**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON,D.C. 20549

**FORM 10-K**

| **x**      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | **For the fiscal year ended December 31, 2006**                                                    |
| ** ** | **or**                                                                                                  |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                 to                **

**Commissionfile number 000-27765**

**SYMYX TECHNOLOGIES, INC.**(Exact name of registrant as specified in its charter)

| **Delaware**                                                  |   | **77-0397908**                                              |
|---------------------------------------------------------------|--------|-------------------------------------------------------------|
| (State or other  jurisdiction of                              |   | (IRS Employer                                               |
| incorporation or  organization)                               |   | Identification  Number)                                     |
| **3100 Central Expressway**                                   |   |                                                        |
| **Santa  Clara, California 95051**                            |   | **(408)  764-2000**                                         |
| (Address of  principal executive offices  including zip code) |   | (Registrant’s  telephone number,  including area code) |

 

**SECURITIESREGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:**

| **Class:**                          |   | **Name of  each exchange on which registered:** |
|-------------------------------------|--------|-------------------------------------------------|
| **Common  Stock, $0.001 Par Value** |   | **NASDAQ  Global Select Market**                |

 

**SECURITIES REGISTEREDPURSUANT TO SECTION 12(g) OF THE ACT:None**

Indicate by check mark if the registrant isa well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  oYes   xNo

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  oYes   xNo

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  xYes   oNo

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one).

| o Large accelerated filer |   | x Accelerated filer |   | o Non-accelerated filer |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  oYes   xNo

The approximate aggregatemarket value of the registrant’s common stock held by non-affiliates as of June 30,2006 (the last business day of the registrant’s most recently completed secondfiscal quarter) was $691,872,000, based on the closing price for the commonstock on the NASDAQ Global Select Market on such date. As of February 20,2007, 32,991,403 shares of the registrant’s common stock were outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

**Certain sections of theProxy Statement to be filed in connection with the 2007 Annual Meeting ofStockholders are incorporated by reference into Part III of this AnnualReport on Form 10-K where indicated.**

 

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**TABLE OF CONTENTS**

| ITEM   | ** ** | ** ** | ** ** | **Page**                                                                                                            | ** ** |
|--------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
|   |       | ** ** |       | **Part I**                                                                                                     |       |   |   |   |   |
|   | 1.         | ** ** |       | Business                                                                                                            |       |   | 1 |   |   |
|   | 1A.        | ** ** |       | Risk Factors                                                                                                        |       |   | 15 |   |   |
|   | 1B.        | ** ** |       | Unresolved Staff  Comments                                                                                          |       |   | 28 |   |   |
|   | 2.         | ** ** |       | Properties                                                                                                          |       |   | 28 |   |   |
|   | 3.         | ** ** |       | Legal Proceedings                                                                                                   |       |   | 28 |   |   |
|   | 4.         | ** ** |       | Submission of  Matters to a Vote of Security Holders                                                                |       |   | 28 |   |   |
|   |       | ** ** |       | **Part II**                                                                                                    |       |   |   |   |   |
|   | 5.         | ** ** |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       |   | 29 |   |   |
|   | 6.         | ** ** |       | Selected Financial  Data                                                                                            |       |   | 32 |   |   |
|   | 7.         | ** ** |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                          |       |   | 33 |   |   |
|   | 7A.        | ** ** |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       |   | 53 |   |   |
|   | 8.         | ** ** |       | Financial  Statements and Supplementary Data                                                                        |       |   | 54 |   |   |
|   | 9.         | ** ** |       | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure                               |       |   | 97 |   |   |
|   | 9A.        | ** ** |       | Controls and  Procedures                                                                                            |       |   | 97 |   |   |
|   | 9B.        | ** ** |       | Other Information                                                                                                   |       |   | 99 |   |   |
|   |       | ** ** |       | **Part III**                                                                                                   |       |   |   |   |   |
|   | 10.        | ** ** |       | Directors,  Executive Officers and Corporate Governance                                                             |       |   | 100 |   |   |
|   | 11.        | ** ** |       | Executive  Compensation                                                                                             |       |   | 100 |   |   |
|   | 12.        | ** ** |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       |   | 100 |   |   |
|   | 13.        | ** ** |       | Certain  Relationships and Related Transactions and Director Independence                                           |       |   | 100 |   |   |
|   | 14.        | ** ** |       | Principal  Accounting Fees and Services                                                                             |       |   | 100 |   |   |
|   |       | ** ** |       | **Part IV**                                                                                                    |       |   |   |   |   |
|   | 15.        | ** ** |       | Exhibits and  Financial Statement Schedules                                                                         |       |   | 101 |   |   |
|   |       | ** ** |       | Signatures                                                                                                          |       |   | 104 |   |   |

 

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**PART I**

***ITEM 1.****                     BUSINESS*

*This discussion andother parts of this Annual Report on Form 10-K (“Report”), includingthe “Management’s Discussion and Analysis of Financial Condition and Results ofOperation,” contain forward-looking statements that involve risks anduncertainties, within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These statements typically may be identified by the use offorward-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 terminologyregarding beliefs, plans, expectations or intentions regarding the future. Thecautionary statements made in this Annual Report on Form 10-K shouldbe read as being applicable to all related forward-looking statements wheneverthey appear in this Annual Report on Form 10-K. Forward-lookingstatements include, without limitation, statements regarding:  our belief that our collaborations withindustry leaders will lead to discoveries that are royalty-bearing uponcommercialization by our customers; our belief that our technology can helptransform materials research and development by discovering new break-throughmaterials faster and more cost effectively than by using traditional methods;our ability to help transform how our customers perform research, by providingSymyx Tools, Symyx Software, and patented methods that they can apply toimprove their R&D execution and increase their research productivity bydramatically increasing their probability of success and reduce the time andcosts per experiment to discover new materials; our expectation that our technologywill effectively address new challenges and provide solutions in the chemicalsand energy and life science industries through our research services,technology and intellectual property; our belief that we will have a growingportfolio of intellectual property and that this portfolio will create futuresource of revenue for us; our belief that we will continue to expand ourcapabilities through the development of new instruments and software andenhanced versions of existing systems; that our technology innovations providea unique solution to the need for better data integration and will help addressthe rising costs and manufacturing challenges presented by low-cost competingproducers overseas; our commitment to retaining our position as a leadingcompany that develops and supplies high-throughput technologies; our intent tocontinue to enter into new collaborative arrangements, including periodicallyco-sponsoring research programs with partners; our expectations that newcollaborations will come from existing partners extending programs andundertaking new research initiatives as well as from new partners; our beliefthat our acquisition of Autodose SA in July 2006 will help us advance ourproduct portfolio and grow new and existing customer relationships in Europe,specifically by allowing us to offer customers systems that combine Autodose’spowder-handling technology with our existing liquid-handling roboticstechnology; the possibility of an additional cost of acquisition based upon theachievement of certain revenue targets in 2007, 2008 and 2009 by Autodose; thatAutodose development projects existing at the time of the our acquisition havepotential to produce future revenue; our belief that we have created a growingpipeline of materials that have emerged from our discovery platform; our beliefthat our proprietary database will emerge as a powerful tool in acceleratingmaterials discovery by enabling our scientists to benefit from the cumulativeeffect of our research; our belief that service is an important component ofthe value we offer our customers; our belief that our supply arrangements areadequate and that there are no material constraints on the sources andavailability of materials; that pharmaceutical and biotechnology companies mayuse Symyx Software to support their pre-clinical research activities as well assome pharmaceutical discovery research and chemicals research; our belief thatcurrent emerging development candidates have met their technical targets andhave potential for commercialization and that a material that has beenidentified as a development candidate may take as little as two years to reachcommercialization; our belief that our success depends upon our proprietarytechnology; that we will realize a revenue backlog in fiscal year 2007 andbeyond; our belief that our employee relations are good and that future successdepends in part upon our continued ability to hire and retain qualifiedpersonnel; our belief that we are in substantial compliance with environmentallaws and regulations; our expectations that ExxonMobil, Dow, and a select listof other companies will in aggregate continue to account for a substantialportion of our revenue for the foreseeable future and the loss of one or moreof these customers or collaborative partners would harm our business andoperating results; our belief that our success is partially dependent on ourability to successfully*

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*integrate the software and technologies acquired inconnection with the acquisitions of IntelliChem, Inc. and Synthematix, Inc.with existing software and technologies and with each other; our belief that wemay engage in additional acquisitions and will expand our business focus inorder to exploit technology or market opportunities; our expectation that ourquarterly results of operations will fluctuate; our belief that ourcollaborative agreements are structured in a manner to enable us to minimizeconflicts with our collaborators; our intention to continue to expand ourinternational presence in order to increase our export sales; our expectationthat the ultimate cost to resolve our legal proceedings, claims and litigationarising in the ordinary course of business will not have a material adverseeffect on our consolidated financial position, results of operations, or cashflows; our belief that we are well positioned to capitalize on our investmentin the technology, instrumentation and informatics necessary to pursuehigh-throughput discovery of materials; our expectation that we will continueto generate revenue from the European market through Symyx Tools sales,research collaboration service, license of our software and license of ourintellectual property; our expectation that future growth will place a strainon our research, administrative and operational infrastructure; our expectationthat our cash flows and revenue will be comprised largely of payments made andrevenue earned under research and development collaborations, product sales,license fees and royalties; our expectation that a significant portion of ourtotal revenue will continue to be generated from a few key customers; ourbelief that our expanding customer base will contribute to our expected growthof Symyx Tools revenue; our expectation that our Symyx Software revenue willcontinue to grow as we recognize revenue under existing software licenses andservices agreements, as well as new agreements; our anticipation that ourcustomers will commercialize an additional three materials during 2007 and thatthese materials, as well as five materials previously commercialized bycustomers, will contribute to our growth in Materials and Intellectual PropertyLicensing revenue in the future; our expectation that cost of products soldwill continue to be driven by the variability of product mix and sales volumein each period and that the cost of products sold as a percentage of productsales will fluctuate significantly from period to period; that cost of productssold may be affected by adjustments to the warranty expense accrual for pre-existingsales; our anticipation that our headcount will continue to increase to meetthe mix and level staffing required by our collaborative, tools and softwareagreements and by the expansion of our business; our expectation to receiveover $200 million in revenue from ExxonMobil and over $120 million in revenuefrom Dow during the five-year term of each of the alliances; our belief thatrevenue from our strategic alliances will greatly contribute to our expectedgrowth in Collaborations revenue in 2007 through 2009 and that ExxonMobil andDow will continue to be major contributors to such revenue; our belief thatexpanding our customer base will contribute to our expected growth of SymyxTools revenue; our belief that the demonstrated acceptance of our high-throughputexperimentation technology by our customers will lead to the expected growth inour license fee revenue in future years; our expectation to continue to devotesubstantial resources to research and development; our expectation thatresearch and development expenses will continue to increase; our expectationthat our sales, general and administrative expenses will increase; ouranticipation that the adoption of certain accounting standards will not have amaterial impact on our consolidated financial statements; our expectation thatwe will continue to generate positive cash flow from our operating activitiesin the near future; our expectation to continue to make significant investmentsin the purchase of property and equipment to support our expanding operations;our expectation to satisfy the obligations of our principal and othercommitments; our belief that our current cash, available-for-sale securitiesbalances and the cash flows generated by operations will be sufficient tosatisfy our anticipated cash needs; our belief that the our internal controlsover financial reporting was effective as of December 31, 2006; our beliefthat our insurance protection is reasonable in view of the nature and scope ofour operations; our expectation that we will retain future earnings, if any, tosupport the development of our business and that we will not pay any cashdividends in the foreseeable future; and our expectation for the annualamortization expense of total intangible assets to be approximately $4,132,000in 2007, $4,124,000 in 2008, $2,881,000 in 2009, $1,458,000 in 2010, $813,000in 2011 and $203,000 thereafter.*

*The PrivateSecurities Litigation Reform Act of 1995 provides a “safe harbor” for suchforward-looking statement. In order to comply with the terms of the safeharbor, we note that a variety of factors could cause actual results andexperience to differ materially from the anticipated results or otherexpectations expressed in*

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*such forward-looking statements. Among the factorsthat could cause actual results to differ materially are the factors detailedunder the heading “Risk Factors.”*Such factors include but are not limited to the following:  themarket may not accept our products and services; we may lose one or moreof our major customers or partners; we have concentrated reliance on certainmajor collaborators to successfully commercialize products;  failure ofcollaborators to successfully commercialize products; we depend on a limitednumber of suppliers and our manufacture of products may be delayed if shipmentsfrom these suppliers are interrupted; the pace, quality or number of ourdiscoveries of new materials may be inadequate; our inability tocompete with the greater financial, marketing, technical and customer servicecapabilities of our competitors; uncertaintiesas to patent protection and litigation; our future growth strategy,including impact of acquisitions, mergers or other changes in businessstrategy, could result in large one-time charges or disrupt our business ifintegration or execution of such strategies is unsuccessful; uncertaintywith respect to the successful integration of the Autodose technology and theIntelliChem and Synthematix software into our business; lack of investmentincome to support expanding operations; a limited customer base; assumptionswith respect to the potential and applications of current projects; ourinability to attract and retain personnel; assumptions underlying our criticalaccounting policies and system of internal or disclosure controls may beincorrect, and there can be no assurance that such systems will succeed inachieving their goals of preventing misstatements, errors or fraud; generaleconomic conditions in the United States and in major European and Asianmarkets; unknown conditions that would jeopardize our compliance withenvironmental laws and regulations; exposure to risks associated with exportsales and operations; future competition from new market entrants;exposure to claims outside our insurance coverage; miscalculations in theassessment of our amortization calculations; and natural disasters, power failures and other disasters.

*Given these uncertainties, readers are cautioned not to place unduereliance on the forward-looking statements.*Allforward-looking statements and risk factors included in this document are madeas of the filing date hereof, based on information available to Symyx as of thefiling date hereof, and Symyx assumes no obligation to update anyforward-looking statement or risk factor. You should also consult the riskfactors listed from time to time in the Company’s Reports on Form 10-Qand other SEC filings.

**General**

Symyx Technologies, Inc. (the “Company” or “Symyx”)is a global provider of research and development (“R&D”) execution andinnovation for the chemicals, energy, life science, consumer product and otherindustries. Symyx develops and applies high-throughput research technologiesand research software for customers. We provide collaborative researchservices, electronic lab notebook and scientific decision-support software andinstruments to integrate and automate laboratory experimentation. We work withcustomers to speed and improve research, discovery and development of newproducts. We have over 325 issued patents and over 320 patent applicationson file worldwide protecting our methods, discoveries, instruments andsoftware.

Symyx was incorporated in California on September 20,1994 and completed a reincorporation in the state of Delaware in February 1999.Symyx’s headquarters are located at 3100 Central Expressway, Santa Clara,California, 95051, and the telephone number at that location is (408) 764-2000.Our mailing address is 415 Oakmead Parkway, Sunnyvale, CA 94085. Our SECfilings are available free of charge through our website at www.symyx.com. OurCommon Stock trades on the NASDAQ Global Select Market under the symbol “SMMX.”

We work with customers through our Collaborations,Symyx Tools and Symyx Software offerings. Collaborations and Symyx Toolsprovide different ways for customers to access our proprietary high-throughputtechnologies. Symyx develops and applies high-throughput technologies thatenable faster, broader experimentation by working with small amounts ofmaterials in an automated fashion and utilizing parallel or array-basedtesting. Funded Collaborations with industry leaders lead to discoveries thatare royalty-bearing upon commercialization by our customers. Symyx Toolsprovides a way for customers to 

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bring some of thecapabilities of our laboratories into their own organizations by purchasinginstruments to integrate and automate laboratory experimentation to increaseresearch productivity. With Symyx Software, we help address customer needs forgreater data access and integration across the enterprise, improving theirability to manage research data and integrate their research and developmentteams.

By partnering with us,purchasing our hardware or licensing our software, companies can leverage ourindustry-level investments in technology, Symyx Software, and Symyx Tools toimprove their R&D execution.

***Collaborations***

In Symyx Labs, ourscientists, engineers, and software programmers work on behalf of customers todiscover and optimize materials. Employing our proprietary technology methods,high-throughput workflows that automate complete laboratory processes andsoftware, they are creating new breakthroughs in laboratory performance andmaterials discovery. With technology that enables experimentation up to 1000times faster than traditional research, we are able to deliver improved speed,efficiencies and innovation to customers.

***Symyx Software***

Symyx Software combinesexperiment design, execution and decision-support to provide a unique solutionthat saves time for scientists while providing information transparency to thebusiness. Designed by scientists for scientists, Symyx Software is at work inthe world’s leading R&D organizations, where it is helping to deliverbreakthrough results. Symyx provides scientific software applications tailoredto meet the specific needs and protocols of chemists in the discovery, process,analytical, formulations and bioprocess functions and a database back-end thatenables sharing across functions. This facilitates optimal use of researchdata, improved data quality and documentation and better adherence to standardoperating procedures. Our software offering is comprised of Electronic LabNotebook (“ELN”) applications and Lab Execution and Analysis (“LEA”)applications. These applications are based on the Symyx Vault ELN document managementplatform. Symyx Vault provides a single, comprehensive platform for ELNdocuments that can span the entire R&D organization, supporting documentbrowsing and searching, enterprise-level security and auditing, andconfigurable and highly flexible document workflow.

***Symyx Tools***

Symyx Tools provideresearch and development workflows to automate and integrate laboratoryprocesses, increasing testing capacity 10-100 fold. We sell modularofferings that can be configured for specific applications either as IntegratedWorkflows or Benchtop Systems. Integrated Workflows are validated andintegrated with other instruments to run complete laboratory processes.Benchtop Systems automate multiple steps of experimental procedures and arescalable to perform automated experimentation for complete lab processes whichwould include integration with other laboratory equipment. Running up to100 experiments or more per day in parallel with automated instrumentation andintegrated control and reporting, Symyx Tools give scientific teamsbreakthrough capabilities in research and development.

***Intellectual Property Licensing***

Symyxlicenses intellectual property to create value by encouraging the widespreaduse of our innovations in the materials field. We offer selective access tothis intellectual property through patent licensing, materials licensing,technology licensing, and original equipment manufacturer (“OEM”)software licensing. In patent licensing, we enable customers to implementinitial approaches to high-

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throughputmaterials research in their laboratories by licensing certain patents,including our broad methodology patents. We also license materials discoveredin our collaborative and internal research efforts in return for royalties.Finally, we license certain technologies and software to instrumentmanufacturers in return for payments and royalties.

**Customers**

We have a track record of building enduringrelationships with customers, with over half of our customers in 2006 renewingor expanding previous business relationships with Symyx. Our customers applyour various offerings in flexible ways to meet their needs. For some customers,we perform research and share their successes through royalties on commercialdiscoveries. We define the fields in which we are performing research for ourcustomers and give our customers research exclusivity in certain fields ofinterest. Most of our research collaboration projects are with chemical andenergy companies. We provide Symyx Tools and/or license Symyx Software to ourcustomers to help them increase the speed and precision of experimental design,execution and analysis. Symyx Tools customers include chemical, life scienceand consumer product companies. The Symyx Software customer base is dominatedby pharmaceutical and biotechnology companies. Symyx Tools and Symyx Softwareare also used by several leading research universities around the world.

In two instances, we work with customers in alliances,where our customers work with us across all of our business offerings under asubstantial, multi-year commitment. We have such relationships in place withthe Exxon Mobil Corporation (“ExxonMobil”) and The Dow Chemical Company (“Dow”).Under the ExxonMobil alliance effective April 1, 2003, we are contractedto provide research services, develop and sell Symyx Tools, and license ourSymyx Software and intellectual property. The ExxonMobil alliance provides uswith an expected five-year revenue stream of over $200 million (of which $151.6million has been recognized as revenue through December 31, 2006) fromcurrently planned alliance activities, purchases of Symyx Tools, and licensingfees and advance royalties. In addition, we are also entitled to receiveroyalties from the commercialization of materials, processes, and productsbased on discoveries made in the fields covered by the agreement. Under the Dowalliance effective January 1, 2005, we are contracted to perform researchin a number of exclusive areas, develop and provide Symyx Tools, and licenseSymyx Software as well as intellectual property. Dow is obligated to makepayments to us over the five-year term of approximately $120 million (of which$53.3 million has been recognized as revenue through December 31, 2006).In addition, we are entitled to receive royalties on commercialized discoveriesresulting from the collaborative research.

For the fiscal years ended December 31, 2006,2005, and 2004, our Collaborations, Symyx Tools, and Symyx Software businesssegments each contributed more than 10% of our total revenue. See detail inNote 6 of the Notes to the Consolidated Financial Statements.

Forthe fiscal years ended December 31, 2006, 2005, and 2004, the followingcustomers contributed more than 10% of our total revenue (in thousands):

| ** **                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ExxonMobil                |       | $                                           | 51,318     |   | $ | 42,254 |   | $ | 45,016 |   |
| The Dow Chemical  Company |       | 29,302                                      |       | 26,765 |   | 4,420 |   |
| Total                     |       | $                                           | 80,620     |   | $ | 69,019 |   | $ | 49,436 |   |

 

For the fiscal years endedDecember 31, 2006, 2005, and 2004, approximately 11%, 17%, and 22%,respectively, of our total revenue was generated from sales to customerslocated in foreign countries. See Note 6 of the Notes to the ConsolidatedFinancial Statements for further detail. We are exposed to risks associatedwith international operations. See “we are exposed to risks associated withexport sales and 

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internationaloperations that may limit our ability to generate revenue from our products andinternational property” under Item 1A, “Risk Factors.”

**Industry Background**

Materials and their diverse properties contribute invital ways to many of the products in every day use. Examples include thecatalysts used in the manufacture of major chemicals, pharmaceuticals, plasticsand rubbers, the plastics in many of our household and office goods, and materialsused to optimize certain qualities in consumer goods.

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

By applying miniaturization, parallelization, andautomation to the discovery of high-value materials, we believe that we canhelp transform materials research and development by discovering newbreak-through materials faster and more cost-effectively than is possible usingtraditional methods. We can also help transform how our customers performresearch, by providing Symyx Tools, Symyx Software, patented methods, and otherinnovations.

Symyx primarilyserves customers in two broad industries:

1)              Chemicalsand Energy

In order to competeeffectively and efficiently on a global scale, the imperative for chemicals andenergy companies to execute and innovate has never been greater. Meeting thisimperative requires implementing faster, more efficient product applicationtesting, reducing feedstock costs, enhancing production yields, creating newproduct variants, and improving manufacturing quality. For chemicals and energycompanies, product development and process optimization are long,knowledge-intensive endeavors. Faster development of improved commercialproducts and processes require breakthrough technology and better informationcorrelation across people, instruments and geographies.

2)              Lifescience

The Life Science industry is becoming increasinglycompetitive, as pharmaceutical and biotechnology R&D organizations tackleissues such as the growing costs of drug development and marketing, morecompetition from generic drugs, increased partnering and outsourcing and theneed for more targeted therapeutics. All of these market dynamics combine toproduce changing product economics that require better data integration, fasterexperimentation and lower costs. Symyx Software enables the integration ofresearch data and enterprise-wide information sharing. Symyx Tools reduce thecost per experiment through automated experimentation, broaden testing in lesstime, create a better understanding of various drug form possibilities andallow for faster testing and development of compounds.

Symyx is addressing thechallenges and providing solutions to both of the above referenced industriesthrough our research services, technology and intellectual property.

**Symyx Solutions**

*High-ThroughputTechnologies*

Our high-throughput technologies include the rapidcreation of large directed libraries of materials that are then synthesized andtested using our fully integrated high-throughput primary and secondary 

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screens. During primaryscreening, unconventional methods are used to carry out experiments acrossbroad material and processing possibilities - 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 moredetailed evaluation of the focused areas. In conventional terms, creating andtesting 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 reducethe time and costs per experiment to discover new materials. For example, usingtraditional trial and error methods, a team consisting of a chemist plus atechnician could perform 500 to 1,000 experiments per year. In ourlaboratories, that same team could perform up to 50,000 experiments per year.As a result, our scientists would generate significantly more data, increasethe possibility of successful discoveries within that timeframe, and reduce theassociated costs per experiment dramatically.

To achieve these efficiencies, we require extensivecapabilities in materials synthesis, screening, and data analysis. A particularchallenge 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, andto discover a new polymer, we need to screen for physical and mechanicalproperties such as molecular weight and toughness.

