollar amounts as we:

•

have expanded our business development and sales staff with the acquisition of IntelliChem and may continue to expand our personnel as a result of future acquisitions;



•

continue to 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.

    Acquired In-Process Research and Development

        In November 2004, we acquired IntelliChem in a transaction accounted for as a purchase. The purchase price was allocated to the assets acquired, including intangible assets, based on their estimated fair values. The intangible assets include approximately $2.3 million for acquired in-process technology for projects that did not have future alternative uses. The value of the purchased in-process technology was determined using the income approach. At the date of the IntelliChem acquisition, the development of these projects had not yet reached technological feasibility, and the technology in process had no alternative future uses. Accordingly, these costs were expensed in 2004. See more discussion on acquired in-process research and development under "Business Combination."

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    Interest and Other Income (Expense), Net

        Interest and other income (expense), net, for the year ended December 31, 2004 consisted of interest income of approximately $2.4 million and a $155,000 gain from the sale of fixed assets to a related party. Interest and other income (expense), net, for the year ended December 31, 2003 consisted primarily of interest income of approximately $2.0 million. Interest income represents interest income earned on our cash, cash equivalents and available-for-sale securities. Interest income increased in 2004 due to the impact of higher average interest rates and a higher average investment balance in 2004. We anticipate that our interest income in 2005 will be slightly greater than in 2004 due to the impact of recent interest rate increases 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 $3.3 million in 2004 and $1.3 million in 2003. Our effective income tax rate was 20.5% for fiscal year 2004 and 18.3% for fiscal year 2003. The effective income tax rate was lower than our statutory rate in both 2004 and 2003 due to the recognition of approximately $4.3 million and $1.3 million, respectively, of income tax benefits from certain of our deferred tax assets in 2004 and 2003, which had previously been reserved. By weighing all available evidence, we believe that it was more likely than not that we would be able to realize the benefit of all remaining significant deferred tax assets at December 31, 2004.

        As of December 31, 2004, we had net deferred tax assets of approximately $4.9 million. Our net deferred tax assets primarily relate to federal and state research and development credits and the temporary difference between book and tax depreciation expenses, partially offset by deferred tax liabilities recognized for intangible assets in the IntelliChem acquisition. As of December 31, 2004, we had federal and Oregon net operating loss carryforwards of approximately $2.3 million and $4.8 million, respectively. The net operating losses arose from the acquisition of IntelliChem and may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. The net operating loss carryforwards will start to expire in 2020, if not utilized.

        As of December 31, 2004, we had federal and state research and development tax credits of approximately $1.3 million and $1.8 million, respectively. The federal research and development tax credit will begin to expire in 2011, while the state research and development credits have no expiration date.

    Comparison of Years Ended December 31, 2003 and 2002

    Revenue

        Our total revenue in 2003 was $63.0 million, a decrease of 3% from $64.8 million in 2002. This decrease was primarily due to the decrease in our product revenue caused by lower sales of Discovery Tools systems. Our service revenue increased 9% from $35.4 million in 2002 to $38.7 million in 2003 (including $1.7 million from a related party in 2003). Our revenue from license fees and royalties increased 177% from $3.5 million in 2002 to $9.8 million in 2003 due to the expansion of our customer base in licensing of materials, software, and technology, in particular ExxonMobil.

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        Dow, Eli Lilly, ExxonMobil, Merck, and an undisclosed partner accounted for 7%, 0%, 35%, 13%, and 11%, respectively, of total revenue for the year ended December 31, 2003. Dow, Eli Lilly, ExxonMobil, Merck, and an undisclosed partner accounted for 13%, 16%, 19%, 9%, and 10%, respectively, of revenue for the same period in 2002.

        We segregate revenue by the following segments (in thousands):

        The reconciliation of segment revenue above to the revenue disclosed in the Consolidated Income Statements is provided in Note 6 "Segment Disclosure" of Notes to the Consolidated Financial Statements.