As the pioneer inhigh-throughput materials science, we found no existing technology capable ofmeeting our synthesis, screening, and data analysis requirements. To addressthis challenge, we assembled a multi-disciplined team of people with expertisein the fields of inorganic, physical, polymer, and organic chemistries,physics, engineering, and software programming. This team has successfullydesigned, built, and validated a powerful array of highly specializedproprietary instruments and software. Our scientists can synthesize a widerange of materials and screen for properties including catalytic, chemical,physical, mechanical, electronic, and optical properties. In addition, wecontinue to expand our capabilities through the development of new instrumentsand software and enhanced versions of existing systems.

*Research Software*

Our software was initially developed to support theexperiment design, execution and analysis needs of our scientists. Ourdevelopment of high-throughput technologies for material science enabledbroader and faster experimentation which produced large quantities of data. Wecould not find a commercial software solution that met the needs of ourscientists. Thus, we developed Symyx Software to integrate research data andfacilitate design, execution and analysis of large quantities of multi-mediadata.

**Throughacquisitions, we expanded the capabilities and potential market of oursoftware. Symyx Software currently provides applications tailored to meet thespecific needs and protocols of chemists in the discovery, process, analytical,formulations and bioprocess functions and a database back-end that enablessharing across functions. Thus, our software is now used by chemists working inthose functions in the chemical, energy, life science and consumer industries.We believe having front-ends that are customized based on functionalspecificity in our software facilitate adoption and use of Symyx Software, enableoptimal use of research data, and improve data quality, documentation andbetter adherence to standard operating procedures. Today our software offeringis comprised of ELN applications and LEA applications. These applications arebased on the Symyx Vault ELN document management platform. Symyx Vault providesa single, comprehensive platform for ELN documents that can span the entireR&D organization, supporting document browsing and searching,enterprise-level security and auditing, and configurable and highly flexibledocument workflow. This enables data integration, information sharing andknowledge transfer between scientists, teams, geographies and functions withinan enterprise. Growing trends in outsourcing, globalization, regulation andchanging product economics require better data integration, and we believe thatSymyx Software provides a unique solution.**

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**Symyx Offerings**

We are committed toretaining our position as a leading company that develops and supplieshigh-throughput technologies for the discovery of new materials withcommercially valuable properties. We have created several complementaryofferings in support of that objective, including research collaborations withSymyx Labs, products through the sale of Symyx Tools and license of SymyxSoftware, discovered materials and intellectual property.

*Collaborations*

In Collaborations, our scientific teams performresearch on behalf of customers, producing breakthrough discoveries and oftendeveloping new technologies that are then commercialized through Symyx Toolsand Symyx Software. Our Collaborations programs also contribute greatly towardthe development of our intellectual property, including patents coveringmethodology, composition of matter, instrumentation, and software. In returnfor our research services, typically in exclusive fields, we receive researchfunding and rights to downstream royalties or other payments on materials wemay discover.

We provide the platform technologies and effort, andour partners acquire rights to develop and commercialize resulting materialswithin their defined field of license. Typically, we enter into collaborativearrangements to discover materials that can be manufactured in customers’existing or new assets. These discoveries often require further investment inproduct development and manufacturing, as well as extensive marketing efforts.Our collaborative partners have already developed the infrastructure to supportthese requirements, and may therefore be in a strong position to commercializeour discoveries.

Much of our collaborative research is focused on thechemicals industry, where we apply proprietary high-throughput technologiesaimed at making break-through discoveries leading to improved commercialprocesses and materials. Our technology innovations can help chemical companiesaddress the rising costs and manufacturing challenges presented by low-cost competingproducers overseas. We are working with leading companies to discover catalystsfor the manufacture of polyolefins and a variety of other commodity chemicals.The range of new technologies developed in these research collaborations—includinginstruments, software, methods, and materials—results in a growing portfolio ofintellectual property that creates future sources of revenue for Symyx.

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

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

Periodically, we will also co-sponsor research programswith partners where we share the research costs and are entitled to receive alarger royalty on commercialized discoveries (compared to royalty levels ofbetween 1% - 5% of end product sales for our typical collaborations programs)or engage in profit sharing.

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We donot track fully burdened research and development costs or capital expendituresby project. However, based on hours spent on each project, we estimate theresearch and development efforts undertaken for various projects were asfollows:

| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Projects funded  by collaboration partners |       |     | 65         | %        |       |     | 73         | % |   |   | 79 | % |   |
| Internally funded  projects:               |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Software development                       |       |     | 26         | %        |       |     | 21         | % |   |   | 5 | % |   |
| Research                                   |       |     | 7          | %        |       |     | 5          | % |   |   | 10 | % |   |
| Tools development                          |       |     | 2          | %        |       |     | 1          | % |   |   | 6 | % |   |
| Total                                      |       |     | 100        | %        |       |     | 100        | % |   |   | 100 | % |   |

 

Due to the nature of our research and our dependenceon our collaborative partners to commercialize the results of the research, wecannot predict with any certainty whether any particular collaboration orresearch effort will ultimately result in a commercial product and, therefore,whether we will achieve future milestones or royalty payments under our variouscollaborations.

In order to expand ourtechnologies and grow our product pipeline, we intend to continue to enter intonew collaborative arrangements. As a result of these new arrangements, and theconclusion of existing collaborations, our portfolio of collaborations willchange over time. We expect that new collaborations will come from existingpartners extending current programs and undertaking new research initiatives aswell as from new partners.

*Symyx Tools*

Through Symyx Tools, we leverage the power of ourinventions by selling automated instruments to life science companies to speedand improve preclinical testing of drug candidates, and to chemical, energy andother companies for materials discovery research and testing. Symyx Toolsincludes high-throughput reactors, screening systems, robots and otheranalytical equipment. These instruments are all integrated with Symyx Softwarewhich facilitates the process of designing, executing, and evaluating researchand development. In July 2006, we expanded our Symyx Tools capabilitieswith the acquisition of Autodose SA, a privately-held, Geneva-based maker ofprecision powder-dispensing equipment. We believe that this acquisition willhelp us to advance our product portfolio and grow new and existing customerrelationships in Europe.

Companies that purchase Symyx Tools from us are ableto implement high-throughput technologies at a great time and cost savingscompared to taking a license to operate from us and then developing andbuilding a system internally. Customers typically purchase Symyx Tools ineither Benchtop System or Integrated Workflow configurations. The BenchtopSystem is a self-contained, software-driven unit that automates multiple stepsof experimental procedures and scalable to enable data and instrumentintegration with other equipment in the laboratory. Integrated Workflows arevalidated, integrated systems that perform fully automated experimentation forcomplete laboratory processes and includes integration with other laboratoryequipment and software and the ability to support document browsing andsearching, enterprise-level security and auditing, and configurable documentworkflow. Symyx Tools are used to help accelerate research, productoptimization and process development, enabling scientists to increase theirresearch productivity.

Life science companies use our instrumentation toautomate and improve pre-clinical research. The workflows we sell to lifescience companies include those for solubility, polymorph and salt selection,liquid formulations, forced degradation, excipient compatibility, organicsynthesis and bioCatalysis. Chemical companies use Symyx Tools to automate andintegrate their materials discovery and research and development processes. Theworkflows we sell to chemical companies include those for formulations, 

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heterogeneous catalysis,homogeneous catalysis and polymerization catalysis. Consumer product companiesutilize Symyx Tools to design, formulate and test the performancecharacteristics of materials. The workflows we sell to consumer productcompanies include those for additive, adhesive/coatings/sealants, home andpersonal care and plastics.

We offer our customers the flexibility of purchasingeither complete systems or individualized system components. This approachallows customers to build full high-throughput experimentation capabilitygradually with the assurance that they will be able to integrate the systemsand data management of different research processes at any time.

**Weassemble and ship our Symyx Tools from our facilities in California and Geneva.As we assemble our systems, we generally manufacture only critical componentsourselves, usually components that contain proprietary technology. We contractwith others for the manufacture and supply of the majority of components. Webelieve our supply arrangements to be adequate and that there are no materialconstraints on the sources and availability of materials. From time to time, werely on a single supplier for all of our requirements of a particularcomponent.**

*Symyx Software*

We license Symyx Software to enhance experimentdesign, laboratory automation, data capture, data analysis and visualization,and data communication in high-throughput and traditional researchenvironments. Symyx Software combines experiment design, execution anddecision-support to deliver a solution that saves scientists time whileproviding information transparency to the business. Symyx Software integrateswith existing infrastructure including Laboratory Information ManagementSystems (LIMS), a wide variety of major instrumentation devices, common desktoptools and enterprise content and data management systems.

Symyx Software encompasses:

*ElectronicLab Notebook:*   Application-specific interfaces tohelp scientists compose, load and calculate, so that enterprises can capture,process and share their projects and intellectual property.

*LabExecution:*   Experiment design and data capturewith instrument-neutral procedure automation.

*ExperimentAnalysis:*   Real-time data warehousing, querying,visualization and reporting with unified and linked views across documents,chemical structures, multi-step synthesis and sample lifecycles.

*VaultPlatform:*   Repository for scientific data anddocuments that enable scientific collaboration, IP protection anddecision-support across the enterprise to improve the value of data in R&D.

Customers of our softwareinclude chemical, energy, and life science companies, as well as otherindustrial customers seeking to improve and integrate their research datamanagement. Chemical, energy and other industrial companies may use oursoftware broadly across their research groups. Pharmaceutical and biotechnologycompanies may use Symyx Software to support their pre-clinical researchactivities as well as some pharmaceutical discovery research and chemicalsresearch.

*Materials and IPLicensing*

*DiscoveredMaterials*

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

Our portfolio ofdiscovered materials provides us with an array of licensing opportunities andoffers a significant path to commercialization of new materials. Ourdiscoveries demonstrate the ability of our high-throughput researchtechnologies to address a range of materials for use in a variety of chemicaland 

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otherindustrial applications. As a result, we have created a growing pipeline ofmaterials that have emerged from our discovery platform. At the time of thisfiling, our discoveries include 5 commercialized materials, 10 developmentcandidates (exclusive of sensor development candidates that were transferred toVisyx Technologies Inc. in November 2006) and 5 emerging developmentcandidates.  Development candidates havemet their technical targets and are in development with partners. Emergingdevelopment candidates have met their technical targets and are pendingdecisions regarding potential commercialization.

*IP Licensing*

Launched in mid-2002, our patent licensingprogram leverages our established capabilities in the field of high-throughputmaterials discovery, including our broad-based research capabilities, validatedinstruments and software, and extensive know-how. Created to give companiesselective access to our broad methodology patents, this program offers aconstructive way to uphold the value of our intellectual property portfoliowhile expanding the ways in which we can work with potential customers.

We developed our patentlicensing program to accommodate companies that want to implementhigh-throughput materials research on a smaller scale - generally increasingtheir research productivity by approximately 10-fold. Because our patentlicenses typically are for a limited number of experiments or for a limitednumber of scientists’ use, this licensing approach complements our otherbusiness offerings by targeting research programs that are generally too smallto warrant investment in Symyx Collaborations or Symyx Tools. In this manner,companies can benefit from our inventions by licensing our patents and patentapplications for a fee.

*Symyx Sensors*

In the past years, wedeveloped a solid-state mechanical resonator (“sensor”) technology for use inour own laboratories to test polymer viscosity, density, and other properties.We have determined that these sensors have many potential applications outsideof the laboratory. In November 2006, we created Visyx Technologies, Inc.(“Visyx”) to focus on the commercialization of our sensor technologies. Inaddition to certain intellectual property transferred from Symyx, Visyxreceived a $400,000 cash investment from Symyx, and also obtained funding inthe amount of $1.4 million from CMEA Ventures. As of December 31, 2006, weowned approximately 38% of the outstanding shares of Visyx and had a 45% votingright in relation to our shareholding.

**Sales and SalesSupport**

Our sales organization is comprised of approximately20 professionals in the United States, Europe, and Japan. We have dedicatedsales organizations targeting the chemicals/energy industries and thepharmaceutical/biotechnology industries.

We believe that service isan important component of the value we offer our customers. Although salesrepresentatives have direct responsibility for account relationships, our salessupport group works closely with our customers to maximize the value of ouroffering. Our sales organization includes field application scientists whoparticipate in the pre-sales effort to the customers’ R&D managers,technology support representatives, and product managers to gather a betterunderstanding of customers’ needs. Our sales organization also includes fieldservice engineers dedicated to post-sales support, who train users at ourfacilities in California and at customer sites, install instruments andsoftware for customers, and provide customizations requested by the customer.

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**IntellectualProperty and Other Proprietary Rights**

Our success dependsupon our proprietary technology. The risks associated with patents andintellectual property are more fully discussed in the “Risk Factors” sectioncontained in Item 1A of this Annual Report on Form 10-K. There arefive general areas that may be patented using our high-throughput approach:

·       librarysynthesis methods;

·       thelibraries themselves;

·       screeningor characterization methods;

·       equipmentand software; and

·       newmaterials and their uses.

During 2006, we wereissued 42 patents worldwide. Our patent portfolio as of the end of 2006consisted of 328 issued patents, including 270 United States patents, 29European patents, and 29 patents in other countries, and approximately 320patent applications pending worldwide. These patents and applications covercomposition of matter, instruments, and methodology, and include issued patentswith broad claims in high-throughput combinatorial methodologies. We co-ownwith Lawrence Berkeley National Laboratory, on behalf of The Regents of theUniversity of California, 11 of the issued United States patents and 11 of theissued patents in other countries. We have an exclusive license to thesepatents and patent applications from Lawrence Berkeley National Laboratory,which was agreed to upon our formation. In addition to patents, we rely oncopyright, trademark and trade secret rights, confidentiality procedures, andlicensing arrangements to establish and protect our proprietary rights. Theearliest filed patents will begin to expire in 2014.

**Markets**

Symyx provides customersin the chemicals, energy, life science, consumer product and other industrieswith proprietary research services, Symyx Tools, Symyx Software andintellectual property to increase their research and development effectivenessby achieving better results with shorter timelines and lower costs. We realizevalue through research collaborations, the sale of Symyx Tools, and the licenseof intellectual property, software, and materials. Our market opportunitiesfall into two primary areas: our customers’ research and developmentexpenditures and the market for sales of materials.

*Research andDevelopment (“R&D”) Expenditures Market*

Leading global companiesin the chemicals, energy, life science and consumer products industries spentin excess of $100 billion on research and development in 2005, and continue toseek to improve the return on their R&D investments. These investmentsinclude personnel costs, deployment of laboratory informatics and purchase oftechnology, services and instruments.

*Materials Markets*

The materials we discovercover a broad range of applications, including catalysts for the manufacture ofplastics and commodity chemicals, polymers for industrial, consumer goods andlife science applications, and diverse electronic materials. Each of thesematerials typically may generate annual worldwide sales for our customers inthe range of $100 million to $500 million. When customers commercialize a Symyxdiscovery, we typically are entitled to receive royalties of 1% - 5% of endproduct sales.

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**Competition**

In our Collaborations business area, our competitionconsists chiefly of in-house efforts of certain chemical companies withinternal high-throughput materials discovery programs. In addition, AccelergyCorporation, Avantium Technologies, and HTE AG., use certain high-throughputapproaches to materials discovery.

Symyx Tools workflows compete with certain instrumentmanufacturers, including Chemspeed Technologies, Zinsser Analytic, and others.We believe that our Tools offerings are unique because our workflows enablefully automated, software-driven experimentation with laboratory equipment andresearch data integration capabilities.

Symyx Software competes inthe life science research software market with companies like CambridgeSoftCorporation, and in more limited areas, with other providers of scientific datamanagement software. In our assessment, the research software market is highlyfragmented and a large number of software providers offer spot solutions targetedto particular areas within laboratory informatics. We believe that SymyxSoftware is unique in its ability to enable enterprise-wide data integrationand access to experiment design, execution and analysis.

**Backlog ofCommitted Revenue**

As of December 31,2006, our customers have contractually committed approximately $90 million ofour 2007 revenue for the purchase of Symyx Tools, licenses to Symyx Softwareand intellectual property, and funding for research and development undercollaborative agreements in 2007. We also have approximately an additional $58million in revenue backlog expected to be realized in fiscal 2008 and beyond.As of December 31, 2005, our total backlog of committed revenue was $246million. The decrease in backlog from 2005 to 2006 was primarily due to thedelivery of services and tools during 2006.

**Employees**

Currently we have a totalof approximately 380 employees, including approximately 280 scientific andtechnical employees and over 100 people in business development, legal, sales,and general and administrative services. Our headcount increased significantlyduring 2006 because of the expansion of our software group and the acquisitionof Autodose in July 2006. None of our employees is represented by a laborunion, and we consider our employee relations to be good. We believe that ourfuture success depends in part upon our continued ability to hire and retainqualified personnel.

**Executive Officersof the Registrant**

Setforth below is information regarding our executive officers as of February 20,2007:

| **Name of Executive Officer** | ** ** | ** ** | ** ** | **Age**                                               | ** ** | **Position with the Company** |
|-------------------------------|------------|------------|------------|-------------------------------------------------------|------------|-------------------------------|
| Steven D. Goldby (1)          |       | 66         |       | Chairman of the Board  and Chief Executive Officer    |
| Isy Goldwasser (2)            |       | 37         |       | President                                             |
| Jeryl L. Hilleman (3)         |       | 49         |       | Executive Vice  President and Chief Financial Officer |
| Paul J. Nowak (4)             |       | 52         |       | Executive Vice  President and Chief Operating Officer |
| W. Henry Weinberg (5)         |       | 62         |       | Executive Vice  President and Chief Technical Officer |
| Rex S. Jackson (6)            |       | 46         |       | Executive Vice President  and General Counsel         |

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(1)          Before joining Symyx in1998, Mr. Goldby served as Chief Executive Officer for more than ten yearsat MDL Information Systems, Inc., the enterprise software company thatpioneered scientific 

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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 fromGeorgetown University Law Center.

(2)          Mr. Goldwasser hasbeen with Symyx since its founding and was appointed President and ChiefOperating Officer in 1998. He is responsible for Symyx’s business developmentefforts. Mr. Goldwasser received a B.S. degree in chemical engineeringfrom the Massachusetts Institute of Technology and an M.S. degree in chemicalengineering from Stanford University.

(3)          Prior to joining Symyxin 1997, Ms. Hilleman served as Vice President Finance and Chief FinancialOfficer with two public biotechnology companies, Geron Corporation and CytelCorporation. Ms. Hilleman received her A.B. degree from Brown Universityand an M.B.A. from the Wharton Graduate School of Business. She was selected asa 1999 Crown Fellow by the Aspen Institute.

(4)          Mr. Nowak joinedSymyx in June 2004. Prior to Symyx, Mr. Nowak held a variety ofpositions with VWR International, including President and Chief OperatingOfficer of VWR International since January 2001. Mr. Nowak received aB.S. degree in biology from the State University of New York.

(5)          Dr. Weinberg joinedSymyx in 1996, and also remains an Adjunct Professor at the University ofCalifornia, Santa Barbara. Dr. Weinberg is a member of the NationalAcademy of Engineering and is widely known for his work on aspects of surfacechemistry and physics, heterogeneous catalysis, and combinatorial materialsscience. Dr. Weinberg obtained a B.S. degree in chemical engineering fromthe University of South Carolina, and a Ph.D. in chemical engineering from theUniversity of California, Berkeley.

(6)          Mr. Jackson joinedSymyx in February 2007. Prior to Symyx, he held various management positions atmultiple companies, including Senior Vice President and General Counsel forAvago Technologies Ltd. and Synopsys, Inc. Mr. Jackson obtained aB.S. degree in political science from Duke University and a J.D. degree fromStanford University.

There is no familyrelationship between any of the foregoing executive officers or between any ofsuch executive officers and any of the members of our Board of Directors. Ourexecutive officers serve at the discretion of the Board.

**EnvironmentalMatters**

Our United States andEuropean operations are subject to federal, state, and local environmental lawsand regulations. We have a number of proactive programs underway to minimizeour impact on the environment, and we believe that we are in substantialcompliance with environmental laws and regulations.

**Company Website andAvailable Information**

We are subject to the informational requirements ofthe Securities and Exchange Act of 1934, as amended. Therefore, we fileperiodic reports, proxy statements and other information with the Securitiesand Exchange Commission, or the SEC. Our website can be found at www.symyx.com.The website contains information about Symyx, our products and services, andour operations. Copies of each of our filings with the SEC on Form 10-K,Form 10-Q, and Form 8-K and all amendments to thosereports can be viewed and downloaded free of charge at our website as soon asreasonably practicable after they are filed with the SEC. Furthermore, anymaterials we file with the SEC may be read at the SEC’s Public Reference Room at100 F Street, NE, Washington, DC 20549. Anyone may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

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Our website also containsour Corporate Governance Guidelines, charter and membership of the Board’sAudit, Compensation and Nominating and Governance Committees, as well as ourCode of Conduct and Ethics.

**Item 1A.**                RiskFactors

Set forth below andelsewhere in this Annual Report on Form 10-K and in other documentswe file with the SEC are risks and uncertainties that could cause actualresults to differ materially from the results contemplated by theforward-looking statements contained in this Annual Report on Form 10-K.These are not the only risks and uncertainties facing us. Additional risks anduncertainties not presently known to us or that we currently deem immaterialalso may impair our business operations.

**Most of our revenueis generated from a small number of key customers and the loss of or reductionin business from a key customer could substantially reduce our revenues and beperceived as a loss of momentum in our business**

Over time we have expandedour base of customers and research collaborative partners, however, substantialportions of our revenues are generated from a small number of companies. Inparticular, ExxonMobil and The Dow Chemical Company accounted for 41% and 23%,respectively, of our total revenue in the year ended December 31, 2006. Weexpect that ExxonMobil, The Dow Chemical Company, and a select list of othercompanies will in the aggregate continue to account for a substantial portionof our revenues for the foreseeable future and the loss of or reduction inbusiness from one or more of these customers or collaborative partners wouldharm our business and operating results. When our alliance with ExxonMobil lapsesin 2008. we may experience a reduction in total revenue if we cannot timelyreplace the revenue from the ExxonMobil alliance with a revenue stream fromother sources comparable in size. The cancellation of or reduction of businessfrom the ExxonMobil or The Dow Chemical Company strategic alliance, or thefailure to renew either alliance, or loss of or reduction in business fromanother significant customer or collaborative partner could also be perceivedas a loss of momentum in our business and have an adverse impact on ourfinancial results, which may cause the market price of our common stock tofall.

**Failure tointegrate our products that we acquired through acquisitions and failure toachieve customer acceptance of the ELN technology and precisionpowder-dispensing equipment would harm our revenue and operating results**

We acquired IntelliChemand Synthematix, providers of electronic laboratory notebook software, and morerecently, Autodose, a provider of precision powder-dispensing equipment. Oursuccess is partially dependent on our ability to successfully integrate thesoftware and technologies we acquired in these acquisitions with our existingsoftware and technology and with each other. If this integration is notsuccessful or if the integrated products do not achieve substantial marketacceptance among new and existing customers, due to factors such astechnological problems, competition, pricing, sales execution, or marketshifts, it will have a material adverse effect on our revenues and operatingresults.

**Business activitiessuch as the development of a new line of business or the acquisition of a companyor technology could disrupt our business, affect our operating results anddistract our management team**

We have completed threeacquisitions, and in the future, we may engage in additional acquisitions andexpand our business focus in order to exploit technology or marketopportunities. In the event of any future acquisitions, we may issue stock thatwould dilute our current stockholders’ percentage ownership, pay cash, incurdebts, or assume liabilities. We may not be able to successfully integrate ouracquired businesses into our existing business in a timely and non-disruptivemanner or at all. In addition, acquisitions may adversely affect our operatingresults and could result in, among other things, large one-time chargesassociated with acquired in-process research and development, future write-offsof goodwill 

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andother acquisition-related intangible assets that are deemed to be impaired,restructuring charges related to consolidation of operations, chargesassociated 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 attentionmay be diverted from normal daily operations of the business. Furthermore, anacquisition or business expansion may not produce the revenues, earnings, orbusiness synergies that we anticipate. The time, capital management, and otherresources spent on an acquisition or business expansion that fails to meet ourexpectations could cause our business and financial condition to be materiallyand adversely affected.

**We may not be ableto maintain and grow a profitable business**

Our ability tomaintain or increase our rate of profitability and grow our business is dependenton our ability to:

·       makediscoveries that our customers choose to commercialize that generate asubstantial stream of royalties and other revenue;

·       extendcurrent collaboration research and development arrangements and add new ones;

·       securenew Symyx Tools customers; and

·       addadditional licensees of our software, discovered materials, and intellectualproperty.

Our ability to achieve ourobjectives and maintain or increase the profitability of our business willdepend in large part on acceptance by potential customers of ourhigh-throughput screening technology and methodology as an effective tool inthe discovery of new materials. Historically, life science and chemicalcompanies have conducted materials research and discovery activities internallyusing traditional manual discovery methods. In order for us to achieve ourbusiness objectives, we must convince these companies that our technology andcapabilities justify outsourcing part of their basic research and discoveryprograms. We cannot assure you that we will achieve the levels of customeracceptance that will be necessary for us to maintain and grow a profitablebusiness. A failure to achieve the necessary customer acceptance and extendcurrent collaborations and add new ones, secure new Symyx Tools customers, andadd additional licensees of our software, discovered materials, andintellectual property would adversely affect our revenue and profitability andmay cause our stock price to decrease.

**Failure tosuccessfully commercialize our discoveries would reduce our revenues andprofitability and harm our business**

For us to achieve and sustain a significant level ofprofitability, we must continuously make discoveries with significantcommercial potential.

If we license our discovered materials ormethodologies to other companies, we typically do not receive royalties onsales of products by our partners until they have commenced commercial sales ofproducts containing our materials or produced using our methods. Thecommercialization of discovered materials can be a long and expensive processand we cannot control our partners’ activities in this regard. The failure ofour partners to commercialize development candidates resulting from ourresearch efforts would reduce our future revenue and would harm our businessand operating results. In addition, our partners may delay or cancelcommercialization of development candidates which may harm our business andoperating results.

In order for us tocommercialize development candidates ourselves, we would need to develop, orobtain through outsourcing arrangements, the capability to manufacture, market,and sell products. We do not have this capability, and we may not be able todevelop or otherwise obtain the requisite 

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manufacturing,marketing, and sales capabilities. If we are unable to successfullycommercialize products resulting from our proprietary research efforts, ourrevenues and operating results would decline.

**We are dependent onthe research and development activities of companies in the chemical, energy,life science, consumer product, and other industries, and declines orreductions in research and development activities in these industries couldharm our business**

The market for our research services, Symyx Tools, andSymyx Software within the chemical, energy, electronics, life science, consumerproduct, and other industries depends on our customers’ ability and willingnessto invest in research and development. A large portion of our revenues areattributable to our collaborative arrangements with chemical, energy, lifescience, consumer product, and other companies. These contracts generallyexpire after a fixed period of time. If we cannot renew existing contracts orenter into new collaborative arrangements, our business and operating resultsmay be harmed.

In particular, manycompanies in the chemical and life science industries have, in the past severalyears, experienced declining profitability or even losses. As a result, somechemical and life science companies have reduced their research and developmentactivities. In addition, many chemical products have become commodity productsthat compete primarily on the basis of price. If commoditization of chemicalproducts and other pressures affecting the industry, including governmental regulationsand governmental spending, continue in the future, more companies could adoptstrategies that involve significant reductions in their research anddevelopment programs. Although we believe that our approach can help chemical,energy, life science, consumer product, and other companies increase theefficiency of their research and development activities, our efforts toconvince them of this value may be unsuccessful. To the extent that thesecompanies reduce their research and development activities, they would be lesslikely to do business with us. As a result of current negative economicconditions, a number of these companies have recently both reduced the size oftheir research and development budgets as well as the size of their workforces.Decisions by these companies to reduce their research and developmentactivities could result in fewer or smaller scale collaborations with us, feweror smaller scale intellectual property and software licenses, fewer sales ofour Symyx Tools and related licenses and products, or choosing not to work withSymyx, any of which could reduce our revenues and harm our business andoperating results.

**We cannot predictthe pace, quality, or number of discoveries we may generate, and any inabilityof ours to generate a significant number of discoveries would reduce ourrevenues and harm our business**

Our future revenues andprofitability are dependent upon our ability to achieve discoveries, whetherthrough collaborations with customers or through our own proprietary research,which our partners or we choose to commercialize. Because of the inherentlyuncertain nature of research activities, we cannot predict with a high level ofprecision the pace with which we may generate discoveries or the quality of anydiscoveries that we may generate. Due to the uncertain nature of materialsdiscovery, in which several hundred thousand compounds must often be screenedto identify a single development candidate, we may not generate the number ofdiscoveries that we would expect to generate from a given number ofexperiments, or any discoveries at all. In addition, our development candidatesmay not result in products having the commercial potential our collaborators orwe anticipate. If this happens, our existing and potential new customers maynot renew or enter into new agreements with us. Consequently, our futurerevenues from our research collaborations and from commercialization of ourdiscovered materials would likely decline and harm our business and operatingresults.

**Difficulties we mayencounter managing our growth may divert resources and limit our ability tosuccessfully expand our operations**

We have experienced rapidand substantial growth since our inception. Overall, we have increased thenumber of our employees from approximately 170 at the end of 1999 toapproximately 380 at the end of 

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2006 andoffices in one country in 1999 to offices in 5 countries in 2006. This growthhas placed, and our anticipated growth in the future will continue to place, astrain on our research, administrative, and operational infrastructure. As ouroperations expand domestically and internationally, and as we continue toacquire new businesses, we will need to continue to manage multiple locationsand additional relationships with various collaborative partners, suppliers,and other third parties. Our ability to manage our operations and growtheffectively requires us to continue to improve our reporting systems andprocedures as well as our operational, financial and management controls. In addition,recent SEC rules and regulations have increased the internal control andregulatory requirements under which we operate. We may not be able tosuccessfully improve our management information and control systems to a levelnecessary to manage our growth and we may discover deficiencies in existingsystems and controls that we may not be able to remediate in an efficient ortimely manner.

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

Our strategy includesconducting research programs for our own account as well as for collaborativepartners. We believe that our collaborative agreements are structured in amanner to enable us to minimize conflicts with our collaborators relating torights to potentially overlapping leads developed through programs for our ownaccount and through programs funded by a collaborator, or through programsfunded by different collaborators. However, conflicts between a collaboratorand us, or between or among collaborators, could potentially arise. In thisevent, we may become involved in a dispute with our collaborators regarding thematerial. Disputes of this nature could harm the relationship between us andour collaborators, and concerns regarding our proprietary research programscould also affect our ability to enter into new collaborative relationships andcause our revenues and operating results to decline.

**We have a limitednumber of contracts for the sale of Symyx Tools and for the licensing ofintellectual property, software, technologies, and materials to date, and wecannot assure you that we will be able to build a sustainable business relatedto either the sale of additional systems or the licensing of intellectualproperty, software, technologies, and materials**

To date, we have entered a growing but still limitednumber of contracts for our Symyx Tools. Because of the high cost andcomplexity of these systems, the sales cycle for them has been and is likely tocontinue to be long. Sales of these systems will require us to educate ourpotential customers about the full benefits of these systems, which may requiresignificant time.

Sales of SymyxTools and licensing of intellectual property, software, technologies, andmaterials will be subject to a number of significant risks over which we havelittle or no control, including:

·       customers’budgetary constraints and internal acceptance review procedures;

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

·       complexityof our systems and difficulties we may encounter in meeting individual customerspecifications and commitments on a timely basis;

·       ourability to build new systems and design software and workflows to meet thedemands of our customers;

·       customers’willingness to renew annual right to use software license or maintenance andsupport agreements;

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·       thefact that there may be only a limited number of customers that are willing topurchase our larger systems or enter into licensing agreements with us;

·       along sales cycle that involves substantial human and capital resources; and

·       potentialdownturns in general or in industry specific economic conditions.

If we are unable tocontinue to build the infrastructure to support Symyx Tools and intellectualproperty and software licensing, or if the sales or build cycles for SymyxTools or software licensing lengthen unexpectedly, our revenues may decline ornot grow as anticipated and our results from operations may be harmed.

**The loss of keypersonnel or the inability to attract and retain additional personnel couldhave a material adverse effect on our results of operations**

We believe our future success will depend upon ourability to attract and retain highly skilled personnel, including keyscientific and managerial personnel. As we seek to expand our operations, thehiring of qualified scientific and technical personnel will be difficult, asthe number of people with experience in high-throughput materials science islimited and we may face competition for qualified professionals, especially inthe San Francisco Bay Area, where we are headquartered. Further, as we form newalliances with other collaboration partners, we may need personnel withspecific skill sets that may be difficult to locate or attract. Failure toattract and retain personnel, particularly scientific and technical personnel,would impair our ability to grow our business and pursue new discoveryinitiatives and collaborative arrangements.

In addition, our 1997Stock Plan has recently expired and there is no guarantee that our stockholderswill approve a new stock plan at our next annual meeting, if ever. Sincestock-based compensation is an important employee recruitment and retentiontool, we may not be able to attract and retain key personnel if we do notreceive stockholder approval for a new plan.

**Competition couldincrease, and competitive developments could render our technologies obsoleteor noncompetitive, which would reduce our revenues and harm our business**

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

**Our inability toadequately protect our proprietary technologies could harm our competitiveposition and have a material adverse effect on our business**

The success of our business depends, in part, on ourability to obtain patents and maintain adequate protection of our intellectualproperty for our technologies and products in the United States and othercountries. The laws of some foreign countries do not protect proprietary rightsto the same extent as the laws of the United States, and many companies haveencountered significant problems in protecting their proprietary rights inthese foreign countries. These problems can be caused by, for example, a lackof 

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rules and processesallowing for meaningfully defending intellectual property rights. If we do notadequately protect our intellectual property, competitors may be able topractice our technologies and erode our competitive advantage, and our businessand operating results could be harmed.

The patent positions of technology companies,including our patent positions, are often uncertain and involve complex legaland factual questions. We will be able to protect our proprietary rights fromunauthorized use by third parties only to the extent that our proprietarytechnologies are covered by valid and enforceable patents or are effectivelymaintained as trade secrets. We apply for patents covering our technologies andproducts as we deem appropriate. However, we may not obtain patents on allinventions for which we seek patents, and any patents we obtain may bechallenged and may be narrowed in scope or extinguished as a result of suchchallenges. Our existing patents and any future patents we obtain may not besufficiently broad to prevent others from practicing our technologies or fromdeveloping competing products. Others may independently develop similar oralternative technologies or design around our patented technologies orproducts. These companies would then be able to offer research services anddevelop, manufacture and sell products that compete directly with our researchservices and products. In that case, our revenues and operating results woulddecline.

We rely upon trade secretprotection for certain of our confidential information. We have taken measuresto protect our confidential information. These measures may not provideadequate protection for our trade secrets or other confidential information.For example, we seek to protect our confidential information by entering intoconfidentiality agreements with employees, collaborators, and consultants.Nevertheless, employees, collaborators or consultants may still disclose ormisuse our confidential information, and we may not be able to meaningfullyprotect our trade secrets. In addition, others may independently developsubstantially equivalent information or techniques or otherwise gain access toour trade secrets. Disclosure or misuse of our confidential information wouldharm our competitive position and could cause our revenues and operatingresults to decline.

**Failure toadequately enforce our intellectual property rights could harm our competitiveposition and have a material adverse effect on our business**

Our success depends on our ability to enforce ourintellectual property rights through either litigation or licensing. To besuccessful in enforcing our intellectual property through litigation orlicensing there are several aspects to consider, including maintaining thevalidity of our intellectual property, proving that others are infringing, andobtaining a commercially significant outcome as a result of such infringement.Intellectual property litigation can be successful if our intellectual propertywithstands close scrutiny. If it does not withstand this scrutiny, we can losepart or all of our intellectual property position. In addition, we are involvedin several administrative proceedings, such as opposition proceedings in theEuropean Patent Office that challenge the validity of the patents we haveobtained there. If we lose part or all of our intellectual property position,whether through litigation or opposition proceedings, our business andoperating results may be harmed.

With regard to proving infringement of ourintellectual property, our success depends in part on obtaining useableknowledge of what technologies others are practicing. If others do not publishor disclose the technologies that they are using, our ability to discover infringinguses and enforce our intellectual property rights will diminish. If we areunable to enforce our intellectual property rights or if the ability to enforcesuch rights diminishes, our revenues from intellectual property licensing andour operating results may decline.

Our intellectual propertymust protect our overall business structure by allowing us to obtaincommercially significant results from litigation, including compensation and/orrelevant injunctions, without resulting in undue cost and expense. Enforcement of our intellectual propertythrough litigation can result in significant expenses, distractions, and risksthat might cause us to lose focus or may otherwise 

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harm our profitability and weaken our intellectualproperty position. Enforcement proceedings can adversely affect ourintellectual property while causing us to spend resources on the enforcementproceedings. As our licensing activities have matured, we have become involvedin arbitration and litigation to assert and defend our intellectual property.These matters may become material and more such matters may arise. Successfulconclusion of these matters will assist our business, while unsuccessfulconclusion of these matters will cost us time and money and possibly loss ofrights. Our ability to manage the costs of these proceedings to obtain asuccessful result cannot be predicted.

**Our business may beharmed if we are found to infringe proprietary rights of others**

Our commercial success also depends in part onensuring we do not infringe patents or other proprietary rights of thirdparties. Others have filed, and in the future are likely to file, patentapplications covering technologies that we may wish to utilize with ourproprietary technologies, or products that are similar to products developedwith the use of our technologies. If these patent applications result in issuedpatents and we wish to use the claimed technology, we would need to obtain alicense from the third party and this would increase our costs of operationsand harm our operating results.

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

**We have engaged inbusiness relationships with early stage companies whose ability to perform alltheir obligations is less certain than our traditional large chemical, energy,life science, and consumer product customers**

We have entered intocollaborative, development and licensing relationships in certain areas withearly stage companies. These companies may lack established businesses andthere is no assurance that these companies will succeed. The inability of thesecompanies to perform all their financial and operational contractualobligations in a timely manner could adversely affect our results.

**We expect that ourquarterly results of operations will fluctuate, and this fluctuation couldcause our stock price to decline, causing investor losses**

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

·       expirationof or reduction in revenue derived from research contracts with majorcollaborative partners, which may not be renewed or replaced with contractswith other companies;

·       thesize and timing of customer orders for shipments of, and payments related to,Symyx Tools;

·       thetechnical risks associated with the delivery of Symyx Tools and the timing ofcustomer acceptance of Symyx Tools;

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·       thesize and timing of both software and intellectual property licensing agreementswe may enter into;

·       thetiming and willingness of partners to commercialize our discoveries that wouldresult in royalties;

·       thesize and timing of royalties we receive from third parties, including those wholicense Symyx Tools and Software for resale;

·       thesuccess rate of our discovery efforts associated with milestones and royalties;

·       specialcharges related to acquisitions;

·       thesize and timing of internal research and development programs we undertake onan un-funded basis;

·       developmentsor disputes concerning patent or other proprietary rights;

·       thestructure, timing and integration of acquisitions of businesses, products andtechnologies and related disruption of our current business;

·       fluctuationsin the market values of our cash equivalents and short and long-terminvestments and in interest rates, including any gains or losses arising on thesale of these investments;

·       changesin accounting rules and regulations, including those related to revenuerecognition and accounting for stock options granted to employees; and

·       generaland 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 expensesfor facilities, equipment, and personnel, are relatively fixed in nature.Accordingly, in the event revenues decline or do not grow as anticipated due toexpiration of research contracts, failure to obtain new contracts or otherfactors, we may not be able to correspondingly reduce our operating expenses.Failure to achieve anticipated levels of revenues could therefore significantlyharm our operating results.

Due to the possibility offluctuations in our revenues and expenses, we believe that quarter-to-quartercomparisons of our operating results are not a good indication of our futureperformance. As a result of these possible fluctuations, it is difficultfor our management to predict or estimate our quarterly or annualoperating results and to give accurate guidance. Our operating results in somequarters may not meet the expectations of stock market analysts and investors.In that case, our stock price would probably decline, and investors wouldexperience a decline in the value of their investment.

**Our stock price hasbeen and may continue to be volatile**

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

·       decisionsby significant stockholders to acquire or divest their stock holdings, giventhe relatively low average daily trading volumes we have historicallyexperienced;

·       theannouncement of new products or services by us or our competitors;

·       quarterlyvariations in our or our competitors’ results of operations;

·       failureto achieve operating results projected by securities analysts;

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·       failureto achieve operating results within guidance provided by our senior management;

·       changesin earnings estimates or recommendations by securities analysts;

·       changesin management;

·       changesin investors’ beliefs as to the appropriate valuation ratios for us and ourcompetitors;

·       changesin investors’ levels of risk aversion;

·       speculationin the press or analyst community;

·       developmentsin our industry;

·       changesin our growth rates; and

·       generalmarket conditions, political influences, and other factors, including factorsunrelated to our operating performance or the operating performance of ourcompetitors.

These factors andfluctuations, as well as general economic, political, and market conditions,may materially adversely affect the market price of our common stock. Securitiesclass action litigation is often brought against a company following periods ofvolatility in the market price of its securities. We may in the future be thetarget of similar litigation. Securities litigation, whether with or withoutmerit, could result in substantial costs and divert management’s attention andresources, which could harm our business and financial condition, as well asthe market price of our common stock. Additionally, volatility or a lack ofpositive performance in our stock price may adversely affect our ability toretain key employees, most of whom have been granted stock options orrestricted stock units.

**We depend on alimited number of suppliers and will be delayed in our manufacture or unable tomanufacture our Symyx Tools if shipments from these suppliers are delayed orinterrupted**

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

Even if alternativesources of supply are available, it could be time-consuming and expensive forus to qualify new vendors and integrate their components into our Symyx Tools.In addition, we are dependent on our vendors to provide components ofappropriate quality and reliability. Consequently, in the event that suppliesfrom these vendors were delayed or interrupted for any reason, we could bedelayed in our ability to develop and deliver products.

**Our investmentscould lose market value and consequently harm our ability to fund continuingoperations**

The primary objective of our investment activities isto preserve principal while at the same time maximizing yields withoutsignificantly increasing risk. To achieve this objective, we maintain ourportfolio of cash equivalents, short-term and long-term investments in avariety of securities, including government and corporate obligations and moneymarket funds. These securities are generally classified as available-for-saleand consequently are recorded on the balance sheet at fair value withunrealized gains or losses reported as a separate component of accumulatedother comprehensive income (loss), net of estimated tax. The market values ofthese investments may fluctuate due to market conditions and other conditionsover which we have no control. Fluctuations in the market price and valuationsof these securities may require us to record losses due to impairment in thevalue of the securities underlying our investment. This could result in future chargeson our earnings. All securities are held in United States currency.

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Investments in both fixedrate and floating rate interest earning instruments carry varying degrees ofinterest rate risk. Fixed rate securities may have their fair market value adverselyimpacted due to a rise in interest rates. In general, securities with longermaturities are subject to greater interest rate risk than those with shortermaturities. Although floating rate securities generally are subject to lessinterest rate risk than fixed rate securities, floating rate securities mayproduce less income than expected if interest rates decrease. Due in part tothese factors, our investment income may fall short of expectations or we maysuffer losses in principal if securities are sold that have declined in marketvalue due to changes in interest rates.

**Changes inaccounting standards regarding stock option plans could limit the desirabilityof granting stock options, which could harm our ability to attract and retainemployees, reduce our profitability and may affect our stock price**

We adopted SFAS 123R on January 1,2006. This statement requires us to treat the value of stock options granted toemployees as an expense. The adoption of this statement has reduced theattractiveness of granting stock options because the additional expenseassociated with these grants would reduce our profitability. However,stock-based compensation is an important employee recruitment and retentiontool, and we may not be able to attract and retain key personnel if we continueto reduce the scope of our employee stock programs. We may need to limit theuse of stock-based compensation altogether and continue to explore othercompensation plans to assist in employee recruitment and retention. As a resultof our adoption of SFAS 123R we have made the decision to grant restrictedstock units rather than stock options. We cannot determine how investors willview the change in accounting treatment of stock-based compensation and thechange in our practices and how these changes may impact our stock price andperception of the value of our company.

**Failure to maintaineffective internal controls in accordance with Section 404 of theSarbanes-Oxley Act could have a material adverse effect on our business and stockprice**

Each year we are requiredto document and test our internal control procedures in order to satisfy therequirements of Section 404 of the Sarbanes-Oxley Act, which requiresannual management assessments of the effectiveness of our internal controlsover financial reporting and a report by our Independent Registered PublicAccounting Firm addressing these assessments and the effectiveness of internalcontrol over financial reporting. During the course of our testing we mayidentify deficiencies that we are required to remediate in order to comply withthe requirements of Section 404. In addition, if we fail to maintain theadequacy of our internal controls, as such standards are modified, supplementedor amended from time to time, we may not be able to ensure that we can concludeon an ongoing basis that we have effective internal controls over financialreporting in accordance with Section 404 of the Sarbanes-Oxley Act.Furthermore, there are certain areas of accounting such as income tax thatinvolve extremely complex rules that vary by country, where an innocenterror, not misconduct, could be deemed to be a significant deficiency or amaterial weakness in our internal controls. Failure to maintain an effectiveinternal control environment could have a material adverse effect on our stockprice.

**If our productscontain defects, it could harm our revenues and expose us to litigation**

The 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 correctivereleases of our software products to fix any defects or errors. Any defects orerrors could also cause injury to personnel and/or damage to our reputation andresult in increased costs, loss of revenues, product returns or ordercancellations, or lack of market acceptance of our products. Accordingly, anydefects or errors could have a material and adverse effect on our business,results of operations and financial condition.

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Our license agreementswith our customers typically contain provisions designed to limit our exposureto potential product liability claims. It is possible, however, that thelimitation of liability provisions contained in our license agreements may not beeffective as a result of existing or future federal, state, or local laws orordinances or unfavorable judicial decisions. Although we have not experiencedany product liability claims to date, sale and support of our products entailsthe 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 aproduct liability claim against us, it could have a material adverse effect onour business, results of operations, and financial condition. Our productsinteroperate with many parts of complicated computer systems, such asmainframes, servers, personal computers, application software, databases,operating systems, and data transformation software. Failure of any one of theseparts could cause all or large parts of computer systems to fail. In suchcircumstances, it may be difficult to determine which part failed, and it islikely that customers will bring a lawsuit against several suppliers. Even ifour software is not at fault, we could suffer material expense and materialdiversion of management time in defending any such lawsuits.

**We are exposed togeneral global economic and market conditions**

Our business is subject tothe effects of general economic conditions in the United States, Europe, Asia,and globally, and, in particular, market conditions in the life science andchemical industries. In recent quarters, our ability to conclude Symyx Toolssale agreements and research and development collaborative arrangements havebeen adversely affected as a result of unfavorable economic conditions andreduced capital spending in the United States, Europe, and Asia. If theeconomic conditions in the United States and globally do not improve, or if weexperience a worsening in the global economic slowdown, we may experiencematerial adverse impacts on our business, operating results, and financialcondition.

**We are exposed torisks associated with export sales and international operations that may limitour ability to generate revenue from our products and intellectual property**

We have recentlyestablished operations in certain parts of Europe and Asia. We intend tocontinue to expand our international presence in order to increase our exportsales. Export sales to international customers and operating in foreigncountries entail a number of risks, including:

·       obtainingand enforcing intellectual property rights under a variety of foreign laws;

·       unexpectedchanges in, or impositions of, legislative or regulatory requirements;

·       delaysresulting from difficulty in obtaining export licenses for certain technology,and tariffs, quotas, and other trade barriers and restrictions;

·       longerpayment cycles and greater difficulty in accounts receivable collection;

·       potentiallyadverse taxes;

·       currencyexchange fluctuations;

·       greaterdifficulties in maintaining and enforcing United States accounting and publicreporting standards;

·       greaterdifficulties in staffing and managing foreign operations;

·       theburdens of complying with a variety of foreign laws; and

·       otherfactors beyond our control.

We are also subject togeneral geopolitical risks in connection with international operations, such aspolitical, social and economic instability, terrorism, potential hostilities,changes in diplomatic and trade 

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relationships,and disease outbreaks. Although to date we have not experienced any materialadverse effect on our operations as a result of such regulatory, geopolitical,and other factors, we cannot assure investors that such factors will not have amaterial adverse effect on our business, financial condition, and operatingresults or require us to modify our current business practices.