    Industry Collaborations Revenue

        Industry Collaborations revenue increased from $28.9 million in 2002 to $36.1 million in 2003. The increase in Industry Collaborations revenue in 2003 was primarily attributable to the funding received under the new alliance agreement we entered into with ExxonMobil effective April 2003. The increase in Industry Collaborations revenue from ExxonMobil was partially offset by a decrease in the level of funding received from Celanese.

    Industry Collaborations Revenue — Related Party

        Revenue resulting from work performed under the Ilypsa Research Agreement during the year ended December 31, 2003 amounted to $1.7 million, and has been classified as related party revenue.

    Discovery Tools Revenue

        Discovery Tools revenue decreased from $31.9 million in 2002 to $18.9 million in 2003. The decrease in Discovery Tools revenue in 2003 was primarily due to a lower sales volume of our larger Discovery Tools Systems. We delivered Polymorph Discovery Tools systems which generated approximately $9.9 million of revenue in 2002, and none of these same systems were delivered in 2003.

        During year 2003, we shipped Discovery Tools systems to Merck, North Dakota State University, Battelle Memorial Institute and several other customers. Discovery Tools revenue included $14.5 million of product sales and $4.4 million of service revenue for the year ended December 31, 2003 and $25.6 million of product sales and $6.2 million of service revenue for the year ended December 31, 2002. Service revenue in 2002 was higher than 2003 as we received approximately $3.4 million of funding towards the development of two new Discovery Tool platforms in 2002.

    Intellectual Property Licensing Revenue

        Intellectual Property Licensing revenue increased 17% from $3.3 million in 2002 to $3.9 million in 2003. The increase in licensing revenue in 2003 was primarily due to payments received from ExxonMobil.

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        In the final quarter of 2003, we received our first royalty payments from Agfa for the sale of our commercialized material.

    Sensors Revenue

        We started receiving license fees from the licensing of our sensor technology to Hella KG in 2003.

    Software Revenue

        Software revenue increased from $0.8 million in 2002 to $1.2 million in 2003. The increase was primarily due to the increase in license fees received from ExxonMobil.

    Cost of Products Sold

        Cost of products sold was $2.9 million, or 20% of product sales revenue for the year ended December 31, 2003, compared to $6.2 million, or 24% of product sales revenue for the year ended December 31, 2002. The decrease in the cost of products sold was due to the change in the product mix shipped in the respective years.

    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.

        Approximately 65% of research and development effort in 2003 was undertaken for collaborative projects funded by our partners, and approximately 35% of research effort was on internally funded research including development costs related to our Discovery Tools business. This compares with approximately 63% of research and development effort undertaken for collaborative projects funded by our partners, and approximately 37% of research effort on internally funded research including development costs related to our Discovery Tools business during 2002.

        Research and development expenses in 2003 were $40.1 million, including $1.7 million of direct costs of research services provided to a related party, compared with $39.3 million in 2002, an increase of $0.8 million or 2%. The increase in 2003 was due primarily to increases in salary related expenses due to the hiring of additional scientific and technical staff to work on research and development projects for ExxonMobil and our related party, Ilypsa.

        Research and development expenses represented 64% of total revenues in 2003 and 61% of total revenues in 2002.

    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 payments of commissions to our sales agents and professional expenses, such as legal and accounting. Sales, general and administrative expenses in 2003 were $14.9 million, compared with $14.6 million in 2002, an increase of $0.3 million or 2%. The increase was primarily due to the addition of a number of business development staff and their associated costs to manage and support our growth.

        Sales, general and administrative expenses represented 24% of total revenues in 2003 and 23% of total revenues in 2002.

    Net Interest Income

        Net interest income represents interest income earned on our cash, cash equivalent and available-for-sale securities. Interest income was $2.0 million in 2003, compared with $3.3 million in 2002. This decrease was due to lower interest rates in 2003. Interest expense was nil in 2003, compared with $9,000 in 2002.

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    Provision for Income Taxes

        We recorded an income tax expense of $1.3 million in 2003 and $2.7 million in 2002. Our effective income tax rate was 18.3% for fiscal year 2003 and 33.5% for fiscal year 2002. The decrease in our effective income tax rate in 2003 was due to the fact that we recognized approximately $1.3 million of income tax benefits from certain of our deferred tax assets in 2003, which had previously been reserved.