**Any inability ofours to keep pace with technological advances and evolving industry standardswould harm our business**

The market for ourproducts is characterized by continuing technological development, evolvingindustry standards, and changing customer requirements. Due to increasingcompetition in our field, it is likely that the pace of innovation and technologicalchange will increase. Our success depends upon our ability to enhance existingproducts and services and to respond to changing customer requirements. Failureto develop and introduce new products and services, or enhancements to existingproducts, in a timely manner in response to changing market conditions,industry standards, or other customer requirements would harm our futurerevenues and our business and operating results.

**We use hazardousmaterials in our business, and any claims relating to improper handling,storage, or disposal of these materials could subject us to significantliabilities**

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

**Compliance withcurrent and future environmental regulations may be costly which could impactour future earnings.**

We may be subject toenvironmental and other regulations due to our production and marketing ofproducts in certain states and countries. We also face increasing complexity inour product design and procurement operations as we adjust to new and upcomingrequirements relating to the materials composition of our products, includingthe restrictions on lead and certain other substances in electronics that applyto specified electronics products put on the market in the European Union as ofJuly 1, 2006 (Restriction of Hazardous Substances in Electrical andElectronic Equipment Directive (EU RoHS)). The European Union has alsofinalized the Waste Electrical and Electronic Equipment Directive (WEEE), whichmakes producers of electrical goods financially responsible for specifiedcollection, recycling, treatment and disposal of past and future coveredproducts. The deadline for enacting and implementing this directive byindividual European Union governments was August 13, 2004 (WEEELegislation), although extensions were granted in some countries. Producersbecame financially responsible under the WEEE Legislation beginning in August 2005.Other countries, such as the United States, China and Japan, have enacted ormay enact laws or regulations similar to the EU RoHS or WEEE Legislation. Theseand other environmental regulations may require us to reengineer certain of ourexisting

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**Our facilities arelocated near known earthquake fault zones, and the occurrence of an earthquakeor other disaster could cause damage to our facilities and equipment and harmour business**

Our facilities are locatedin the Silicon Valley near known earthquake fault zones and are vulnerable todamage from earthquakes. In October 1989, a major earthquake that causedsignificant property damage and a number of fatalities struck this area. We arealso 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 ourfacilities would be seriously, or potentially completely, impaired. Inaddition, the unique nature of our research activities and of much of ourequipment could make it difficult for us to recover from a disaster. We do notcarry earthquake insurance on the property that we own and the insurance we domaintain may not be adequate to cover our losses resulting from disasters orother business interruptions. Accordingly, an earthquake or other disastercould harm our business and operating results.

**Some of ourexisting stockholders can exert control over us, and may not make decisionsthat are in the best interests of all stockholders**

As of December 31,2006, our officers, directors and principal stockholders (greater than 5%stockholders) together control approximately 50% of our outstanding commonstock. As a result, these stockholders, if they act together, will be able toexert a significant degree of influence over our management and affairs andover matters requiring stockholder approval, including the election ofdirectors and approval of significant corporate transactions. This concentrationof ownership may have the effect of delaying or preventing a change in controlof Symyx and might affect the market price of our common stock, even when sucha change may be in the best interests of all stockholders.

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

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

·       aclassified Board of Directors, in which our board is divided into three classeswith three-year terms with only one class elected at each annual meeting ofstockholders, which means that a holder of a majority of our common stock willneed two annual meetings of stockholders to gain control of the Board;

·       aprovision that prohibits our stockholders from acting by written consentwithout a meeting;

·       aprovision that permits only the Board of Directors, the President or theChairman to call special meetings of stockholders; and

·       aprovision that requires advance notice of items of business to be broughtbefore stockholders meetings.

These provisions can beamended only with the vote of the holders of 66 2/3% of our outstanding capitalstock.

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**Item 1B.**               UnresolvedStaff Comments

None.

**Item 2.**                        Properties

Our facilities currentlyconsist of an aggregate of 158,000 square feet of office, research, and laboratoryspace in several locations in California, New Jersey, North Carolina, Oregon,and other states and countries. We own the 39,000 square-foot building at 3100Central Expressway, Santa Clara, California and lease the remaining officespaces under lease agreements that expire from April 2007 to November 2015.We believe our existing properties, including both owned and leased sites, arein good condition and are adequate to meet our current and foreseeable futurerequirements.

**Item 3.**                        LegalProceedings

In May 2006, we fileda complaint against Intematix Corporation (“Intematix”) for patent infringementin the United States District Court for the Northern District of Californiaalleging willful infringement of five patents (the “Original Complaint”) and weamended the Original Complaint to add a claim for a declaratory judgment thatwe did not misappropriate any trade secret information of Intematix (the “AmendedCompliant”). In June 2006, Intematix filed a complaint against us inthe California Superior Court for Alameda County alleging trade secretmisappropriation and unfair competition (the “Intematix Complaint”), and theyfiled a Second Amended Complaint, asserting trade secret misappropriationand unfair competition claims against Symyx, Isy Goldwasser, our president,individually, Intermolecular and David Lazovsky, Intermolecular’s chiefexecutive officer, individually. In December 2006, the parties resolvedthe litigation.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

None.

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

Ourcommon stock is traded on the NASDAQ Global Select Market under the symbol of “SMMX.”The following table sets forth, for the period indicated, the low and high bidprices per share for our common stock as reported by the NASDAQ Global SelectMarket.

| ** **     | ** ** | **HIGH**   | ** ** | **LOW**    | ** ** |
|----------------|------------|------------|------------|------------|------------|
| **2005**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter  |       | $          | 30.61      |       | $          | 21.61 |   |
| Second Quarter |       | $          | 28.49      |       | $          | 21.47 |   |
| Third Quarter  |       | $          | 31.09      |       | $          | 24.01 |   |
| Fourth Quarter |       | $          | 28.77      |       | $          | 22.84 |   |
| **2006**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter  |       | $          | 29.58      |       | $          | 24.00 |   |
| Second Quarter |       | $          | 30.40      |       | $          | 22.21 |   |
| Third Quarter  |       | $          | 25.14      |       | $          | 20.96 |   |
| Fourth Quarter |       | $          | 25.20      |       | $          | 19.40 |   |

 

As of February 20, 2007, there were approximately110 holders of record of our common stock.

No dividends have beenpaid on our common stock since our inception and we currently intend to retainall future earnings, if any, for use in our business and do not anticipatepaying any cash dividends in the foreseeable future.

**Equity CompensationPlan Information**

Thefollowing table provides information as of December 31, 2006 with respectto our shares of common stock that may be issued under our existing equitycompensation plans.

| ** **                                                 | ** ** | ** ** | ** ** | ** **                                                                                                  | ** ** | ** **                                                              | ** ** | ** **                                                                                                                      | ** ** | ** **                                                                                | ** ** |
|------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                     | ** ** | ** ** | ** ** | **A  Number of  Securities to Be  Issued Upon  Exercise of  Outstanding  Options** | ** ** | **B  Weighted  Average  Exercise  Price of  Outstanding  Options** | ** ** | **C  Number of  Securities to Be  Issued Upon  Vesting of  Outstanding  Restricted Stock  Units** | ** ** | **D  Weighted  Average  Grant Price  of  Outstanding  Restricted  Stock Units** | ** ** | **E  Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected in  Columns A and C)** | ** ** |
| Equity Compensation Plans Approved by Stockholders(1)      |       |       | 6,446,274  | (3)                                                                                                         |       |                                                                    | $          | 27.41                                                                                                                           |       |                                                                                      |       | 328,050 |   |   |   | $ | 29.05 |   |   |   | 3,593,661 | (4) |   |
| Equity Compensation Plans Not Approved by  Stockholders(2) |       |       | 316,318    |                                                                                                        |       |                                                                    | $          | 26.01                                                                                                                           |       |                                                                                      |       | — |   |   |   | — |   |   |   | 713,950 |   |   |
| Total                                                      |       |       | 6,762,592  |                                                                                                        |       |                                                                    | $          | 27.35                                                                                                                           |       |                                                                                      |       | 328,050 |   |   |   | $ | 29.05 |   |   |   | 4,307,611 |   |   |
|                                                            |            |            |            |                                                                                                             |            |                                                                         |            |                                                                                                                                 |            |                                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)           Consists of the 1996 Stock Option Plan, 1997 StockOption Plan and the 1999 Employee Stock Purchase Plan.

(2)           Consists of IntelliChem, Inc. 2003 Stock OptionPlan assumed in connection with the acquisition of IntelliChem onNovember 30, 2004, the Synthematix, Inc. 2000 Equity CompensationPlan, as amended, assumed in connection with the acquisition of Synthematix onApril 1, 2005, and the 2001 Non-statutory Stock Option Plan. A descriptionof these plans is available in Note 4 of the Notes to Consolidated FinancialStatements.

(3)           Excludes purchase rights accruing under our 1999Employee Stock Purchase Plan which has a stockholder approved reserve of1,789,350 shares as of December 31, 2006. Under the 1999 Employee StockPurchase Plan, 

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each eligible employee maypurchase up to a maximum of 10,000 shares per annum of common stock atsemi-annual intervals on the last United States business day of April andOctober each year at a purchase price per share equal to 85% of the lowerof (i) the closing selling price per share of common stock on theemployee’s entry date into the two-year offering period in which thatsemi-annual purchase date occurs or (ii) the closing selling price pershare 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 purchaseshares under this Plan. 

(4)           Consists of shares available for futureissuance under our 1996 Stock Option Plan, 1997 Stock Option Plan and the 1999Employee Stock Purchase Plan. As of December 31, 2006, an aggregate of1,789,350 shares of common stock were available for issuance under the 1999Employee Stock Purchase Plan and 1,804,311 shares of common stock wereavailable for issuance under the 1996 Stock Option Plan and 1997 Stock OptionPlan. The 1999 Employee Stock Purchase Plan provides for annual increases inthe number of shares available for issuance under the Plan on the first day ofeach fiscal year, equal to the lesser of 1% of the outstanding shares of commonstock on the first day of the fiscal year, 350,000 shares, or a lesser amountas determined by our Board of Directors. The 1997 Stock Option Plan providesfor an annual increase in the number of shares of common stock reserved forissuance equal to the lesser of 1,500,000 shares, 4% of the outstanding shareson the date of the annual increase, or a lesser amount as determined by ourBoard of Directors. The 1997 Stock Option Plan expired on February 26,2007.

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**Stock PerformanceGraph**

The following graphcompares the cumulative total stockholder return on our common stock with thecumulative total return for each of the NASDAQ composite and the S & PBiotechnology index for the 60 months commencing from December 31,2006. The stock price performance shown on the graph below is not necessarilyindicative of future price performance.

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

Among SymyxTechnologies, Inc., The NASDAQ Composite IndexAnd The S & P Biotechnology Index

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*                    $100 investedon 12/31/01 in stock or index-including reinvestment of dividends. Fiscal yearending December 31.

| ** **                | ** ** | **Cumulative Total Return** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | **12/01**                             | ** ** | **12/02** | ** ** | **12/03** | ** ** | **12/04** | ** ** | **12/05** | ** ** | **12/06** | ** ** |
| Symyx  Technologies, Inc. |       | 100.00                                |       | 59.27 |   | 96.75 |   | 141.48 |   | 128.48 |   | 101.65 |   |
| NASDAQ Composite          |       | 100.00                                |       | 71.97 |   | 107.18 |   | 117.07 |   | 120.50 |   | 137.02 |   |
| S & P Biotechnology   |       | 100.00                                |       | 79.59 |   | 102.55 |   | 110.35 |   | 130.52 |   | 126.94 |   |

 

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**Item 6.**                        SelectedFinancial Data

Thefollowing selected historical information has been derived from our auditedfinancial statements. The financial information as of December 31, 2006and 2005 and for each of the three years in the period ended December 31,2006 are derived from audited financial statements included elsewhere in thisAnnual Report on Form 10-K. The table should be read in conjunctionwith Item 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operation,” and Item 8, “Financial Statements and SupplementaryData.”

| ** **                                                            | ** ** | **For the Years Ended December 31,**      | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                            | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated  Statements of Operations Data:**                      | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Service revenue                                                       |       | $                                                                  | 57,933     |   | $ | 56,980 |   | $ |  42,251 |   | $ |  38,689 |   | $ |  35,397 |   |
| Product sales                                                         |       | 33,526                                                             |       | 26,663 |   | 27,060 |   | 14,458 |   | 25,877 |   |
| License fees and royalties                                            |       | 33,441                                                             |       | 24,494 |   | 13,874 |   | 9,816 |   | 3,547 |   |
| Total revenue                                                         |       | 124,900                                                            |       | 108,137 |   | 83,185 |   | 62,963 |   | 64,821 |   |
| Operating  expenses:                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cost of products sold                                                 |       | 11,811                                                             |       | 11,090 |   | 7,857 |   | 2,937 |   | 6,239 |   |
| Research and development                                              |       | 65,060                                                             |       | 50,660 |   | 41,142 |   | 40,058 |   | 39,307 |   |
| Sales, general and administrative                                     |       | 35,224                                                             |       | 25,566 |   | 18,007 |   | 14,933 |   | 14,592 |   |
| Acquired in-process research and development                          |       | 1,392                                                              |       | 1,590 |   | 2,260 |   | — |   | — |   |
| Amortization of intangible assets arising from  business combinations |       | 4,270                                                              |       | 3,515 |   | 231 |   | — |   | — |   |
| Total operating expenses                                              |       | 117,757                                                            |       | 92,421 |   | 69,497 |   | 57,928 |   | 60,138 |   |
| Income from  operations                                               |       | 7,143                                                              |       | 15,716 |   | 13,688 |   | 5,035 |   | 4,683 |   |
| Interest and  other income, net                                       |       | 7,709                                                              |       | 4,427 |   | 2,521 |   | 1,996 |   | 3,260 |   |
| Income before  income tax expense and equity loss                     |       | 14,852                                                             |       | 20,143 |   | 16,209 |   | 7,031 |   | 7,943 |   |
| Income tax  expense                                                   |       | (6,382                                                             | )          | (8,141 | ) | (3,327 | ) | (1,290 | ) | (2,657 | ) |
| Equity in loss  from investment in Visyx Technologies Inc.            |       | (186                                                               | )          | — |   | — |   | — |   | — |   |
| Net income                                                            |       | $                                                                  | 8,284      |   | $ | 12,002 |   | $ | 12,882 |   | $ | 5,741 |   | $ | 5,286 |   |
| Basic net income  per share                                           |       | $                                                                  | 0.25       |   | $ | 0.37 |   | $ | 0.40 |   | $ | 0.18 |   | $ | 0.17 |   |
| Shares used in  computing basic net income per share                  |       | 33,199                                                             |       | 32,819 |   | 32,067 |   | 31,199 |   | 30,647 |   |
| Diluted net  income per share                                         |       | $                                                                  | 0.24       |   | $ | 0.35 |   | $ | 0.38 |   | $ | 0.18 |   | $ | 0.17 |   |
| Shares used in computing  diluted net income per share                |       | 34,214                                                             |       | 34,564 |   | 33,872 |   | 32,470 |   | 31,638 |   |

 

| ** **                                                | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                | ** ** | **(In thousands)** | ** ** |
| **Consolidated  Balance Sheet Data:**                     | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash  equivalents and available-for-sale securities |       | $                       | 149,995    |   | $ | 168,625 |   | $ | 136,541 |   | $ | 138,698 |   | $ | 118,020 |   |
| Working capital                                           |       | 146,180                 |       | 162,237 |   | 142,361 |   | 131,154 |   | 118,363 |   |
| Long-term  investments                                    |       | 13,714                  |       | — |   | — |   | — |   | — |   |
| Goodwill and  intangible assets                           |       | 31,657                  |       | 32,065 |   | 24,397 |   | 856 |   | 910 |   |
| Total assets                                              |       | 260,006                 |       | 241,412 |   | 207,002 |   | 177,536 |   | 157,368 |   |
| Total stockholders’  equity                          |       | 228,376                 |       | 218,529 |   | 191,009 |   | 159,438 |   | 145,483 |   |
|                                                           |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operation

*All percentage amounts and ratios were calculatedusing the underlying data in thousands. Operating results for the year ended December 31,2006, are not necessarily indicative of the results that may be expected forfuture fiscal years. The following discussion and analysis should be read inconjunction with our historical financial statements and the notes to thosefinancial statements that are included in Item 8 of Part II of this AnnualReport on Form 10-K.*

**Overview**

Our revenue and cash flows from operations have comefrom research collaborations, sale and support of laboratory systems, andlicensing of software, discovered materials, and intellectual property. Wedevelop and apply high-throughput experimentation to the discovery ofinnovative materials for chemical, energy, electronics, life science, and otherindustries. We expect that our future cash flows and revenue will be comprisedin large part of payments to be made and revenue to be earned under researchand development collaborations together with product sales and license fees androyalties.

Since our inception, wehave invested heavily in establishing the technology, laboratory systems, andsoftware necessary to transform traditional research and development and pursuehigh-throughput discovery of materials. Through collaborations and our owninternal research, we continue to develop and apply high-throughputtechnologies for discovery of new materials. Our list of discovered materialscontinues to advance over time, including catalysts to manufacture commoditychemicals and polyolefins, polymers and phosphors for life science andindustrial applications, and materials for electronics applications. We applyour expertise in high-throughput research technologies to offer a growing lineof Symyx Tools to enable improved research and development execution in ourcustomers’ laboratories. We continue to expand Symyx Software, offeringcustomers an integrated research and development execution and decision-supportsystem. We believe we are now well positioned to capitalize on theseinvestments.

**Recent Developments**

Our major recentdevelopments and their impact on our business are highlighted below:

·       Completionof $30 million repurchase of 1.2 million shares of Symyx common stock

·       Creationand venture funding of Visyx in November 2006, providing a focused companyfor the commercial development of Symyx sensor technology

·       Strategicinvestment in Intermolecular Inc., a venture-backed company advancingtechnologies for semiconductor manufacturing

·       Commercializationof a Symyx-discovered polymer for an undisclosed electronic application by JSRCorporation, bringing the total number of commercialized Symyx-discoveredmaterials to five

·       Announcementby the Dow Chemical Company of the introduction of a revolutionary olefin-basedelastomer, INFUSETM Olefin-Block Copolymers, discovered by Dow using Symyx Toolsand manufactured using Dow technologies and a Symyx discovered catalyst. Salesof INFUSE are expected to generate royalty payments to Symyx

·       Growthwithin Symyx’s historic base of life science customers, plus expansion throughnew industrial and academic customers

·       Acquisitionof Autodose in Geneva, Switzerland in July 2006, providing an operatingbase in Europe, advanced powder handling capabilities and a springboard for newBenchtop Tools products

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·       Introductionof Symyx Benchtop System at the American Laboratory Association (ALA) meetingin January 2007, adding a significant new modular entry point for SymyxTools and winning the ALA New Product Award Designation

·       Expandingadoption of Symyx Software by pharmaceutical companies plus increasingbiotechnology company customer base and active evaluation by chemical companies

·       Introductionof three major new software product releases: Symyx ELN Software 5.3, DiscoveryNotebook 4.0 and release of upgrades to the Symyx Lab Execution and Analysisapplications

In the year ended December 31, 2006, we generatedtotal revenue of $124.9 million, with operating income of $7.1 million, netincome of $8.3 million and diluted earnings per share of $0.24. Included in the2006 operating income and net income were purchase accounting adjustments andother special charges arising from the acquisitions, including approximately$1.4 million of an in-process research and development charge, $4.3 million ofamortization of intangible assets, and other merger related expenses.

During 2006, we generated a positive cash flow fromoperations. After paying $30 million to repurchase a portion of our commonstock, making a $13.5 million long-term investment in Intermolecular, Inc.,providing $400,000 of funding to Visyx Technologies Inc. and using a net $4.2million to acquire Autodose, we ended the year with $150.0 million in cash,cash equivalents and available-for-sale securities.

Our total headcount increased from 275 employees atthe end of 2004 to 347 employees at the end of 2005 and to 380 employees at theend of 2006 primarily as the result of acquisitions, the expansion of oursoftware group, additional research personnel to meet our contractualobligations under our alliance agreements with ExxonMobil and Dow andadditional sales and marketing resources. We anticipate that our headcount willcontinue to increase to meet the mix and level of staffing required by ourcollaborative, tools and software agreements.

We adopted Statement of Financial Accounting StandardsNo. 123 (revised 2004), *Share-Based Payment*(“SFAS 123R”), effective January 1, 2006, using the modifiedprospective transition method. We analyzed our stock-based compensationstrategies prior to the adoption of SFAS 123R and made the decision to grantrestricted stock units rather than stock options to our employees andnon-employee directors in 2006.

To reduce stock-based compensation expenses under SFAS123R, on two separate occasions during the three month period ended September 30,2005, the Compensation Committee of our Board of Directors approved amendmentsto the terms of outstanding options to purchase shares of our common stock. Oneach occasion, the terms of options with exercise prices above a designatedthreshold were amended to become fully-vested and exercisable on December 30,2005, provided that the holder of such option remained an employee orconsultant of Symyx on such date. The first occasion was on September 13,2005, when we amended the terms of outstanding options to purchaseapproximately 251,000 shares of our common stock with exercise prices above $30per share. The second occasion was on September 22, 2005, when we amendedthe terms of outstanding options to purchase approximately 159,000 shares ofour common stock with exercise prices equal or greater than $24.67 per share.All such options were issued pursuant to the terms of our various stock plans.No options held by our executive officers or members of our Board of Directorswere accelerated pursuant to this authorization. No compensation expense wasrecorded in connection with the acceleration of the vesting schedule of theabove options because the fair market value of the common stock was less thanthe exercise price of the accelerated options on each of the respectivemeasurement dates. These accelerations reduced compensation expenses that wouldhave been recorded in accordance with SFAS 123R in the consolidated incomestatement for the year ended December 31, 2006.

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Werecognized stock-based compensation expenses of $10.3 million during the yearended December 31, 2006. Stock-based compensation expenses recognized inour results of operations for the year ended December 31, 2006 were asfollows (in thousands):

| Cost of products  sold             |   | $     | 163    |   |
|------------------------------------|--------|-------|--------|--------|
| Research and  development          |   | 4,450 |   |
| Sales, general  and administrative |   | 5,683 |   |
| Total                              |   | $     | 10,296 |   |

 

Includedin the above amounts are expenses related to restricted stock units of $7.9million, which would have been included in our consolidated income statementfor the year ended December 31, 2006 under the provisions of Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB No. 25”). The expenses related to restricted stock units aretherefore not considered as part of the impact of the adoption ofSFAS 123R for the year ended December 31, 2006 in the following table(in thousands, except per share amounts).

| ** **                                        | ** ** | **As  Reported** | ** ** | **Effect of  Adopting  SFAS 123R  Included** | ** ** |
|---------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
| Income from  continuing operations                |       | $                | 7,143      |                                                   |       | $ | (2,415 | ) |   |
| Income before  income tax expense and equity loss |       | $                | 14,852     |                                                   |       | $ | (2,415 | ) |   |
| Net income                                        |       | $                | 8,284      |                                                   |       | $ | (2,010 | ) |   |
| Cash flow from  operations                        |       | $                | 29,920     |                                                   |       | $ | (2,262 | ) |   |
| Cash flow from  financing activities              |       | $                | (11,425    | )                                                      |       | $ | 2,667 |   |   |
| Basic net income  per share                       |       | $                | 0.25       |                                                   |       | $ | (0.06 | ) |   |
| Diluted net income per  share                     |       | $                | 0.24       |                                                   |       | $ | (0.06 | ) |   |

 

In accordance with SFAS 123R, stock-basedcompensation expenses recognized in the consolidated income statement for theyear ended December 31, 2006 were based on awards ultimately expected tovest. The forfeiture rate was estimated to be between 0% and 15% based onhistorical turnover rates of different groups of employees. The forfeiture rateis subject to revision, if necessary, in subsequent periods if actualforfeitures differ from those estimates. In the pro forma information requiredunder SFAS 123 for periods prior to 2006, we accounted for forfeitures as theyoccurred.

As of December 31,2006, we have the following unrecognized compensation costs: a) $604,000related to unvested stock options granted and outstanding expected to beamortized on a graded vesting basis through 2009; b) $1,704,000 related to unvestedrestricted stock units granted expected to be amortized on a straight-linebasis over the remaining vesting period of 2 to 4 months; and c) $335,000related to our Employee Stock Purchase Plan (“ESPP”) expected to be amortizedon a straight-line basis over the weighted-average remaining period of 6months.

***Business Acquisitions***

*Acquisition ofAutodose SA*

On July 13, 2006, we completed the acquisition of100% of the outstanding shares of privately-held Autodose SA (“Autodose”), aGeneva, Switzerland-based maker of precision powder-dispensing equipment. Byacquiring Autodose, we will be able to offer customers tools that combineAutodose’s powder-handling technology with our existing liquid-handlingrobotics technology. The acquisition was accounted for as a businesscombination. Autodose has since been renamed Symyx Technologies Europe 

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SA and its results ofoperations have been included in our consolidated financial statements sincethat date.

The preliminary purchase price for this acquisitionwas $7,103,000, consisting of approximately $6,856,000 in cash (including$1,024,000 to be paid to Autodose’s stockholders within 12 months of the dateof the acquisition) and $247,000 in transaction costs, consisting of legal andother professional service fees.

The above purchase price is preliminary becauseadditional purchase price consideration of up to $6,262,000 may be payable uponthe achievement of certain revenue targets in 2007, 2008 and 2009 by Autodose.We will evaluate the possibility of achieving these targets from time to timeand record the fair value of any additional consideration as an additional costof the acquisition. No additional consideration was recorded as of December 31,2006.

In accordance with Statement of Financial AccountingStandards No. 141, *Business Combinations*,we allocated the preliminary purchase price to the tangible assets,liabilities, and intangible assets acquired, as well as IPR&D, based ontheir estimated fair values. The excess preliminary purchase price over thefair values was recorded as goodwill. The fair value assigned to intangibleassets acquired was based on estimates and assumptions determined bymanagement. The acquired goodwill was assigned entirely to our Symyx Toolssegment. Purchased intangibles with finite lives are amortized on astraight-line basis over their respective useful lives. See Note 7 of the Notesto Consolidated Financial Statements for information regarding the allocationof the preliminary purchase price.

Inperforming this allocation of the preliminary purchase price, we considered,among other factors, our intention for future use of the acquired assets,analyses of historical financial performance and estimates of futureperformance of Autodose’s products. The fair value of intangible assets wasprimarily based on the income approach. The relief from royalty approach wasalso utilized when appropriate. The rates utilized to discount the net cashflows to their present values ranged from 16% to 23%. These discount rates weredetermined after consideration of our rate of return and the weighted averagereturn on assets. Risks we identified and considered in this analysis includedachieving anticipated levels of market acceptance and penetration, successfulcompletion of development efforts, market growth rates, and risks related tothe impact of potential changes in future target markets. Identifiableintangible assets purchased in the Autodose acquisition consisted of thefollowing (in thousands, except for useful life) with a weighted average usefullife of 5.3 years—no significant residual value is estimated for these assets:

| ** **              | ** ** | **Amount** | ** ** | **Useful Life** | ** ** |
|-------------------------|------------|------------|------------|----------------------|------------|
| Customer backlog        |       |       | $          | 144                  |       |   |   | 0.5 year |   |   |
| Trade name              |       |       | 343        |                 |       |   | 5 years |   |   |
| Developed  technology   |       |       | 2,061      |                 |       |   | 5 years |   |   |
| Customer  relationships |       |       | 1,141      |                 |       |   | 6.5 years |   |   |
| Total                   |       |       | $          | 3,689                |       |   |   | 5.3 years |   |   |

 

As of July 13, 2006, Autodose had been working onfour development projects. These projects have not yet been proven to betechnologically feasible, but have been developed to a point where they hadvalue associated with potential future revenue. Because technologicalfeasibility was not yet proven and no alternative future uses were believed toexist for the in-process technologies, the assigned value of $1,392,000 wasexpensed immediately upon the closing of the acquisition, in accordance withFASB Interpretation No. 4, *Applicability of FASBStatement No. 2 to Business Combinations Accounted for by the PurchaseMethod*.

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The value of in processresearch and development (“IPR&D”) was determined by estimating theexpected cash flows from the projects once commercially viable, discounting thenet cash flows back to their present value and then applying a percentage of completionto the calculated value as defined below. A discount rate of 23% was used forIPR&D, which is higher than the discount rate used to value certain otherAutodose assets due to inherent risk surrounding the successful development ofthe IPR&D and the increase in projected financial results compared withhistorical results.

*Acquisition ofSynthematix, Inc.*

On April 1, 2005, we completed the acquisition of100% of the outstanding shares of privately-held Synthematix, Inc., basedin Durham, North Carolina. Synthematix was a provider of organic synthesisreaction planning software systems for scientific knowledge management inchemistry research, with customers primarily in the pharmaceutical,biotechnology, and fine chemical industries. The results of Synthematix’soperations have been included in our consolidated financial statements sincethat date. On August 1, 2005, Synthematix was merged into one of oursubsidiaries, Symyx IntelliChem, Inc., whose name was subsequently changedto Symyx Software, Inc.

The purchase price for this acquisition was$14,015,000, consisting of approximately $13,079,000 in cash, $571,000 in fairvalue of assumed stock options to purchase 23,876 shares of Symyx common stock,and $365,000 in transaction costs, consisting of legal and other professionalservice fees.

In accordance with Statement of Financial AccountingStandards No. 141, *Business Combinations*,we allocated the preliminary purchase price to the tangible assets, deferredcompensation, liabilities, and intangible assets acquired, as well asIPR&D, based on their estimated fair values. The excess purchase price overthe fair values was recorded as goodwill. The fair value assigned to intangibleassets acquired was based on estimates and assumptions determined by management.The acquired goodwill was assigned entirely to our software segment. Purchasedintangibles with finite lives are amortized on a straight-line basis over theirrespective useful lives. See Note 7 of Notes to Consolidated FinancialStatements for information regarding the purchase price allocation.

Inperforming this purchase price allocation, we considered, among other factors,its intention for future use of the acquired assets, analyses of historicalfinancial performance and estimates of future performance of Synthematix’sproducts. The fair value of intangible assets was primarily based on the incomeapproach. The relief from royalty approach was also utilized when appropriate.The rates utilized to discount the net cash flows to their present values rangedfrom 15% to 17.5%. These discount rates were determined after consideration ofour rate of return and the weighted average return on assets. Risks weidentified and considered in this analysis included achieving anticipatedlevels of market acceptance and penetration, successful completion ofdevelopment efforts, market growth rates, and risks related to the impact ofpotential changes in future target markets. Identifiable intangible assetspurchased in the Synthematix acquisition consisted of the following (inthousands, except for useful life) with a weighted average useful life of 4.6years. No significant residual value is estimated for these assets.

| ** **              | ** ** | **Amount** | ** ** | **Useful Life** | ** ** |
|-------------------------|------------|------------|------------|----------------------|------------|
| Trade name              |       |       | $          | 280                  |       |   |   | 1 year |   |   |
| Developed  technology   |       |       | 2,350      |                 |       |   | 4.5 years |   |   |
| Customer  relationships |       |       | 500        |                 |       |   | 7.0 years |   |   |
| Total                   |       |       | $          | 3,130                |       |   |   | 4.6 years |   |   |

 

The IPR&D project that Synthematix was working onwas the development of next generation of Synthematix software. At the date ofacquisition, that software had not yet been proven to be technologicallyfeasible but had been developed to a point where it had value associated withpotential future revenue. Because technological feasibility was not  proven and no alternative future uses were 

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believed to exist for thein-process technologies, the assigned value was expensed immediately upon theclosing of the acquisition, in accordance with FASB Interpretation No. 4, *Applicability of FASB Statement No. 2 to Business CombinationsAccounted for by the Purchase Method*.

The value of IPR&D wasdetermined by estimating the expected cash flows from the projects oncecommercially viable, discounting the net cash flows back to their present valueand then applying a percentage of completion to the calculated value as definedbelow. A discount rate of 20% was used for IPR&D which is higher than thediscount rate used to value other Synthematix assets due to inherent risksurrounding the successful development of the IPR&D and the increase inprojected financial results compared with historical results.

**Critical AccountingPolicies**

Our financial statementsand accompanying notes are prepared in accordance with United States generallyaccepted accounting principles (“GAAP”). Note 1 of the Notes to theConsolidated Financial Statements included under Item 8 in this Annual Reporton Form 10-K describes the significant accounting policies andmethods used in the preparation of the consolidated financial statements.Preparing financial statements and related disclosures requires management toexercise judgment in making estimates and assumptions that affect the reportedamounts of assets, liabilities, revenue, and expenses. These estimates andassumptions are affected by management’s application of accounting policies.Estimates include the forfeiture rate for stock-based awards, future warrantyexpenditures and product life cycles, and assumptions such as the elementscomprising a revenue arrangement, including the distinction between softwareupgrades/enhancements and new products; when technological feasibility isachieved for the Company’s products; the potential outcome of future taxconsequences of events that have been recognized in the Company’s financialstatements or tax returns; and determining when investment impairments areother-than-temporary. The following critical accounting policies, among others,are impacted significantly by judgments, estimates and assumptions used in thepreparation of the consolidated financial statements.

*Source of Revenueand Revenue Recognition Policy*

We recognize revenue in accordance with the Securitiesand Exchange Commission’s Staff Accounting Bulletin No. 104 (“SAB 104”), *Revenue Recognition*, the American Institute of CertifiedPublic Accountants Statement of Position (“SOP”) 97-2, *Software Revenue Recognition*, as amended by SOP 98-9,*Modification of SOP 97-2, SoftwareRevenue Recognition*, Financial Accounting Standards Board TechnicalBulletin 90-1, *Accounting for SeparatelyPriced Extended Warranty and Product Maintenance Contracts*, the Emerging Issues Task Force consensus onIssue 00-21 or EITF 00-21, *Multiple-DeliverableRevenue Arrangements*, and other authoritative accountingliterature. We generate revenue fromservices provided under research collaborations, the sale of products, licenseof software, provision of support and maintenance services, and the license ofintellectual property. It is possible for our customers to work with us inmultiple areas of our business and contracts may include multiple elements ofservice revenue, product revenue, and license and royalty revenue. Indetermining the basis for non-software product revenue recognition, we firstdetermine the fair value of any extended warranty services and defer thisrevenue to be recognized over the service period. For those non-software productsale contracts that involve multiple element deliverables, we identify alldeliverables and allocate revenue among the units of accounting in accordancewith EITF 00-21. In an arrangement that includes software that ismore than incidental to the products or services as a whole, we recognizerevenue from the software and software-related elements, as well as anynon-software deliverable(s) for which a software deliverable is essentialto its functionality, in accordance with SOP 97-2.

Service revenue consistsof research and development funding received from collaborative partners aswell as support and maintenance or extended warranty agreements. Productrevenue consists of payments 

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fromcustomers for Symyx Tools, comprising hardware, associated software andintellectual property licenses and consumables. Royalties and license feesinclude fees for licensing of our software, intellectual property, proprietarymaterials and technology license payments and royalties on laboratory systemsand software sold under license by third parties.

*Service Revenue*

We recognize revenue from research collaborationagreements, software consulting agreements, and support and maintenanceagreements as earned upon performance of the services specified in theagreements. Payments received that are related to future performance aredeferred and recognized as revenue as the performance requirements arefulfilled.

Non-refundable up-front payments received inconnection with research and development collaboration agreements, includingtechnology access fees, are deferred and recognized as earned upon performance of the services over the relevantperiods specified in the agreement, generally the research term. Revenue frommilestone payments, which are substantially at risk until the milestones arecompleted, is recognized upon completion of these milestone events. Milestonepayments to date have been immaterial.

Revenue allocable tosupport and maintenance is recognized on a straight-line basis over the periodthe support and maintenance is provided. Our software licenses may provide fortechnical support, bug fixes, and rights to unspecified upgrades on awhen-and-if-available basis for periods defined within the contract. Revenuerelated to this post-contract customer support is deferred and recognized overthe term of the contracted support.

*Product Sales*

We recognize revenue fromthe sale of Symyx Tools hardware and the license of associated software, andall related costs of products sold are expensed, once delivery has occurred andcustomer acceptance has been achieved. A determination is made for each systemdelivered as to whether software is incidental to the system as a whole. Ifsoftware is not incidental to the Symyx Tools as a whole, revenue from thesearrangements is recognized in accordance with SOP 97-2, as amended. Ifsoftware is incidental to the Symyx Tools, revenue from the sale of the SymyxTools is earned and recognized when persuasive evidence of an arrangementexists, delivery of the product has occurred, no significant obligations withregard to implementation remain, the fee is fixed or determinable, andcollectibility is reasonably assured. If there are extended payment terms, werecognize product revenue as these payments become due. We consider all arrangementswith payment terms extending beyond 12 months not to be fixed or determinable.If the fee is not fixed or determinable, revenue is recognized as paymentsbecome due from the customer. In multiple element arrangements, we use theresidual method to allocate revenue to delivered elements once we haveestablished fair value for all undelivered elements. A warranty expense accrualis established at the time of delivery.

*Software LicenseFees*

Forsoftware licensed on an annual right to use basis, revenue is recognized on astraight-line basis over the term of the license. For revenue allocable to thesoftware portion of a multiple element arrangement or licensed on a perpetualbasis, we recognize revenueupon delivery of the software product to the end-user and commencement of thelicense, unless we have ongoing obligations for which fair value cannot beestablished or the fee is not fixed or determinable or collectibility is notprobable, in which case we recognize revenue only when each of these criteria havebeen met. By way of example, for the ELN software products that weacquired from IntelliChem, Inc. and Synthematix, Inc, we have not yetestablished the fair value of certain ongoing obligations and accordingly, anyperpetual license fees are 

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recognizedratably over the period of the ongoing obligations (typically a bundled supportand maintenance commitment of one year). Weconsider all arrangements with payment terms longer than 12 months not to befixed or determinable. If the fee is not fixed or determinable, revenue isrecognized as payments become due from the customer. If evidence of the fairvalue of one or more undelivered elements does not exist, the total revenue isdeferred and recognized when delivery of those elements occurs or when fair valuefor any remaining undelivered elements can be established.

*IntellectualProperty License Fees and Royalties*

We recognize license fee revenue for licenses to ourintellectual property when earned under the terms of the agreements. Generally,revenue is recognized upon transfer of the license unless we have continuingobligations for which fair value cannot be established, in which case therevenue is recognized over the period of the obligation. If there are extendedpayment terms, we recognize license fee revenue as these payments become due.We consider all arrangements with payment terms extending beyond 12 months notto be fixed or determinable. In certain licensing arrangements there isprovision for a variable fee as well as a non-refundable minimum amount. Insuch arrangements, the amount of the non-refundable minimum guarantee isrecognized upon transfer of the license unless we have continuing obligationsfor which fair value cannot be established and the amount of the variable feein excess of the guaranteed minimum is recognized as revenue when it is fixedor determinable.

We recognize royalty revenue based on reported salesby third party licensees of products containing our materials and intellectualproperty. If there are extended payment terms, royalty revenue is recognized asthese payments become due. Non-refundable royalties, for which there are nofurther performance obligations, are recognized when due under the terms of theagreements.

See Note 1 of the Notes toConsolidated Financial Statements for a further discussion of our revenuerecognition policies.

*Stock-BasedCompensation*

Prior to January 1, 2006, we elected to followAPB No. 25 and related interpretations in accounting for stock awards toemployees. Accordingly, no compensation expense was recognized in our financialstatements prior to January 1, 2006 in connection with stock-based awardsgranted to employees with exercise prices not less than fair value on the grantdate. Deferred compensation for options assumed in connection with businesscombinations was determined as the difference between the exercise price andthe fair market value of our common stock on the date options were assumed.Deferred compensation was amortized on a graded vesting method through December 31,2005.

We adopted SFAS 123R,effective January 1, 2006, using the modified prospective transitionmethod. Under that transition method, stock-based compensation expenserecognized during the year ended December 31, 2006 includes: (a)  ESPPawards with offering periods commencing, and stock options granted or assumed,prior to, but not yet vested as of December 31, 2005, based on thegrant-date fair value estimated in accordance with the original provisions ofStatement of Financial Accounting Standard No. 123 (“SFAS 123”); (b) ESPPawards with offering periods commencing subsequent to December 31, 2005 inaccordance with the provisions of SFAS 123R; and (c) restricted stockunits awarded subsequent to December 31, 2005 based on the grant-date fairvalue estimated in accordance with the provisions of SFAS 123R. Under themodified prospective transition method, results for prior periods are notrestated. See Note 1 and 4 of the Notes to the Consolidated FinancialStatements for further details.

*Warranty ExpenseAccrual*

A warranty expense accrualis established at the time of customer acceptance of a Symyx Tools system andis included as a cost of product sold. Management is required to exercisejudgment in establishing the 

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appropriatelevel of warranty expense accrual for each Symyx Tools system delivered andestablishes the accrual based, in part, on reference to actual warranty costsincurred on similar systems. The actual results with regard to warrantyexpenditures could have a material impact on our financial statements. Whenactual warranty costs are anticipated to be higher than our original estimates,an additional expense is charged to cost of products sold in the period inwhich such a determination is made. When actual warranty costs are lower thanour original estimates, the difference will have a favorable impact to cost ofproducts sold at the time the warranty expires for the systems. In years 2006,2005 and 2004, we have recorded favorable adjustments of approximately$200,000, $416,000 and $966,000, respectively.

*Research andDevelopment Costs*

We account for researchand development costs in accordance with several accounting pronouncements,including Statement of Financial Accounting Standard No. 2, *Accounting for Research and Development Costs*(“SFAS 2”),and Statement of Financial Accounting Standard No. 86, *Accounting for the Costs of Computer Software to be Sold, Leased, orOtherwise Marketed*(“SFAS 86”). SFAS 86 specifies that costsincurred internally in creating a computer software product should be chargedto expense when incurred as research and development until technologicalfeasibility has been established for the product. Once technologicalfeasibility is established, all software costs should be capitalized until theproduct is available for general release to customers. Judgment is required indetermining when the technological feasibility of a product is established. Wehave determined that technological feasibility for our software products isreached shortly before the products are released to manufacturing. Costsincurred after technological feasibility is established have not been material,and accordingly, we have expensed our software development costs when incurred.

*Inventories*

We carry our inventoriesat the lower of cost or market, cost being determined on a specificidentification basis. We apply judgment in determining the provisions forslow-moving, excess and obsolete inventories based on historical experience andanticipated product demand.

*Intangible Assets*

We amortize intangibleassets, with the exception of goodwill which is not subject to amortization,over their estimated economic lives. Determining the estimated economic life ofintangible assets requires judgment on the part of management. For example, ifwe determined that the estimated economic lives of these assets were one yearless than those reported in Note 10 of the Notes to Consolidated FinancialStatements, the 2006 amortization expense of intangibles would have beenincreased by $0.9 million. We conduct impairment reviews of intangible assetsannually or when circumstances indicate the potential impairment of intangibleassets. We also review the amortization periods for intangible assets whencircumstances indicate there may be a change in economic lives of intangibleassets.

*Valuation ofGoodwill and Purchased Intangible Assets*

We evaluate therecoverability of goodwill and other intangible assets periodically and takeinto account events or circumstances that warrant revised estimates of usefullives or that indicate that impairment exists. No impairments of goodwill orother intangible assets have been identified during any of the periodspresented.

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**RESULTS OFOPERATIONS**

***Revenue***

| ** **                  | ** ** | **2006**                         | ** ** | **2005**                         | ** ** | **2004**                         | ** ** |
|-----------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **Amount  (in 000’s)** | ** ** | **Change  over  Previous  Year** | ** ** | **Amount  (in 000’s)** | ** ** | **Change  over  Previous  Year** | ** ** | **Amount  (in 000’s)** | ** ** |
| Service revenue             |       | $                                | 57,933     |                             |       | 2                                | %          |   | $ | 56,980 |   |   | 35 | % |   | $ | 42,251 |   |
| Product sales               |       | 33,526                           |       |                             | 26         | %                                |       | 26,663 |   |   | (1 | )% |   | 27,060 |   |
| License fees and  royalties |       | 33,441                           |       |                             | 37         | %                                |       | 24,494 |   |   | 77 | % |   | 13,874 |   |
| Total revenue               |       | $                                | 124,900    |                             |       | 16                               | %          |   | $ | 108,137 |   |   | 30 | % |   | $ | 83,185 |   |

 

Our total revenue increased30% from 2004 to 2005 and 16% from 2005 to 2006. These increases wereprimarily due to the expansion of revenue under our alliances with ExxonMobiland The Dow Chemical Company, particularly in regard to sale of Tools, as wellas an increase in software license fees and royalties from new and existingcustomers.

In 2005, we commenced bifurcating Symyx Tools salestransactions into product sales revenue (reported under the Symyx Tools segment)and software license fees revenue (the majority of which was reported under theSymyx Software segment). Prior to 2005, Symyx Tools sales transactions werereported solely in the product sales revenue line in the consolidated incomestatements. It was not practical to bifurcate the Symyx Tools salestransactions recorded prior to 2005 into product sales and software licensefees revenue.

Revenueis attributed to the following geographic locations based on the physicallocation of Symyx’s customers (as a percentage of total revenue in therespective periods):

| ** **                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| North America               |       |     | 89         | %        |       |     | 83         | % |   |   | 80 | % |   |
| Japan                       |       |     | 3          | %        |       |     | 2          | % |   |   | 7 | % |   |
| Belgium                     |       |     | 2          | %        |       |     | 2          | % |   |   | 10 | % |   |
| Europe (excluding  Belgium) |       |     | 6          | %        |       |     | 13         | % |   |   | 3 | % |   |
| Total                       |       |     | 100        | %        |       |     | 100        | % |   |   | 100 | % |   |

 

Thefollowing table lists our major customers for the years ended December 31,2006, 2005 and 2004 and revenue generated from these customers as a percentageof our total revenue in the respective periods. We expect that a significantportion of our total revenue will continue to be generated from a few keycustomers*.*

| ** **                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| ExxonMobil                |       |     | 41         | %        |       |     | 39         | % |   |   | 54 | % |   |
| The Dow Chemical  Company |       |     | 23         | %        |       |     | 25         | % |   |   | 5 | % |   |
| Total                     |       |     | 64         | %        |       |     | 64         | % |   |   | 59 | % |   |

 

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Wesegregate revenue by the following segments:

| ** **                  | ** ** | **2006**                         | ** ** | **2005**                         | ** ** | **2004**                         | ** ** |
|-----------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **Amount  (in 000’s)** | ** ** | **Change  over  Previous  Year** | ** ** | **Amount  (in 000’s)** | ** ** | **Change  over  Previous  Year** | ** ** | **Amount  (in 000’s)** | ** ** |
| Collaborations              |       | $                                | 52,218     |                             |       | (3                               | )%         |   | $ | 53,818 |   |   | 28 | % |   | $ | 42,131 |   |
| Symyx Tools                 |       | 37,847                           |       |                             | 23         | %                                |       | 30,829 |   |   | 8 | % |   | 28,576 |   |
| Symyx Software              |       | 25,495                           |       |                             | 66         | %                                |       | 15,315 |   |   | 125 | % |   | 6,815 |   |
| Materials and IP  Licensing |       | 5,650                            |       |                             | 7          | %                                |       | 5,268 |   |   | 26 | % |   | 4,191 |   |
| Symyx Sensors               |       | 3,690                            |       |                             | 27         | %                                |       | 2,907 |   |   | 97 | % |   | 1,472 |   |
| Total                       |       | $                                | 124,900    |                             |       | 16                               | %          |   | $ | 108,137 |   |   | 30 | % |   | $ | 83,185 |   |

 

The reconciliation ofsegment revenue above to the revenue disclosed in the consolidated incomestatements is provided in Note 6 “Segment Disclosure” of Notes to theConsolidated Financial Statements.

*CollaborationsRevenue*

The Collaborations group generates revenue primarilyfrom the research services it provides to our collaboration partners.

The increase in Collaborations revenue from 2004 to2005 was primarily attributable to the funding received under the allianceagreement we entered into with The Dow Chemical Company effective January 1,2005 partially offset by a decrease in the level of funding received from anundisclosed partner. In 2006, revenue from Collaborations decreased due to theexpiration of the collaboration with BP, partially offset by a newcollaboration we started with 3D Systems.

We expect to receive over$200 million in revenue from ExxonMobil and over $120 million in revenue fromDow during the five-year term of each of the alliances, through our researchcollaborations, product sales, and license of software and intellectualproperty. Through December 31, 2006, we had recognized $151.6 million and$53.3 million of revenue from the ExxonMobil and Dow alliances, respectively,including a total of approximately $116.7 million in Collaborations revenuefrom these two alliances. We believe these two alliances will continue to bethe major contributors to our Collaborations revenue in 2007.