        As of December 31, 2003, we had net deferred tax assets of approximately $1.4 million. Our net deferred tax assets primarily related to revenue that had been recognized for income tax purposes but deferred for financial reporting purposes together with reserves and accruals that had been recognized for financial reporting purposes but not for income tax purposes, partially offset by accelerated income tax deductions for insurance and property tax. At December 31, 2003, we had federal net operating loss carryforwards of approximately $3.2 million, the majority of which were attributable to stock option deductions and whose benefit, if realized, would be recognized directly to equity.

Recent Accounting Pronouncements

    Share-Based Payment

        On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 123 (revised 2004), Share-Based Payment, ("SFAS 123(R)"), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, ("APB 25"), and amends FASB SFAS 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

        We must adopt SFAS 123(R) no later than July 1, 2005.

        SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

1.

A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.



2.

A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

        We expect to adopt Statement 123(R) using the modified-prospective method.

        As permitted by SFAS 123, we currently account for share-based payments to employees using APB 25's intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)'s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income (loss) and earnings per share in Note 1 of the Notes to the Consolidated Financial Statements ("Stock Based Compensation"). SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We are currently evaluating the impact on our financial statements upon the adoption of SFAS 123(R).

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    The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments

        In March 2004, the FASB ratified the recognition and measurement guidance and certain disclosure requirements for impaired securities as described in Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF Issue No. 03-1 provides new guidance for determining and recording impairment for both debt and equity securities. It also requires additional disclosure for declines in investments that are deemed to be temporary under the standard. In September 2004, the FASB approved the issuance of a FASB Staff Position to delay certain measurement and recognition guidance contained in EITF Issue No. 03-1. We will evaluate the effect, if any, of EITF Issue No. 03-1, when final guidance is released. Disclosures required under EITF Issue No. 03-1 are included in Note 1 of the Notes to the Consolidated Financial Statements.

    Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock

        In July 2004, the FASB ratified Emerging Issues Task Force (EITF) consensus on Issue No. 02-14, Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock, which provides guidance regarding application of the equity method of accounting to investments other than common stock. EITF Issue No. 02-14 applies to reporting periods beginning after September 15, 2004. The adoption of EITF Issue No. 02-14 did not have a material impact on our financial statements.

    Inventory Costs

        In November 2004, the FASB issued SFAS No. 151, Inventory Costs — an amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 amends ARB 43, Chapter 4 to clarify that "abnormal" amounts of idle facility expense, freight, handling costs and spoilage should be recognized as current period charges. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

    Exchanges of Nonmonetary Assets

        In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB No. 29 ("SFAS 153"). SFAS 153 amends ARB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not anticipate that the adoption of this standard will have a material impact on our financial statements.

    Accounting for Preexisting Relationship between the Parties to a Business Combination

        In October 2004, the FASB ratified Emerging Issues Task Force (EITF) consensus on Issue No. 04-1, Accounting for Pre-Existing Relationship between the Parties to a Business Combination, which provides guidance regarding separate accounting when two parties that have a pre-existing contractual relationship enter into a business combination. EITF Issue No. 04-01 applies to reporting periods beginning after October 13, 2004. The adoption of EITF Issue No. 04-1 is not expected to have a material impact on our financial statements.

    Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004

        On December 21, 2004, the FASB issued FASB Staff Position 109-1 ("FAS FSP 109-1"), Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, which provides guidance on the application of FASB Statement 109, Accounting for Income Taxes, to the provision within the American Job Creation Act

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of 2004 that provides a tax deduction on qualified production activities. FAS FSP 109-1 applies to reporting periods beginning after December 21, 2004. The adoption of FAS FSP 109-1 is not expected to have a material impact on our financial statements.

    The Effect of Contingently Convertible Instruments on Diluted Earnings per Share

        In October 2004, the FASB ratified Emerging Issues Task Force (EITF) consensus on Issue No. 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share, which provides guidance regarding when contingently convertible instruments should be included in diluted earnings per share. EITF Issue No. 04-8 applies to reporting periods ending after December 15, 2004. The adoption of EITF Issue No. 04-8 did not have a material impact on our financial statements.

    Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds

        In October 2004, the FASB ratified Emerging Issues Task Force (EITF) consensus on Issue No. 04-10, Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds, which provides guidance regarding how an enterprise should evaluate the aggregation criteria in paragraph 17 of FASB Statement 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with paragraph 19 of FASB Statement 131. The effective date of EITF Issue No. 04-10 has not been determined but early application is permitted. The adoption of EITF Issue No. 04-10 is not expected to have a material impact on our financial statements.

    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 operating activities for the year ended December 31, 2004 and finished the year with cash, cash equivalents and available-for-sale securities of approximately $136.5 million, after paying a net $26.9 million in the acquisition of IntelliChem. This compared to cash, cash equivalent and available-for-sale securities of approximately $138.7 million at December 31, 2003.

        As of December 31, 2004, we had no long-term liabilities.

        Our operating activities provided $22.9 million, $27.2 million, and $9.7 million of cash in 2004, 2003, and 2002, respectively. The sources of cash for the three years were primarily the receipt of research and development funding from collaborative partners and revenue from product sales and licensing, partially offset by operating expenses. We expect that we will continue to generate positive cash flow from our operating activities in the near future.

        Net cash used in investing activities was $32.7 million, $43.1 million, and $1.6 million, respectively, in 2004, 2003, and 2002. Included in the 2004 cash used in investing activities was the $26.9 million net cash paid associated with the acquisition of IntelliChem. The other fluctuations from period to period were due primarily to the timing of purchases, sales, and maturity of our available-for-sale securities. Cash used in purchases of property, plant and equipment was $4.5 million, $9.7 million, and $4.5 million, respectively, in 2004, 2003, and 2002. Included in the 2003 cash used in purchase of property, plant and equipment was $3.9 million paid for an office building. 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 $12.1 million, $7.4 million, and $2.0 million in 2004, 2003, and 2002, respectively. These amounts are primarily the proceeds from the exercise of stock options and sale of stock under the Employee Share Purchase Plan in each of the three years. The increase from 2002 to 2003 and to 2004 is due primarily to the fact that employees more actively exercised stock options as our stock price increased in 2003 and 2004.

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        Current liabilities decreased by approximately $2.1 million at December 31, 2004 as compared to December 31, 2003. A decrease of $4.2 million in deferred revenue from 2003 to 2004 was largely offset by an increase in accounts payable and other accrued liabilities and an increase in accrued compensation and employee benefits. The decrease of deferred revenue was attributable largely to the delivery of Discovery Tools systems in 2004, for which advanced deposits were made in 2003.

    Backlog

        As of December 31, 2004, our customers have contractually committed to funding of approximately $83 million and $226 million, respectively, for year 2005 and beyond, for the purchase of Discovery Tools systems, licenses to our intellectual property and software, royalty for the sale of products containing Symyx-discovered materials and for research collaborations.

    Commitments

        As of December 31, 2004 and 2003, our principal commitments were $11.3 million and $11.8 million, respectively. 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 as of December 31, 2004 are as follows (in thousands):

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

        A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of such businesses, products or technologies. We have entered into an agreement to acquire Synthematix, Inc. for approximately $13 million of cash at close plus an additional potential payment of up to $4 million over a one-year period based on achievement of incremental revenue targets. We expect to close this transaction in early April 2005.

    Contingencies

        We are currently not a party to any legal proceedings that we believe to be material.

        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, management does not 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.

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        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, 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 December 31, 2004. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets. The only transactions between us and related parties during 2004 were:

•

Research and development services, software licenses, software support, and maintenance services provided and the sale of certain research related equipment to Ilypsa, Inc.;



•

Loans originally provided to certain employees and executive officers for the exercise of stock options prior to our initial public offering in 1999, which were fully repaid as of December 31, 2004; and



•

Mario M. Rosati, one of our directors, is also a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation, which provides legal services with respect to real estate issues, for which they receive compensation at normal commercial rates.