*Symyx Tools Revenue*

The Symyx Tools group generates revenue primarily fromthe sale of Symyx Tools and associated services.

Symyx Tools revenue increased from $28.6 million in2004 to $30.8 million in 2005 and $37.8 million in 2006. For the year ended December 31,2006, Symyx Tools revenue included $33.5 million of product sales, $4.3 millionof service revenue, and $51,000 of license revenue. For the year ended December 31,2005, Symyx Tools revenue included $26.7 million of product sales, $4.1 millionof service revenue, and $70,000 of license revenue. For the year ended December 31,2004, Symyx Tools revenue included $25.7 million of product sales, $2.8 millionof service revenue and $31,000 of license revenue. The increase in Symyx Toolsrevenue in 2006 and 2005 was primarily due to increased shipments of SymyxTools. During the years ended December 31, 2006 and 2005, we shipped 26and 20 tools, respectively, including our CORE(*x*) modulesand extended core modules and Autodose’s benchtop products, to chemical, lifescience, academic institutions, and several other customers. We adopted ourmodular strategy in 2005 to facilitate timely customer purchases becausepurchase decisions on a complete Symyx Tools system may take a long time. Thismodular approach allows our customers to build up full combinatorial high-

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throughput experimentationcapability over time by acquiring stand-alone portions of a Symyx Tools systemthat integrate together to make an entire workflow.

Under the ExxonMobil andDow alliances, we are contracted to deliver multiple Symyx Tools in the nextfew years. We also negotiate with other chemical and life science companies forthe sale of Symyx Tools. Webelieve our expanding customer base will contribute to our expected growth ofSymyx Tools revenue.

*Symyx SoftwareRevenue*

The Symyx Software groupgenerates revenue primarily from the licensing of software, includingLaboratory Execution and Analysis (“LEA”) and Electronic Laboratory Notebook (“ELN”)software, and provision of associated support, maintenance and consultingservices.

Symyx Software revenueincreased from $6.8 million in 2004 to $15.3 million in 2005 and to $25.5 millionin 2006. The increase in Symyx Software revenue in 2005 was primarily due toincreased revenue from software licenses, and associated maintenance andsupport from The Dow Chemical Company as well as a number of customers accessedthrough our 2004 acquisition of IntelliChem and our 2005 acquisition ofSynthematix. The increase in Symyx Software revenue in 2006 was due primarilyto increased revenue from software licenses and services provided particularlyto large life science companies where our ELN software has established itselfas the industry leader. We expect Symyx Software revenue will continue to growas we recognize the revenue for licenses and services under these as well asnew agreements.

*Materials Licensingand IP Revenue*

The Materials and IP Licensing group generates revenueprimarily from the licensing fees received from licensing our intellectualproperty and from royalties paid by third party licensees for sale of productscontaining our materials and intellectual property.

Materials and IP Licensing revenue increased from $4.2million in 2004 to $5.3 million in 2005 and to $5.7 million in 2006. Theincrease in licensing revenue in 2005 over 2004 was primarily due to paymentsreceived from The Dow Chemical Company. The increase in licensing revenue in2006 over 2005 was primarily due to royalty payments received on products atthe early stage of commercialization by our customers. We believe that thedemonstrated acceptance of our high-throughput experimentation technology byour customers will lead to the expected growth in our license fee revenue infuture years.

We currently have fivematerials commercialized by Celanese, Dow, JSR Corporation and Agfa-GevaertN.V. We anticipate that our customers may commercialize an additional threematerials during 2007. We believe that these commercialized materials willcontribute to our growth in Intellectual Property and Materials Licensingrevenue in the future.

*Symyx SensorsRevenue*

The Symyx Sensors group,prior to its spin-out into Visyx Technologies Inc., provided developmentservices and licenses for specific applications of our sensor technology. SymyxSensors revenue in both 2005 and 2004 consisted primarily of payments receivedfrom Hella KG. Symyx Sensors revenue increased significantly in 2006 over 2005due primarily to payments received from Univation for sensor developmentservices, partially offset by a decrease in payments received from Hella KG.

***Cost of Products Sold***

Cost of products sold was $11.8 million, or 35% ofproduct sales revenue in 2006, compared to $11.1 million, or 42% ofproduct sales revenue in 2005 and $7.9 million, or 29% of product sales revenue

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for the year ended December 31,2004. The increase in the total cost of products sold in 2006 and 2005 wasprimarily due to the increase of products sold. The decrease in cost ofproducts sold as a percentage of product sales revenue in 2006 compared to 2005was due to the change in the product mix shipped in the respective years, andthe development costs related to prototypes sold being previously expensed asdevelopment costs, as discussed below. The increase in cost of products sold asa percentage of product sales revenue in 2005 compared to 2004 was due to achange in the product mix shipped in the respective years, the change in 2005of bifurcation of Symyx Tools sales transactions into product sales revenue andsoftware license fees revenue discussed under “*Revenue*”above, as well as an unfavorable inventory obsolescence charge of approximately$725,000 in 2005.

The cost of products sold will continue to be drivenby the variability of product mix and sales volume in each period. The cost ofproducts sold as a percentage of product sales is expected to fluctuate significantlyfrom period to period because the majority of Symyx Tools are built to order orto particular specifications. For systems that include a significantdevelopment component prior to their commercial build, or systems sold tocustomers as a prototype, the development costs incurred prior to thecommercial build are expensed as development costs, included in research anddevelopment expenses, which results in a lower cost of products sold and highermargin in the quarter in which such a system is sold to the customer.

The cost of products soldmay also be affected by adjustments to the warranty expense accrual forpre-existing sales. When actual warranty costs are lower than our estimates,the difference will have a favorable impact to cost of products sold at thetime the warranty expires for the systems. When actual warranty costs areanticipated to be higher than our original estimates, an additional expense ischarged to cost of products sold in the period in which such a determination ismade.

***Other OperatingExpenses***

| ** **                                                            | ** ** | **2006**                         | ** ** | **2005**                                          | ** ** | **2004**                         | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **Amount  (in 000’s)** | ** ** | **As a  Percentage  of Total  Revenue** | ** ** | **Change  over  Previous  Year** | ** ** | **Amount  (in 000’s)** | ** ** | **As a  Percentage  of Total  Revenue** | ** ** | **Change  over  Previous  Year** | ** ** | **Amount  (in 000’s)** | ** ** | **As a  Percentage  of Total  Revenue** | ** ** |
| Research and development                                              |       | $                                | 65,060     |                                              |       | 52                               | %          |   |   | 28 | % |   | $ | 50,660 |   |   | 47 | % |   |   | 23 | % |   | $ | 41,142 |   |   | 49 | % |   |
| Sales, general and administrative                                     |       | 35,224                           |       |                                              | 28         | %                                |       |   | 38 | % |   | 25,566 |   |   | 24 | % |   |   | 42 | % |   | 18,007 |   |   | 22 | % |   |
| Acquired in-process research and development                          |       | 1,392                            |       |                                              | 1          | %                                |       |   | (12 | )% |   | 1,590 |   |   | 1 | % |   |   | (30 | )% |   | 2,260 |   |   | 3 | % |   |
| Amortization of intangible assets arising from  business combinations |       | 4,270                            |       |                                              | 3          | %                                |       |   | 21 | % |   | 3,515 |   |   | 3 | % |   |   | 1,422 | % |   | 231 |   |   | * |   |   |
| Total operating  expenses                                             |       | $                                | 105,946    |                                              |       | 84                               | %          |   |   | 30 | % |   | $ | 81,331 |   |   | 75 | % |   |   | 32 | % |   | $ | 61,640 |   |   | 74 | % |   |

----

*                     Less than 1%

*Research andDevelopment Expenses*

Our research and development expenses consistprimarily of salaries and other personnel-related expenses, includingstock-based compensation expenses totaling $4.5 million in 2006, facilitycosts, supplies, and depreciation of facilities and laboratory equipment.

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Thetable below indicates the major collaborative partners, defined as thosecontributing greater than 10% of collaborative research revenue in 2006, forwhom we conducted research and development, together with the date upon whichthe current contract ends and the primary focus of the collaborations.

| **Partner**               | ** ** | ** ** | ** ** | **Current  Research  Contract Ends** | ** ** | **Primary focus of current collaborative efforts** | ** ** |
|---------------------------|------------|------------|------------|-------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| The Dow Chemical  Company |       |       | 12/31/2009 |                                      |       | Polyolefin  catalysts for certain commodity chemicals                       |       |
| ExxonMobil                |       |       | 5/31/2008  |                                      |       | Catalysts for certain  commodity chemicals including olefins                |       |

 

We donot track fully burdened research and development costs or capital expendituresby project. However, based on hours spent on each project, we estimate theresearch and development efforts undertaken for various projects were asfollows:

| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Projects funded  by collaboration partners |       |     | 65         | %        |       |     | 73         | % |   |   | 79 | % |   |
| Projects funded  internally:               |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Software development                       |       |     | 26         | %        |       |     | 21         | % |   |   | 5 | % |   |
| Research                                   |       |     | 7          | %        |       |     | 5          | % |   |   | 10 | % |   |
| Tools development                          |       |     | 2          | %        |       |     | 1          | % |   |   | 6 | % |   |
| Total                                      |       |     | 100        | %        |       |     | 100        | % |   |   | 100 | % |   |

 

Due to the nature of our research and our dependenceon our collaborative partners to commercialize the results of the research, wecannot predict with any certainty whether any particular collaboration orresearch effort will ultimately result in a commercial product and, therefore,whether we will achieve future milestones or royalty payments under our variouscollaborations.

Research and development expenses in 2004 included$1.2 million of direct costs of research services provided to Ilypsa, a relatedparty. The increase of research and development expenses in 2006 and 2005 wasdriven primarily by the increases in salary related expenses due to the hiringof additional scientific and technical staff to work on research anddevelopment projects for ExxonMobil and Dow and increased headcount to developour software platform.

Research and developmentexpenses as a percentage of total revenue increased in 2006 compared to 2005primarily due to the recognition of stock-based compensation expense. Researchand development expenses as a percentage of total revenue decreased 2005compared to 2004 because the increase in research and development expenseslagged the significant increase in total revenue. Our core business areas areresearch to discover new materials, the sale of instruments and licensing ofrelated software and licensing of intellectual property and materials discoveredin our collaborative and internal research programs. Accordingly, we expect tocontinue to devote substantial resources to research and development, and weexpect that research and development expenses will continue to increase inabsolute dollars.

*Sales, General andAdministrative Expenses*

Our sales, generaland administrative expenses consist primarily of personnel costs for businessdevelopment, legal, general management, finance, and human resources, including stock-based compensation expensestotaling $5.7 million in 2006, as well as payments of commissions to oursales agents and professional expenses, such as legal and accounting. Theincrease in sales, general and administrative expenses in 2006 compared to 2005was primarily due to the recognition of stock-based compensation and anincrease of personnel costs. The increase in sales, general and administrative 

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expensesin 2005 compared to 2004 was primarily due to an increase of personnel costs,mainly as a result of adding a number of business development and sales staffto manage and support our growth, and an increase in auditing and tax relatedservice fees, largely as a result of the requirements of the Sarbanes-OxleyAct, offset partially by the decrease in legal fees for intellectual propertylitigation. We expect that our sales, general and administrative expenses willcontinue to increase in absolute dollar amounts as we:

·       increaseheadcount to support the growth in our business;

·       addto and improve our existing facilities; and

·       incurescalating costs related to being a public company, such as increasingprofessional fees, including costs associated with continued compliance withthe Sarbanes-Oxley Act of 2002 and tax fees particularly in relation to theadoption of FIN 48 in 2007.

Sales, general andadministrative expenses represented 28%, 24% and 22% of total revenue for yearsended December 31, 2006, 2005 and 2004, respectively. The increase insales, general and administrative expenses as a percentage of total revenuefrom 2005 to 2006 was primarily due to the recognition of stock-basedcompensation expense in 2006.

*Acquired In-ProcessResearch and Development*

In July 2006, we acquired Autodose in atransaction accounted for as a business combination using the purchase method.The preliminary purchase price was allocated to the assets acquired, includingintangible assets, based on their estimated fair values. The intangible assetsinclude approximately $1.4 million for acquired in-process technology forprojects that did not have future alternative uses. The value of the purchasedin-process technology was determined using the income approach. At the date ofthe Autodose acquisition, the development of these projects had not yet reachedtechnological feasibility, and the technology in process had no alternativefuture uses. Accordingly, these costs were expensed at the acquisition date in2006.

In April 2005, we acquired Synthematix in atransaction accounted for as a business combination. The purchase price wasallocated to the assets acquired, including intangible assets, based on theirestimated fair values. The intangible assets include approximately $1.6 millionfor acquired in-process technology for projects that did not have futurealternative uses. The value of the purchased in-process technology wasdetermined using the income approach. At the date of the Synthematixacquisition, the development of these projects had not yet reachedtechnological feasibility, and the technology in process had no alternativefuture uses. Accordingly, these costs were expensed at the acquisition date in2005.

In November 2004, weacquired IntelliChem in a transaction accounted for as a business combination.The purchase price was allocated to the assets acquired, including intangibleassets, based on their estimated fair values. The intangible assets includedapproximately $2.3 million for acquired in-process technology for projects thatdid not have future alternative uses. The value of the purchased in-processtechnology was determined using the income approach. At the date of theIntelliChem acquisition, the development of these projects had not yet reachedtechnological feasibility, and the technology in process had no alternativefuture uses. Accordingly, these costs were expensed at the acquisition date in2004.

*Amortization ofIntangible Assets Arising from Business Acquisitions*

In connection with theacquisitions of IntelliChem in November 2004, Synthematix in April 2005,and Autodose in July 2006, we recorded an aggregate of $20.7 million ofintangible assets (See Note 10 of the Notes to Consolidated FinancialStatements). These intangible assets are being amortized on a straight-linebasis over the estimated useful lives of the assets. For the years ended December 31,2006, 2005 and 2004, we recorded $4.3 million, $3.5 million and $231,000,respectively, of amortization of intangible assets expense related to theseacquisitions.

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***Interest and Other Income, Net***

Interest and other income,net, for the years ended December 31, 2006, 2005 and 2004 consistedprimarily of interest income of approximately $7.7 million, $4.3 million and$2.4 million, respectively. Interest income represents interest income earnedon our cash, cash equivalents and available-for-sale securities. Interestincome increased in 2006 and 2005 due to the impact of rising average interestrates and increasing average investment balance in the past two years. Interestand other income in 2006 includes a settlement received in relation to a legalproceeding.

***Provision for Income Taxes***

We recorded an income tax expense of $6.4 million in2006, $8.1 million in 2005 and $3.3 million in 2004. Our effective income taxrate was 43.5% for 2006, 40.4% for 2005 and 20.5% for 2004. The effectiveincome tax rate for 2006 is higher than our statutory rate principally due tothe non-deductibility of both the in-process research and development chargefrom the Autodose acquisition and certain stock-based compensation expenses.The effective income tax rate was significantly lower than our statutory ratein 2004 due to the recognition of approximately $4.3 million of income taxbenefits from certain of our deferred tax assets in 2004, which had previouslybeen offset by a valuation allowance. We expect our 2007 income tax rate to beclose to 40%.

As of December 31, 2006, we had net deferred taxassets of approximately $9.6 million. Our net deferred tax assets primarilyrelate to state research and development credits and the temporary differencebetween book and tax depreciation expenses and stock-based compensation,partially offset by deferred tax liabilities recognized for intangible assetsin the IntelliChem, Synthematix, and Autodose acquisitions. As of December 31,2006, we had federal net operating loss carryforwards of approximately $1.0million. The net operating losses from the acquisitions of Synthematix may besubject to an annual limitation due to the ownership change limitationsprovided by the Internal Revenue Code of 1986, as amended, and similar stateprovisions. The annual limitation may result in the expiration of net operatinglosses and credits before utilization. The net operating loss carryforwardswill start to expire in 2010, if not utilized.

As of December 31,2006, we had California research and development tax credits of approximately$2.1 million. The state research and development credits have no expirationdate.

***Equity in Loss from Investment in Visyx TechnologiesInc.***

In November 2006, weinvested $400,000 in cash and licensed certain sensor technology in exchangefor approximately 38% of the outstanding shares of Visyx Technologies Inc. Wehave a 45% voting right in relation to our shareholding. We recorded a $186,000equity loss based on our share of the loss reported by Visyx for the periodended December 31, 2006.

**Recent AccountingPronouncements**

*Accounting forUncertainty in Income Taxes*

In June 2006, theFASB issued Financial Interpretation No. 48 (“FIN 48”), *Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109*. FIN 48 clarifies the accounting for incometaxes by prescribing the minimum recognition threshold a tax position isrequired to meet before being recognized in the financial statements. FIN 48also provides guidance on derecognition, measurement, classification, interestand penalties, accounting in interim periods, disclosure and transition. FIN 48will be effective in fiscal years beginning after December 15, 2006. Weare currently evaluating the effect that the adoption of FIN 48 will have onour consolidated results of operations and financial condition and are not yetin a position to determine such effects. We expect FIN 48 will result inincreased volatility in our future effective income tax rates, the extent ofwhich has not been determined yet.

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*Fair Value Measures*

In September 2006,the FASB issued Statement No. 157 (“SFAS 157”), *Fair ValueMeasurements*. SFAS 157 provides guidance for using fair valueto measure assets and liabilities. It also responds to investors’ requests forexpanded information about the extent to which companies measure assets andliabilities at fair value, the information used to measure fair value, and theeffect of fair value measurements on earnings. SFAS 157 applies wheneverother standards require (or permit) assets or liabilities to be measured atfair value, and does not expand the use of fair value in any new circumstances.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and is required to be adopted by us in thefirst quarter of fiscal 2008. We are currently evaluating the effect that theadoption of SFAS 157 will have on our consolidated results of operationsand financial condition.

*Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*

In September 2006,the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*. SAB 108 providesguidance on the consideration of the effects of prior year misstatements inquantifying current year misstatements for the purpose of a materialityassessment. SAB 108 establishes an approach that requires quantification offinancial statement errors based on the effects of each of the company’sbalance sheets and statement of operations and the related financial statementdisclosures. Early application of the guidance in SAB 108 is encouraged in anyreport for an interim period of the first fiscal year ending afterNovember 15, 2006, and will be adopted by us in the first quarter offiscal 2007. We do not expect the adoption of SAB 108 to have a material impacton our consolidated results of operations and financial condition.

***Liquidity and Capital Resources***

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

*Balance Sheet andCash Flows*

We had positive cash flow from operating activitiesfor the year ended December 31, 2006 and finished the year with cash, cashequivalents and available-for-sale securities of approximately $150.0 million.This compared to cash, cash equivalents and available-for-sale securities ofapproximately $168.6 million at December 31, 2005. During 2006, we used$30.0 million to repurchase our common stock, $19.6 million for capitalexpenditure, $13.5 million for a long-term investment in Intermolecular, Inc.,$400,000 for our investment in Visyx Technologies Inc., and a net of $4.2million for the acquisition of Autodose SA.

As of December 31, 2006, we had $791,000 ofnoncurrent deferred tax liabilities arising from the Autodose acquisition.

Our operating activities provided $29.9 million, $42.6million and $22.9 million of cash in 2006, 2005, and 2004, respectively. Thesources of cash for the three years were primarily the receipt of research anddevelopment funding from collaborative partners and revenue from product salesand licensing, partially offset by operating expenses. We expect that we willcontinue to generate positive cash flows from our operating activities on anannual basis, although this may fluctuate significantly on a quarterly basis.Depending on the timing of tools deliveries and customer payments, we mayexperience negative cash flows from operating activities. As a result ofadopting SFAS 123R, $2.7 million of excess tax benefits for the year ended December 31,2006 have been classified as an operating cash outflow and a financing cashinflow.

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Net cash used in investing activities was $53.0million, $2.7 million and $32.7 million, respectively, in 2006, 2005, and 2004.Included in the 2006 cash used in investing activities were $13.9 million forlong-term investments in Intermolecular and Visyx and a net of $4.2 million forthe acquisition of Autodose. During the same period of time, the majority ofproceeds from the maturities of available-for-sale securities were re-investedin available-for-sale securities. Included in the 2005 cash used in investingactivities was the $12.8 million net cash paid for the acquisition ofSynthematix. Included in the 2004 cash used in investing activities was the$26.9 million net cash paid for the acquisition of IntelliChem. The otherfluctuations from period to period were due primarily to the timing ofpurchases, sales, and maturity of our available-for-sale securities. Cash usedin purchases of property, plant and equipment was $19.6 million, $6.5 millionand $4.5 million, respectively, in 2006, 2005, and 2004. The increase of cashused in purchases of property, plant and equipment in 2006 was primarilyassociated with the build-out of an additional leased facility. We expect tocontinue to make significant investments in the purchases of property andequipment to support our expanding operations.

Financing activities used $11.4 million of cash in2006 and provided cash of $11.3 million and $12.1 million in 2005 and2004, respectively. The cash inflows were primarily the proceeds from theexercise of stock options and sale of stock under the Employee Share PurchasePlan in each of the three years and for 2006, excess tax benefits fromstock-based compensation. Cash outflows from financing activities in 2006consisted of $30.0 million of cash used to repurchase our common stock.

Our accounts receivablebalance at December 31, 2006 increased significantly compared to December 31,2005 due to the large number of Symyx Tools delivered late in the last quarterof 2006. Current liabilities increased by approximately $8.0 million at December 31,2006 as compared to December 31, 2005. All current liabilities, except fordeferred rent, have increased in 2006 due to the expansion of our operations in2006.

*Backlog*

As of December 31,2006, our customers have contractually committed to fund of approximately $90 millionand $58 million, respectively, for year 2007 and beyond, for the purchase ofSymyx Tools, licenses to our intellectual property and software, and researchwork to be undertaken.

*PrincipalCommitments*

Our principal commitments consist of our obligationsunder operating leases, our commitments to purchase inventory and fixed assets,and our commitments made for leasehold improvements. As of December 31,2006 and 2005, our principal commitments were $16.6 million and $17.7 million,respectively. Subsequently in January 2007, we extended our lease for oneof our facilities in Sunnyvale, California, until November 2015, whichresulted in an incremental commitment of $5.9 million. We expect to satisfythese obligations as they become due over the next nine years.

Futureprincipal commitments as of December 31, 2006 were as follows (inthousands):

| ** **            | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than  5 Years** | ** ** |
|-----------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| Facility  Commitments |       | $         | 13,240     |                            |       | $                  | 2,985      |               |       |                             | $          | 4,984 |   |   |   | $ | 2,741 |   |   |   | $ | 2,530 |   |   |
| Purchase  Commitments |       | 3,331     |       |                            | 3,331      |               |       |               | —     |                             |       |   | — |   |   |   | — |   |   |
| Total                 |       | $         | 16,571     |                            |       | $                  | 6,316      |               |       |                             | $          | 4,984 |   |   |   | $ | 2,741 |   |   |   | $ | 2,530 |   |   |

 

We believe that our current cash, available-for-salesecurities balances and the cash flows expected to be generated by operationswill be sufficient to satisfy our anticipated cash needs for working capital,capital expenditures, investment requirements, and other liquidity requirementsassociated with our existing operations for at least the coming year.Nonetheless, we may raise additional funds through public 

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or private financing,collaborative relationships or other arrangements. We cannot assure you thatadditional funding, if sought, will be available on terms favorable to us.Further, any additional equity financing may be dilutive to stockholders, anddebt financing, if available, may involve restrictive covenants. Collaborativearrangements may require us to relinquish our rights to some of ourtechnologies or products. Our failure to raise capital when needed may harm ourbusiness and operating results.

A portion of our cash maybe used to acquire or invest in complementary businesses or products or toobtain the right to use complementary technologies. From time to time, in theordinary course of business, we may evaluate potential acquisitions of suchbusinesses, products or technologies.

*Other Commitments*

As discussed in the “*Off Balance Sheet Financing and Related PartyTransactions”*below*,*our commitment for future investmentspursuant to the Collaborative Development and License Agreement and theAlliance Agreement with Intermolecular, Inc. as of December 31, 2006were $1,879,000. We expect to meet this commitment during the next two yearswith additional research efforts and capital expenditures.

*CustomerIndemnification*

From time to time, weagree to indemnify our customers against certain third party liabilities,including liability if our products infringe a third party’s intellectualproperty rights. Such indemnification provisions are accounted for inaccordance with FASB Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.* The indemnification istypically limited to no more than the amount paid by the customer. As of December 31,2006, we were not subject to any pending intellectual property-relatedlitigation.

*Contingencies*

As discussed in the Note 7of Notes to Consolidated Financial Statements, additional purchase priceconsideration of up to $6,262,000 may be payable upon the achievement ofcertain 2007, 2008 and 2009 revenue targets by Autodose. We will evaluate thepossibility of achieving these targets from time to time and record the fairvalue of any additional consideration as an additional cost of the acquisition.No additional consideration was recorded as of December 31, 2006.

*Insurance*

We carry insurance withcoverage and coverage limits that we believe to be adequate. Although there canbe no assurance that such insurance is sufficient to protect us against allcontingencies, our management believes that our insurance protection isreasonable in view of the nature and scope of our operations.

*Off Balance SheetFinancing and Related Party Transactions*

We have not enteredinto any off-balance sheet financing arrangements and have not established anyspecial purpose entities as of December 31, 2006. We have not guaranteedany debt or commitments of other entities or entered into any options onnon-financial assets. The transactions between us and related parties during2006 were:

·       Revenuereceived for software maintenance and support from Ilypsa, Inc. (“Ilypsa”)of which we own approximately 13% of outstanding common stock, totaled$181,000. We account for our ownership interest in Ilypsa using the cost methodas we do not have the ability to exercise significant influence over thestrategic, operating, investing, and financing activities of Ilypsa.

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·       On March 17, 2005, we entered into a CollaborativeDevelopment and License Agreement and on December 19, 2005, we enteredinto an Alliance Agreement, with Intermolecular. In accordance with theagreements, the two companies agreed to work together to conductresearch and development and other activities with respect to materials andhigh-throughput technology for use in semiconductor applications. Each party isbearing its own expenses. In August 2006, we invested $13,500,000 inexchange for approximately 13% of the outstanding shares of Intermolecular. Weaccount for our ownership interest in Intermolecular using the cost method aswe do not have the ability to exercise significant influence over thestrategic, operating, investing and financing activities of Intermolecular.Thomas Baruch, one of our board members, is a director of Intermolecular and ageneral partner of CMEA Ventures, whichholds a minority interest in Intermolecular. Steven D. Goldby, our chairman andchief executive officer, is also a director of Intermolecular. W. HenryWeinberg, one of our executive officers, is a scientific advisory board memberof Intermolecular. During 2006, we recorded $52,000 in royalty revenue fromIntermolecular.

·       In November 2005, we entered intoa Collaborative Research and License Agreement with Solyndra, Inc. (“Solyndra”).Thomas Baruch, one of our board members, is a director of Solyndra and ageneral partner of CMEA Ventures, which holds a minority interest in Solyndra.During 2006, we recognized $1,228,000 of revenue from providing researchservices to Solyndra.

·       In November 2006, weincorporated Visyx Technologies Inc. and provided funding of $400,000 as wellas rights to certain intellectual property in exchange for approximately 38% ofthe outstanding shares of Visyx Technologies Inc. We have a 45% voting right inrelation to our shareholding. Isy Goldwasser, our president, is a board memberof Visyx. Thomas Baruch, one of our board members, is a general partner of CMEAVentures, which holds approximately 42% of outstanding shares of Visyx and hasa 49% voting right in relation to its shareholding. We recorded a $186,000equity loss from this investment in Visyx for the period from its inception tothe end of 2006.

**Dividend Policy**

We have never declared orpaid any dividends on our capital stock. We currently expect to retain futureearnings, if any, to support the development of our business and do notanticipate paying any cash dividends in the foreseeable future.

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**Item 7a.**                 Quantitativeand Qualitative Disclosures About Market Risk

Our exposure to marketrisk is principally confined to our cash equivalents and available-for-sale investmentswhich have maturities of less than two years. We maintain a non-tradinginvestment portfolio of investment grade, liquid debt securities that limit theamount of credit exposure to any one issue, issuer or type of instrument. At December 31,2006 our investment portfolio was comprised of approximately $36.1 million inmoney market funds as well as corporate debts with maturities of three monthsor less and $113.9 million in U.S. municipal and corporate debts. Thesecurities in our investment portfolio are not leveraged, are classified asavailable-for-sale and are subject to interest rate risk. We currently do nothedge interest rate exposure. If market interest rates were to increase by 100basis points, or 1%, from December 31, 2006 levels, the fair value of ourportfolio would decline by approximately $270,000. The modeling technique usedmeasures the change in fair values arising from an immediate hypothetical shiftin market interest rates and assumes ending fair values include principal plusaccrued interest.

**Interest Rate Sensitivity:**

**Principal Amount by Expected Maturity (in thousands)**

**AverageInterest Rate**

| ** **                     | ** ** | **Mature in  2007** | ** ** | **Fair Value  As of  December 31, 2006** | ** ** |
|--------------------------------|------------|--------------------------|------------|--------------------------------------------------------------|------------|
| Available-for-sale  securities |       | $                        | 113,842    |                                                         |       | $ | 113,875 |   |   |
| Average interest rate          |       | 4.85                     | %          |                                                         |       |   |   |
|                                |            |                          |            |                                                              |            |  |  |  |  |

 

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**ITEM8.**                *Financial Statements and Supplementary Data*

| Index to Consolidated Financial Statements                                                   | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of  Independent Registered Public Accounting Firm on Consolidated Financial  Statements                   |       |     | 55         |   |   |
| Consolidated Balance Sheets  at December 31, 2006 and 2005                                                  |       |     | 56         |   |   |
| Consolidated Income  Statements for the Years Ended December 31, 2006, 2005 and 2004                        |       |     | 57         |   |   |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31,  2006, 2005 and 2004 |       |     | 58         |   |   |
| Consolidated Statements of  Cash Flows for the Years Ended December 31, 2006, 2005 and 2004                 |       |     | 59         |   |   |
| Notes to  Consolidated Financial Statements                                                                      |       |     | 60         |   |   |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMON CONSOLIDATED FINANCIAL STATEMENTS**

**The Board ofDirectors and Stockholders of Symyx Technologies, Inc.**

We have audited the accompanying consolidated balancesheets of Symyx Technologies, Inc. as of December 31, 2006 and 2005,and the related consolidated income statements, consolidated statements ofstockholders’ equity and consolidated statements of cash flows for each of thethree years in the period ended December 31, 2006. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 toabove present fairly, in all material respects, the consolidated financialposition of Symyx Technologies, Inc. at December 31, 2006 and 2005,and the consolidated results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2006, in conformity withU.S. generally accepted accounting principles.

As discussed in Notes 1 and 4 to the financialstatements, in 2006 the Company changed its method of accounting forstock-based compensation expense.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Symyx Technologies, Inc.’s internalcontrol over financial reporting as of December 31, 2006, based oncriteria established in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated February 23, 2007 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

**PaloAlto, CaliforniaFebruary 23, 2007**

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**SYMYX TECHNOLOGIES,INC.**

**CONSOLIDATEDBALANCE SHEETS****(In thousands, except share and per shareinformation)**

| ** **                                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                  |       |                  |       |   |   |
| Current assets:                                                                                                                                                             |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                   |       | $                     | 36,120     |   | $ | 70,607 |   |
| Available-for-sale securities                                                                                                                                               |       | 113,875               |       | 98,018 |   |
| Accounts receivable                                                                                                                                                         |       | 16,602                |       | 9,852 |   |
| Inventories                                                                                                                                                                 |       | 2,680                 |       | 841 |   |
| Deferred tax assets, current                                                                                                                                                |       | 5,565                 |       | 2,739 |   |
| Interest receivable and other current assets                                                                                                                                |       | 2,177                 |       | 3,063 |   |
| Total current assets                                                                                                                                                        |       | 177,019               |       | 185,120 |   |
| Property, plant  and equipment, net                                                                                                                                         |       | 31,222                |       | 21,756 |   |
| Goodwill                                                                                                                                                                    |       | 18,046                |       | 17,618 |   |
| Intangible  assets, net                                                                                                                                                     |       | 13,611                |       | 14,447 |   |
| Long-term  investments                                                                                                                                                      |       | 13,714                |       | — |   |
| Deferred tax and  other assets                                                                                                                                              |       | 6,394                 |       | 2,471 |   |
| Total assets                                                                                                                                                                |       | $                     | 260,006    |   | $ | 241,412 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                               |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                        |       |                  |       |   |   |
| Accounts payable                                                                                                                                                            |       | $                     | 3,252      |   | $ | 2,273 |   |
| Other accrued liabilities                                                                                                                                                   |       | 6,301                 |       | 5,081 |   |
| Deferred payment to stockholders of acquired  business                                                                                                                      |       | 1,024                 |       | — |   |
| Accrued compensation and employee benefits                                                                                                                                  |       | 6,307                 |       | 6,144 |   |
| Income taxes payable                                                                                                                                                        |       | 7,418                 |       | 3,737 |   |
| Deferred rent                                                                                                                                                               |       | 732                   |       | 759 |   |
| Deferred revenue                                                                                                                                                            |       | 4,853                 |       | 4,244 |   |
| Warranty expense accrual                                                                                                                                                    |       | 952                   |       | 645 |   |
| Total current liabilities                                                                                                                                                   |       | 30,839                |       | 22,883 |   |
| Noncurrent deferred tax liabilities                                                                                                                                         |       | 791                   |       | — |   |
| Commitments and  contingencies (Note 3)                                                                                                                                     |       |                  |       |   |   |
| Stockholders’  equity:                                                                                                                                                 |       |                  |       |   |   |
| Preferred stock, $0.001 par value, 10,000,000 shares  authorized, issuable in series; no shares issued and outstanding                                                      |       | —                |       | — |   |
| Common stock, $0.001 par value, 60,000,000 shares  authorized and 32,975,216 and 33,194,140 shares issued and outstanding at  December 31, 2006 and 2005, respectively |       | 33                    |       | 33 |   |
| Additional  paid-in capital                                                                                                                                                 |       | 197,823               |       | 196,815 |   |
| Deferred stock  compensation                                                                                                                                                |       | —                |       | (261 | ) |
| Accumulated other  comprehensive loss                                                                                                                                       |       | (4                    | )          | (298 | ) |
| Retained earnings                                                                                                                                                           |       | 30,524                |       | 22,240 |   |
| Total stockholders’ equity                                                                                                                                             |       | 228,376               |       | 218,529 |   |
| Total liabilities  and stockholders’ equity                                                                                                                            |       | $                     | 260,006    |   | $ | 241,412 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**SYMYX TECHNOLOGIES,INC.**

**CONSOLIDATEDINCOME STATEMENTS(In thousands, except per share amounts)**

| ** **                                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenue:                                                               |       |     |       |     |       |     |       |
| Service revenue                                                        |       | $        | 57,933     |     | $          | 56,980   |       | $ | 42,251 |   |
| Product sales                                                          |       | 33,526   |       | 26,663   |       | 27,060   |       |
| License fees and royalties                                             |       | 33,441   |       | 24,494   |       | 13,874   |       |
| Total revenue                                                          |       | 124,900  |       | 108,137  |       | 83,185   |       |
| Operating  expenses:                                                   |       |     |       |     |       |     |       |
| Cost of products sold                                                  |       | 11,811   |       | 11,090   |       | 7,857    |       |
| Research and development                                               |       | 65,060   |       | 50,660   |       | 41,142   |       |
| Sales, general and administrative                                      |       | 35,224   |       | 25,566   |       | 18,007   |       |
| Acquired in-process research and development                           |       | 1,392    |       | 1,590    |       | 2,260    |       |
| Amortization of intangible assets arising from  business  combinations |       | 4,270    |       | 3,515    |       | 231      |       |
| Total operating expenses                                               |       | 117,757  |       | 92,421   |       | 69,497   |       |
| Income from operations                                                 |       | 7,143    |       | 15,716   |       | 13,688   |       |
| Interest and  other income, net                                        |       | 7,709    |       | 4,427    |       | 2,521    |       |
| Income before  income tax expense and equity loss                      |       | 14,852   |       | 20,143   |       | 16,209   |       |
| Income tax  expense                                                    |       | (6,382   | )          | (8,141   | )          | (3,327   | )          |
| Equity in loss  from investment in Visyx Technologies Inc.             |       | (186     | )          | —   |       | —   |       |
| Net income                                                             |       | $        | 8,284      |     | $          | 12,002   |       | $ | 12,882 |   |
| Basic net income per share                                             |       | $        | 0.25       |     | $          | 0.37     |       | $ | 0.40 |   |
| Diluted net income per share                                           |       | $        | 0.24       |     | $          | 0.35     |       | $ | 0.38 |   |
| Shares used in computing basic net income per share                    |       | 33,199   |       | 32,819   |       | 32,067   |       |
| Shares used in  computing diluted net income per share                 |       | 34,214   |       | 34,564   |       | 33,872   |       |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**SYMYX TECHNOLOGIES,INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands)**

| ** ** | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Stockholder  Notes** | ** ** | **Deferred  Stock** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | **Total  Stockholders’** | ** ** |
|------------|------------|--------------------------|------------|-----------------------|------------|-------------------------|------------|------------------------|------------|---------------------|------------|---------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|
| ** ** | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**              | ** ** | **Amount**             | ** ** | **Capital**         | ** ** | **Receivable**                        | ** ** | **Compensation**                     | ** ** | **Income (Loss)**        | ** ** | **Deficit)** | ** ** | **Equity** | ** ** |
|            |            |                          |            |                       |            |                         |            |                        |            |                     |            |                                       |            |                                      |            |                               |            |  |  |  |  |

| Balance at January 1, 2004                                                 |   |   | — |   |   |   | $      | — |   |   |   | 31,610 |   |   |   | $      | 32     |   |    |   | $      | 162,160 |   |   |   | $      | (134   | )      |   |   | $      | (7     | )      |   |   | $      | 31     |   |    |   | $      | (2,644 | )      |   |   | $ | 159,438 |   |   |
|---------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|---|---------|--------|--------|
| Issuance of common stock on exercise of options                                 |   |   | — |   |   |   | — |   |   |   | 742    |   |   |   | — |   |   |   | 10,574  |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 10,574  |   |   |
| Issuance of common stock under employee share  purchase plan                    |   |   | — |   |   |   | — |   |   |   | 133    |   |   |   | — |   |   |   | 1,433   |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,433   |   |   |
| Repayment of notes receivable                                                   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | 134    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 134     |   |   |
| Issuance of options in connection with acquisition                              |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,041   |   |   |    | — |   |   |   | (651   | )      |   |   | — |   |   |   | — |   |   |   | 390     |   |   |
| Amortization of deferred stock compensation                                     |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | — |   |   |   | 40     |   |   |   | — |   |   |   | — |   |   |   | 40      |   |   |
| Issuance of options to consultants for services  received                       |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 500     |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 500     |   |   |
| Tax benefit from employee stock option plans                                    |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 6,138   |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 6,138   |   |   |
| Comprehensive income:                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |
| Net income                                                                      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | 12,882 |   |   |   | 12,882  |   |   |
| Unrealized (loss) on foreign currency translation                               |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | — |   |   |   | — |   |   |   | (1     | )      |   |   | — |   |   |   | (1      | )      |   |
| Unrealized (loss) on available-for-sale securities,  net of income taxes of $28 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | — |   |   |   | — |   |   |   | (519   | )      |   |   | — |   |   |   | (519    | )      |   |
| Comprehensive income                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 12,362  |   |   |
| Balance at December 31, 2004                                               |   |   | — |   |   |   | — |   |   |   | 32,485 |   |   |   | 32     |   |   |   | 181,846 |   |   |    | — |   |   |   | (618   | )      |   |   | (489   | )      |   |   | 10,238 |   |   |   | 191,009 |   |   |
| Issuance of common stock on exercise of options                                 |   |   | — |   |   |   | — |   |   |   | 632    |   |   |   | 1      |   |   |   | 9,728   |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 9,729   |   |   |
| Issuance of common stock under employee share  purchase plan                    |   |   | — |   |   |   | — |   |   |   | 77     |   |   |   | — |   |   |   | 1,566   |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,566   |   |   |
| Issuance of options in connection with acquisition                              |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 571     |   |   |    | — |   |   |   | (216   | )      |   |   | — |   |   |   | — |   |   |   | 355     |   |   |
| Amortization of deferred stock compensation, net of  reversals                  |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | — |   |   |   | 343    |   |   |   | — |   |   |   | — |   |   |   | 343     |   |   |
| Reversal of deferred stock compensation related to  terminated employees        |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (230    | )      |   |    | — |   |   |   | 230    |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |
| Tax benefit from employee stock option plans                                    |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 3,334   |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 3,334   |   |   |
| Comprehensive income:                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |
| Net income                                                                      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | 12,002 |   |   |   | 12,002  |   |   |
| Unrealized (loss) on foreign currency translation                               |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | — |   |   |   | — |   |   |   | (29    | )      |   |   | — |   |   |   | (29     | )      |   |
| Unrealized gain on available-for-sale securities                                |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | — |   |   |   | — |   |   |   | 220    |   |   |   | — |   |   |   | 220     |   |   |
| Comprehensive income                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 12,193  |   |   |
| Balance at December 31, 2005                                               |   |   | — |   |   |   | — |   |   |   | 33,194 |   |   |   | 33     |   |   |   | 196,815 |   |   |    | — |   |   |   | (261   | )      |   |   | (298   | )      |   |   | 22,240 |   |   |   | 218,529 |   |   |
| Issuance of common stock on exercise of options                                 |   |   | — |   |   |   | — |   |   |   | 940    |   |   |   | 1      |   |   |   | 14,030  |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 14,031  |   |   |
| Issuance of common stock under employee share  purchase plan                    |   |   | — |   |   |   | — |   |   |   | 90     |   |   |   | — |   |   |   | 1,877   |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,877   |   |   |
| Repurchase of common stock                                                      |   |   | — |   |   |   | — |   |   |   | (1,249 | )      |   |   | (1     | )      |   |   | (29,999 | )      |   |    | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (30,000 | )      |   |
| Stock-based compensation                                                        |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 10,055  |   |   |    | — |   |   |   | 261    |   |   |   | — |   |   |   | — |   |   |   | 10,316  |   |   |
| Tax benefit from employee stock option plans                                    |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 5,045   |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 5,045   |   |   |
| Comprehensive income:                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |
| Net income                                                                      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | — |   |   |   | — |   |   |   | — |   |   |   | 8,284  |   |   |   | 8,284   |   |   |
| Unrealized gain on foreign currency translation                                 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | — |   |   |   | — |   |   |   | 13     |   |   |   | — |   |   |   | 13      |   |   |
| Unrealized gain on available-for-sale securities, net  of income taxes of $16   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | —  |   |   |    | — |   |   |   | — |   |   |   | 281    |   |   |   | — |   |   |   | 281     |   |   |
| Comprehensive income                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 8,578   |   |   |
| Balance at  December 31, 2006                                              |   |   | — |   |   |   | $      | — |   |   |   | 32,975 |   |   |   | $      | 33     |   |    |   | $      | 197,823 |   |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | (4     | )      |    |   | $      | 30,524 |   |   |   | $ | 228,376 |   |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

58

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**SYMYX TECHNOLOGIES,INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                                 | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| OPERATING ACTIVITIES                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                 |       | $          | 8,284      |       | $          | 12,002     |       | $ | 12,882 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities:         |       |       |       |       |       |       |       |
| Depreciation and amortization                                                              |       | 10,135     |       | 10,508     |       | 12,723     |       |
| Amortization of intangible assets arising from  business combinations                      |       | 4,270      |       | 3,515      |       | 231        |       |
| Acquired in-process research and development                                               |       | 1,392      |       | 1,590      |       | 2,260      |       |
| Stock-based compensation, net of reversals                                                 |       | 10,296     |       | 343        |       | 540        |       |
| Equity in loss from investment in Visyx Technologies  Inc.                                 |       | 186        |       | —     |       | —     |       |
| Gain on sale of property, plant and equipment                                              |       | (7         | )          | (11        | )          | (155       | )          |
| Deferred income taxes                                                                      |       | (5,694     | )          | 55         |       | (3,469     | )          |
| Excess tax benefits from stock-based compensation                                          |       | (2,667     | )          | —     |       | —     |       |
| Tax benefit from employee stock transactions                                               |       | 5,045      |       | 3,334      |       | 6,138      |       |
| Changes  in operating assets and liabilities, excluding effects of business  acquisitions: |       |       |       |       |       |       |       |
| Accounts receivable                                                                        |       | (6,417     | )          | 1,645      |       | (7,012     | )          |
| Inventories                                                                                |       | (831       | )          | 1,738      |       | 1,164      |       |
| Interest receivable and other current assets                                               |       | 908        |       | 1,390      |       | 364        |       |
| Other long-term assets                                                                     |       | (1,176     | )          | 257        |       | 257        |       |
| Accounts payable                                                                           |       | 979        |       | 874        |       | 679        |       |
| Other accrued liabilities                                                                  |       | 965        |       | 866        |       | (526       | )          |
| Accrued compensation and employee benefits                                                 |       | 13         |       | 2,031      |       | 1,528      |       |
| Income taxes payable                                                                       |       | 3,430      |       | 1,810      |       | 900        |       |
| Deferred rent                                                                              |       | (27        | )          | 12         |       | 66         |       |
| Deferred revenue                                                                           |       | 570        |       | 618        |       | (4,498     | )          |
| Warranty expense accrual                                                                   |       | 266        |       | (8         | )          | (1,147     | )          |
| Net cash provided by operating activities                                                  |       | 29,920     |       | 42,569     |       | 22,925     |       |
| INVESTING  ACTIVITIES                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of property, plant and equipment, net                                             |       | (19,649    | )          | (6,527     | )          | (4,470     | )          |
| Purchase of available-for-sale securities                                                  |       | (144,018   | )          | (119,840   | )          | (113,936   | )          |
| Proceeds from maturities of available-for-sale  securities                                 |       | 128,832    |       | 136,440    |       | 101,326    |       |
| Proceeds from sales of available-for-sale securities                                       |       | —     |       | —     |       | 11,987     |       |
| Long-term investments                                                                      |       | (13,900    | )          | —     |       | —     |       |
| Acquisition of businesses, net of cash acquired                                            |       | (4,216     | )          | (12,760    | )          | (26,873    | )          |
| Acquisition of technology                                                                  |       | —     |       | —     |       | (750       | )          |
| Net cash used in investing activities                                                      |       | (52,951    | )          | (2,687     | )          | (32,716    | )          |
| FINANCING  ACTIVITIES                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from issuance of common stock                                                     |       | 15,908     |       | 11,295     |       | 12,141     |       |
| Repurchase of common stock                                                                 |       | (30,000    | )          | —     |       | —     |       |
| Excess tax benefits from stock-based compensation                                          |       | 2,667      |       | —     |       | —     |       |
| Net cash provided by (used in) financing activities                                        |       | (11,425    | )          | 11,295     |       | 12,141     |       |
| Effect of foreign exchange rate changes on cash and  cash equivalents                      |       | (31        | )          | (29        | )          | (1         | )          |
| Net increase (decrease) in cash and cash equivalents                                       |       | (34,487    | )          | 51,148     |       | 2,349      |       |
| Cash and cash equivalents at beginning of period                                           |       | 70,607     |       | 19,459     |       | 17,110     |       |
| Cash and cash equivalents at end of period                                                 |       | $          | 36,120     |       | $          | 70,607     |       | $ | 19,459 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income taxes paid (refunded), net                                                          |       | $          | 3,562      |       | $          | 2,087      |       | $ | (243 | ) |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employee stock options assumed in connection with  acquisitions                            |       | $          | —     |       | $          | 571        |       | $ | 1,041 |   |
| Payable to  stockholders of an acquired business                                           |       | $          | 1,024      |       | $          | —     |       | $ | — |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

59

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.   Summary ofSignificant Accounting Policies**

***Business and Basis of Presentation***

Symyx Technologies, Inc. (the “Company” or “Symyx”)is a global provider of research and development (“R&D”) execution andinnovation for the chemicals, energy, life science, consumer product and otherindustries. Symyx performs research for customers using proprietarytechnologies to discover new and innovative materials, sells automatedhigh-throughput instrumentation, licenses software for use in customers’ ownlaboratories, and licenses discovered materials and intellectual property.