Dividend Policy

        We have never declared or paid any dividends on our capital stock. We currently expect to retain future earnings, if any, to support the development of our business and do not anticipate paying any cash dividends in the foreseeable future.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        Our exposure to market risk is principally confined to our cash, cash equivalents and investments which have maturities of less than two years. We maintain a non-trading investment portfolio of investment grade, liquid debt securities that limit the amount of credit exposure to any one issue, issuer or type of instrument. At December 31, 2004 our investment portfolio comprised approximately $19.4 million in money market funds and $117.1 million in U.S. corporate debt. The securities in our investment portfolio are not leveraged, are classified as available-for-sale and are therefore subject to interest rate risk. We currently do not hedge interest rate exposure. If market interest rates were to increase by 100 basis points, or 1%, from December 31, 2004 levels, the fair value of our portfolio would decline by approximately $583,000. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates and assumes ending fair values include principal plus accrued interest.

Interest Rate Sensitivity:
Principal Amount by Expected Maturity (in thousands)
Average Interest Rate

45

Item 8.    Financial Statements and Supplementary Data

46

SYMYX TECHNOLOGIES, INC.

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

        Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's Board, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

        The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2004. In making this assessment, the Company's management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

        As allowed by guidance provided by the Securities and Exchange Commission relating to current year acquisitions, the Company's management excluded the internal controls of Symyx IntelliChem, Inc., a wholly-owned subsidiary, from its assessment of and conclusion on the effectiveness of internal control over financial reporting as of December 31, 2004. The 2004 consolidated financial statements of Symyx Technologies, Inc. included $27.5 million and $26.9 million, of total assets and net assets, respectively, (consisting principally of $23.0 million of intangibles and goodwill) as of December 31, 2004 and $24,000 of revenue and $3.1 million of net loss (including a $2.3 million charge for acquired in-process research and development) for the year then ended in relation to Symyx IntelliChem, Inc. The Company acquired Symyx IntelliChem, Inc. in a business combination on November 30, 2004. Based on its assessment, the Company's management believes that, as of December 31, 2004, the Company's internal control over financial reporting was effective based on the criteria set forth by COSO.

        The Company's independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on management's assessment of the Company's internal control over financial reporting. This report appears on page 48 of this annual report on Form 10-K.

47

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders
of Symyx Technologies, Inc.

        We have audited management's assessment, included in the accompanying Symyx Technologies, Inc. Management Report on Internal Control Over Financial Reporting, that Symyx Technologies, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Symyx Technologies, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        As indicated in the accompanying Symyx Technologies, Inc. Management Report on Internal Control Over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Symyx IntelliChem, Inc., a wholly-owned subsidiary, acquired on November 30, 2004, which is included in the 2004 consolidated financial statements of Symyx Technologies, Inc. and constituted $27.5 million and $26.9 million of total and net assets, respectively, as of December 31, 2004 and $24,000 of revenues and $3.1 million of net loss for the year then ended. Our audit of internal control over financial reporting of Symyx Technologies, Inc. also did not include an evaluation of the internal control over financial reporting of Symyx IntelliChem, Inc.

        In our opinion, management's assessment that Symyx Technologies, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Symyx Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

48

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Symyx Technologies, Inc. as of December 31, 2004 and 2003, and the related consolidated income statements and consolidated statements of stockholders' equity and cash flows for each of the three years in the period ended December 31, 2004 of Symyx Technologies, Inc. and our report dated March 3, 2005 expressed an unqualified opinion thereon.

49

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON CONSOLIDATED FINANCIAL STATEMENTS

The Board of Directors and Stockholders
of Symyx Technologies, Inc.

        We have audited the accompanying consolidated balance sheets of Symyx Technologies, Inc. as of December 31, 2004 and 2003, and the related consolidated income statements and consolidated statements of stockholders' equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Symyx Technologies, Inc. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Symyx Technologies, Inc.'s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2005 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Palo Alto, California
March 3, 2005

50

SYMYX TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)

See accompanying notes.

51

SYMYX TECHNOLOGIES, INC.

CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)

See accompanying notes.

52

SYMYX TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)