Symyx® was incorporated in California on September 20,1994 and completed a reincorporation in the state of Delaware in February 1999.Symyx’s headquarters is 3100 Central Expressway, Santa Clara, California,95051, and its mailing address is 415 Oakmead Parkway, Sunnyvale, CA 94085. Itstelephone number is (408) 764-2000. The Company’s Securities and ExchangeCommission (“SEC”) filings are available free of charge through its website atwww.symyx.com. The Company’s common stock trades on the NASDAQ Global SelectMarket under the symbol “SMMX.”

The accompanyingconsolidated financial statements have been prepared by management, inaccordance with United States generally accepted accounting principles (“GAAP”)and pursuant to instructions to Form 10-K and Regulation S-X.

***Principles of consolidation***

These consolidated financial statements include theaccounts of the Company and its wholly-owned subsidiaries (collectively, “Symyx”).Symyx accounts for equity investments in companies over which Symyx has theability to exercise significant influence, but does not hold a controllinginterest, under the equity method, and Symyx records its proportionate share ofincome or losses in the consolidated income statements. Symyx has eliminatedall significant intercompany accounts and transactions.

On July 13, 2006, the Company acquired AutodoseSA, a Swiss privately-held company. This acquisition was accounted for as abusiness combination using the purchase method. Autodose SA has since beenrenamed Symyx Technologies Europe SA and its results of operations have beenincluded in the Company’s consolidated financial statements since theacquisition date. All significant intercompany balances and transactions havebeen eliminated on consolidation.

The Company determines theaccounting method used to account for investments in equity securities in whichit does not have a controlling interest, primarily based on the Company’sownership of the investee and whether the Company has the ability to exercisesignificant influence over  thestrategic, operating, investing, and financing activities of the investee.

***Use of Estimates***

Preparing financialstatements in accordance with United States generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts in Symyx’s consolidated financial statements andaccompanying notes. Estimates include the forfeiture rate for stock-basedawards, future warranty expenditures and product life cycles, and assumptionssuch as the elements comprising a revenue arrangement, including thedistinction between software upgrades/enhancements and new products; whentechnological feasibility is achieved for the Company’s products; the potentialoutcome of future tax consequences of events that have been recognized in theCompany’s financial statements or tax returns; and determining when investmentimpairments are other-

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

than-temporary.Actual results and outcomes may differ from management’s estimates andassumptions. For example, the actual results with regard to warrantyexpenditures could have a material unfavorable impact on the Company if systemfailures or the cost to repair a system is greater than what the Company hasused in estimating the warranty expense accrual.

***Cash and Cash Equivalents***

The Company considers allhighly liquid investments, with maturities of three months or less on the dateof purchase, to be cash equivalents. Cash equivalents are carried at fairvalue.

***Investments***

Management determines the appropriate classificationof debt and equity securities at the time of purchase and reevaluates suchdetermination as of each balance sheet date.

The Company has classified its investment portfolio indebt securities as available-for-sale. Available-for-sale securities are statedat fair value, with the unrealized gains and losses, net of tax, reported inother comprehensive income (loss). Realized gains and losses and declines invalue judged to be other-than-temporary on available-for-sale securities areincluded in interest income. The estimated fair value amounts have beendetermined by the Company using available market information.

The amortized cost of debt securities is adjusted foramortization of premiums and accretion of discounts to maturity. Suchamortization is included in interest income. The cost of securities sold isbased on the specific identification method. Interest and dividends areincluded in interest income.

The Company invests its excess cash primarily indeposits with banks and short-term and medium-term marketable securities. Theseinvestments primarily include corporate notes, money market funds, U.S.municipal debt securities, and U.S. treasury notes. By policy, the Companyrestricts its investments to long-term bank obligations rated “A” or higher andshort-term obligations rated “P1” or higher by Moody’s or “A1” or higher byStandard & Poor’s (“S&P”), and corporate obligations, includingintermediate term notes rated “A” or higher, and commercial paper rated “P1” orhigher by Moody’s, or “A1” or higher by S&P. By policy, the Companyrestricts its investments to instruments with maturities of less thantwenty-four months.

Cash,cash equivalents and available-for-sale securities as of December 31, 2006were as follows (in thousands):

| ** **                         | ** ** | **Adjusted  Cost** | ** ** | **Gross Unrealized  Gain** | ** ** | **Gross Unrealized  Loss** | ** ** | **Fair  Value** | ** ** |
|------------------------------------|------------|--------------------|------------|---------------------------------|------------|---------------------------------|------------|-----------------|------------|
| Cash and cash  equivalents         |       | $                  | 36,115     |                            |       | $                               | 5          |            |       |   | $ | — |   |   | $ | 36,120 |   |
| U.S. municipal  debt securities(1) |       | 33,905             |       |                            | —     |                            |       |            | —     |   |   | 33,905 |   |
| U.S. corporate  debt securities    |       | 79,937             |       |                            | 33         |                            |       |            | —     |   |   | 79,970 |   |
| Total                              |       | $                  | 149,957    |                            |       | $                               | 38         |            |       |   | $ | — |   |   | $ | 149,995 |   |

----

(1)          The Company’sinvestments in U.S. municipal debt securities are all Variable Rate DemandNotes. These securities do not have a specific maturity date. However, they maybe redeemed at any time, provided that the issuer is provided notice one weekin advance of such redemption. The Company holds these securities asavailable-for-sale and accordingly records these securities as current assets.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Cash,cash equivalents and available-for-sale securities as of December 31, 2005were as follows (in thousands):

| ** **                      | ** ** | **Adjusted  Cost** | ** ** | **Gross Unrealized  Gain** | ** ** | **Gross Unrealized  Loss** | ** ** | **Fair  Value** | ** ** |
|---------------------------------|------------|--------------------|------------|---------------------------------|------------|---------------------------------|------------|-----------------|------------|
| Cash and cash  equivalents      |       | $                  | 70,591     |                            |       | $                               | 19         |            |       |   | $ | (3 | ) |   | $ | 70,607 |   |
| U.S. corporate  debt securities |       | 98,292             |       |                            | 14         |                            |       |            | (288       | ) |   | 98,018 |   |
| Total                           |       | $                  | 168,883    |                            |       | $                               | 33         |            |       |   | $ | (291 | ) |   | $ | 168,625 |   |

 

Aboveamounts are included in the following line items on the Consolidated BalanceSheets (in thousands):

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Cash and cash  equivalents     |       | $                     | 36,120     |   | $ | 70,607 |   |
| Available-for-sale  securities |       | 113,875               |       | 98,018 |   |
| Total                          |       | $                     | 149,995    |   | $ | 168,625 |   |

 

The Company had no realized gains or losses for theyears ended December 31, 2006 and 2005. Realized losses on the sale ofavailable-for-sale securities for the year ended December 31, 2004 wereminimal. Unrealized gains and losses for the years ended December 31,2006, 2005 and 2004 are included in this Note 1 of Notes to the ConsolidatedFinancial Statements under “Comprehensive Income (Loss).”

The fairvalue of the Company’s investment in debt securities, by contractual maturity,is as follows (in thousands):

| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Due in less than  1 year |       | $                     | 113,875    |   | $ | 96,016 |   |
| Due in 1 to 2  years     |       | —                |       | 2,002 |   |
| Total                    |       | $                     | 113,875    |   | $ | 98,018 |   |

 

Unrealizedlosses on available-for-sale securities by duration and fair value ofinvestments are as follows (in thousands):

| ** **            | ** ** | **December 31,**  | ** ** |
|-----------------------|------------|------------------------|------------|
| ** **            | ** ** | **2006**               | ** ** | **2005** | ** ** |
| ** **            | ** ** | **Unrealized  Losses** | ** ** | **Related Fair  Value of  Investments** | ** ** | **Unrealized  Losses** | ** ** | **Related Fair  Value of  Investments** | ** ** |
| Less than 12  months  |       |                   | $          | — |   |   |   | $ | — |   |   |   | $ | (261 | ) |   |   | $ | 85,446 |   |   |
| 12 months or  greater |       |                   | —     |   |   |   | — |   |   |   | (27 | ) |   |   | 12,059 |   |   |
| Total                 |       |                   | $          | — |   |   |   | $ | — |   |   |   | $ | (288 | ) |   |   | $ | 97,505 |   |   |

 

There were no unrealized lossesas of December 31, 2006. At December 31, 2005, unrealized losses of$288,000 were related to 56 investments in U.S. corporate debt securities.Unrealized losses are primarily attributable to changes in interest rates. Ofthe unrealized losses of $288,000 at December 31, 2005, 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

$27,000exceeded twelve months. The Company did not believe any unrealized lossesrepresented an other-than-temporary impairment as of December 31, 2005.

The Company determines the accounting method used toaccount for investments in equity securities in which it does not have acontrolling interest, primarily based on the Company’s ownership of theinvestee and whether the Company has the ability to exercise significantinfluence over the strategic, operating, investing, and financing activities ofthe investee. Accordingly, the Company accounts for its August 2006investment in Intermolecular, Inc. using the cost method of accountingwhile it accounts for its November 2006 investment in Visyx TechnologiesInc. (“Visyx”) using the equity method of accounting. At December 31,2006, the carrying values of cost basis investments were $13,500,000. TheCompany determines that it is not practical to estimate the fair value of theinvestments and believes that there are no identified events or changes incircumstances that may have a significant adverse effect on the fair value ofthe investment. At December 31, 2006, the carrying value of equity methodinvestment was $214,000.

The Company did notreceive any dividends from Visyx in the year ended December 31, 2006.

***Property, Plant and Equipment***

Property, plant and equipment are stated at cost.Depreciation of equipment is computed on the straight-line method using a lifeof three to five years for financial reporting purposes and by acceleratedmethods for income tax purposes. Depreciation of buildings is computed on thestraight-line method using a life of thirty years for financial reportingpurposes. Leasehold improvements are amortized over the shorter of the leaseterm or the estimated useful life of the assets for financial reporting purposes.

Property,plant and equipment consist of the following (in thousands):

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Machinery and  equipment                        |       | $                     | 31,226     |   | $ | 24,349 |   |
| Computers and  software                         |       | 5,812                 |       | 4,410 |   |
| Land and building                               |       | 3,551                 |       | 3,551 |   |
| Leasehold  improvements                         |       | 34,626                |       | 25,186 |   |
| Construction in  progress                       |       | 2,385                 |       | 2,279 |   |
| Furniture and  fixtures                         |       | 2,002                 |       | 1,146 |   |
| Property, plant and equipment, gross            |       | 79,602                |       | 60,921 |   |
| Less accumulated  depreciation and amortization |       | (48,380               | )          | (39,165 | ) |
| Property, plant  and equipment, net             |       | $                     | 31,222     |   | $ | 21,756 |   |

 

At December 31, 2006,no property, plant and equipment were pledged as collateral against borrowings.Amortization of leasehold improvements is included in depreciation expense.Depreciation expense was $10,217,000, $7,532,000, and $7,951,000 in 2006, 2005,and 2004, respectively.

***Long-Lived Assets***

The Company routinelyevaluates the carrying value of its long-lived assets. The Company recordsimpairment losses on long-lived assets used in operations when events andcircumstances indicate that assets may be impaired, the undiscounted cash flowsestimated to be generated by the assets are less than 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

thecarrying amount of those assets, and the fair values of those assets are lessthan their respective carrying amounts. To date, no impairment charges havebeen recognized.

***Revenue Recognition***

The Company recognizesrevenue in accordance with the Securities and Exchange Commission’s StaffAccounting Bulletin No. 104 (“SAB 104”), *RevenueRecognition*, the American Institute of Certified Public AccountantsStatement of Position (“SOP”) 97-2, *Software RevenueRecognition*, as amended by SOP 98-9, *Modificationof SOP 97-2, Software Revenue Recognition*, FinancialAccounting Standards Board Technical Bulletin 90-1, *Accountingfor Separately Priced Extended Warranty and Product Maintenance Contracts*,the Emerging Issues Task Forceconsensus on Issue 00-21, *Multiple-DeliverableRevenue Arrangements* (“EITF 00-21”), and otherauthoritative accounting literature. The Company generates revenue fromservices provided under research collaborations, the sale of products, thelicense of software, the provision of support and maintenance and otherservices, and the license of intellectual property. It is possible for theCompany’s customers to work with it in multiple areas of its business andcontracts may include multiple elements of service revenue, product revenue,and license and royalty revenue. In determining the basis for non-softwareproduct revenue recognition, the Company first determines the fair value of anyextended warranty services and defers this revenue to be recognized over theservice period. For those non-software product sales contracts that involvemultiple element deliverables, the Company identifies all deliverables,determines the units of accounting and allocates revenue among the units ofaccounting in accordance with EITF 00-21. In an arrangement that includes software that is more thanincidental to the products or services as a whole, the Company recognizesrevenue from the software and software-related elements, as well as anynon-software deliverable(s) for which a software deliverable is essentialto its functionality, in accordance with SOP 97-2.

***Service Revenue***

The Company recognizes service revenue from researchcollaboration agreements, software consulting, and support and maintenanceagreements as earned based upon the performance requirements of the agreements.Payments received prior to performance are deferred and recognized as revenuewhen earned over future performance periods. Collaboration agreements specifyminimum levels of research effort required to be performed by the Company.Payments received under research collaboration agreements are not refundable ifthe research effort is not successful. Direct costs associated with researchcollaborations are included in research and development expense. Softwareconsulting agreements specify the number of days of consulting services to beprovided by the Company. Support and maintenance agreements specify the term ofthe product maintenance and the nature of the services to be provided by theCompany during the term. Costs associated with software consulting and supportand maintenance were immaterial to date and therefore were also included inresearch and development expense.

Non-refundable up-front payments received inconnection with research and development collaboration agreements, includingtechnology access fees, are deferred and recognized on a straight-line basisover the relevant periods specified in the agreement, generally the researchterm. Revenue from milestone payments, which are substantially at risk untilthe milestones are completed, is recognized upon completion of these milestoneevents. Milestone payments to date have been immaterial.

Extended product maintenancecontracts, which typically provide both extended warranty coverage and productmaintenance services, are separately priced from the product, and arerecognized as revenue on a straight-line basis over the term of the coverage.The Company’s software licenses may provide for 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

technicalsupport, bug fixes, and rights to unspecified upgrades on awhen-and-if-available basis for periods defined within the contract. Revenuerelated to this post-contract customer support is deferred and recognized overthe term of the contracted support.

***Product Sales***

Product sales revenue includes sales of Symyx Toolshardware and the license of associated software. The Company’s Symyx Tools aretypically delivered under multiple-element arrangements, which includehardware, software and intellectual property licenses, and maintenance. Adetermination is made for each system delivered as to whether software isincidental to the system as a whole. If software is not incidental to the SymyxTools system as a whole, revenue from these arrangements is recognized inaccordance with SOP 97-2, as amended. If software is incidental to theSymyx Tools system, revenue from the sale of the Symyx Tools system is earnedand recognized when persuasive evidence of an arrangement exists, delivery ofthe product has occurred, no significant obligations with regard toimplementation remain, the fee is fixed or determinable, and collectability isreasonably assured. This is generally upon shipment, transfer of title to andacceptance by the customer of the hardware and associated licenses to softwareand intellectual property, unless there are extended payment terms. The Companyconsiders all arrangements with payment terms extending beyond twelve monthsnot to be fixed or determinable. If the fee is not fixed or determinable,revenue is recognized as payments become due from the customer. In multipleelement arrangements, the Company uses the residual method to allocate revenueto delivered elements once it has established fair value for all undeliveredelements. Payments received in advance under these arrangements are recorded asdeferred revenue until earned.

An accrual is establishedfor warranty expenses at the time the associated revenue is recognized.Shipping and insurance costs associated with the sale of Symyx Tools are notmaterial and are included in sales, general and administrative expenses.

***Software License Fees***

Revenue is recognized when persuasive evidence of anarrangement exists, delivery has occurred, the fee is fixed or determinable,and collectability is probable. The Company enters into certain arrangementswhere it is obligated to deliver multiple products and/or services (multipleelements). In these transactions, the Company allocates the total revenue amongthe elements based on the sales price of each element when sold separately(vendor-specific objective evidence) if all such information is available.

If the fair value of all elements has not beendetermined, the amount of revenue allocated to undelivered elements is based onthe vendor-specific objective evidence of fair value for those elements usingthe residual method. Under the residual method, the total fair value of theundelivered elements, as indicated by vendor-specific objective evidence, isrecorded as unearned, and the difference between the total arrangement fee andthe amount for the undelivered elements is recognized as revenue related todelivered elements. If evidence of the fair value of one or more undeliveredelements does not exist, the total revenue is deferred and recognized whendelivery of those elements occurs or when fair value for any remainingundelivered elements can be established.

For software licensed on anannual right to use basis, revenue is recognized on a straight-line basis overthe term of the license. Revenue from multi-year licensing arrangementsare accounted for as subscriptions, with billings recorded as unearned revenueand recognized as revenue ratably over the billing coverage period. Certainmulti-year licensing arrangements include rights to receive future versions 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

of software products on awhen-and-if-available basis. For software licensed on a perpetual basis, wherethe Company has not established vendor specific objective evidence of the fairvalue of the software licenses and maintenance and support (primarily theElectronic Lab Notebook software products that the Company acquired fromIntelliChem, Inc. and Synthematix, Inc.), the perpetual license feeis recognized ratably over the period of the bundled support and maintenancecommitment.

The Company considers allarrangements with payment terms longer than 12 months not to be fixed ordeterminable. If the fee is not fixed or determinable, revenue is recognized aspayments become due from the customer, provided all the other revenuerecognition criteria have been met.

***Intellectual Property License Fees and Royalties***

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

Royalty revenue is recorded based on reported sales bythird party licensees of products containing the Company’s software andintellectual property. If there are extended payment terms, royalty revenuesare recognized as these payments become due. Non-refundable royalties, forwhich there are no further performance obligations, are recognized when dueunder the terms of the agreements.

Amounts received fromthird parties for options to license certain technology or enter collaborativearrangements upon specified terms are deferred until either the option isexercised or expires.

***Concentration of Revenue***

Duringthe years ended December 31, 2006, 2005, and 2004, the following customerscontributed more than 10% of the Company’s total revenue for the year (inthousands):

| ** **                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ExxonMobil                |       | $                                           | 51,318     |   | $ | 42,254 |   | $ | 45,016 |   |
| The Dow Chemical  Company |       | 29,302                                      |       | 26,765 |   | 4,420 |   |
| Total                     |       | $                                           | 80,620     |   | $ | 69,019 |   | $ | 49,436 |   |

 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Therevenue from the above customers has been included in the following reportablesegments for the years ended December 31, 2006, 2005, and 2004 (inthousands):

| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Collaborations              |       | $                                           | 40,852     |   | $ | 38,696 |   | $ | 28,642 |   |
| Symyx Tools                 |       | 25,283                                      |       | 16,982 |   | 13,121 |   |
| Symyx Software              |       | 9,948                                       |       | 9,251 |   | 4,673 |   |
| Materials and IP  Licensing |       | 4,537                                       |       | 4,090 |   | 3,000 |   |
| Total                       |       | $                                           | 80,620     |   | $ | 69,019 |   | $ | 49,436 |   |

 

Therevenue from the above customers has been included in the consolidated income statementsas follows (in thousands):

| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service revenue             |       | $                                           | 36,854     |   | $ | 33,835 |   | $ | 25,014 |   |
| Product sales               |       | 24,232                                      |       | 16,060 |   | 13,079 |   |
| License fees and  royalties |       | 19,534                                      |       | 19,124 |   | 11,343 |   |
| Total                       |       | $                                           | 80,620     |   | $ | 69,019 |   | $ | 49,436 |   |

 

***Inventory***

Work-in-processinventory consists of purchased parts and fabricated sub-assemblies for SymyxTools in the process of being built. Finished goods inventory consists ofcustomized systems that have been finished but are pending shipment tocustomers. Inventories are carried at the lower of cost or market, with costdetermined on a specific identification basis, except for inventory acquiredfrom Autodose that was recorded at a fair value above its cost in accordancewith purchase accounting rules. The Company’s inventory balances at December 31,2006 and December 31, 2005 were as follows (in thousands):

| ** **      | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------|------------|---------------------------------|------------|---------------------------------|------------|
| Work-in-process |       |                            | $          | 2,580                           |       |   |   | $ | 841 |   |   |
| Finished goods  |       |                            | 100        |                            |       |   | — |   |   |
| Total           |       |                            | $          | 2,680                           |       |   |   | $ | 841 |   |   |

 

The above inventorybalance at December 31, 2006 included approximately $371,000 of inventoryvalued at fair value in accordance with purchase accounting rules andhaving a cost of approximately $198,000.

***Accounts Receivable and Allowance for DoubtfulAccounts***

Trade accounts receivableare recorded at the invoiced amount and do not bear interest. Substantially allreceivables were trade receivables at December 31, 2006 and 2005. TheCompany determined that no allowance for doubtful accounts was required at December 31,2006 and 2005 based on historical customer experience.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

***Warranty Expense Accrual***

The Company offers a warranty on each Symyx ToolSystem shipped. The specific terms and conditions of these warranties varydepending upon the product sold and country in which the Company does business.However, they typically include coverage for parts and labor and software bugfixes, for a specified period (typically one year). The Company estimates thecosts that may be incurred under its basic limited warranty and records aliability in the amount of such costs at the time product revenue isrecognized. Factors that affect the Company’s warranty liability include thenumber of installed units, historical and anticipated rates of warranty claims,and cost per claim. The Company periodically assesses the adequacy of itsrecorded warranty liabilities and adjusts the amounts as necessary.

Changesin the Company’s warranty expense accrual during the years ended December 31,2006 and 2005 are as follows (in thousands):

| ** **                                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance as of  January 1                                                               |       | $        | 645        |     | $          | 653 |   |
| New warranties  issued during the period                                                    |       | 839      |       | 679      |       |
| Costs incurred  during the period on specific systems                                       |       | (332     | )          | (271     | )          |
| Changes in  liability for pre-existing warranties during the period, including  expirations |       | (200     | )          | (416     | )          |
| Balance as of  December 31                                                             |       | $        | 952        |     | $          | 645 |   |

 

***Goodwill***

TheCompany’s goodwill at December 31, 2006 and 2005 is reported under tworeporting units as follows (in thousands):

| ** **     | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------|------------|---------------------------------|------------|---------------------------------|------------|
| Symyx Software |       |                            | $          | 17,672                          |       |   |   | $ | 17,618 |   |   |
| Symyx Tools    |       |                            | 374        |                            |       |   | — |   |   |
| Total          |       |                            | $          | 18,046                          |       |   |   | $ | 17,618 |   |   |

 

Goodwill increased in 2006due principally to the acquisition of Autodose SA as discussed in Note 7 of theNotes to Consolidated Financial Statements. Goodwill is tested for impairmentusing a fair-value-based approach on at least an annual basis, or morefrequently if indicators of potential impairment exist. Based on the results ofits annual impairment tests conducted during 2006 and 2005, Symyx determined thatno impairment of goodwill existed. However, future goodwill impairment testscould result in a charge to earnings. Symyx will continue to evaluate goodwillon an annual basis as of the beginning of its fourth fiscal quarter andwhenever events and changes in circumstances indicate that there may be apotential impairment.

***Intangible Assets***

Intangible assets, withthe exception of goodwill which is not subject to amortization, are amortizedusing the straight-line method over their estimated period of benefit, rangingfrom one to seven years. The Company evaluates the recoverability of intangibleassets periodically and takes into account events or circumstances that warrantrevised estimates of useful lives or that indicate that impairment exists. All of

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

theCompany’s intangible assets are subject to amortization. No impairments ofintangible assets have been identified during any of the periods presented.

***Research and Development***

Symyx’s policy is toexpense as incurred all costs of research and development, including direct andallocated expenses, related both to costs incurred on its own behalf and onbehalf of its customers. The types of costs classified as research anddevelopment expense include salaries of technical staff, consultant costs,chemical and scientific supplies costs, facilities rental, and utilities costsrelated to laboratories and offices occupied by technical staff, depreciationon equipment and facilities used by technical staff and outside services, suchas machining and third-party research and development costs.

***Income Taxes***

Income taxes have beenprovided using the liability method. Deferred tax assets and liabilities aredetermined based on the difference between the financial statement and taxbases of assets and liabilities as measured by the enacted tax rates which willbe in effect when these differences reverse. The Company provides a valuationallowance against net deferred tax assets if, based upon the availableevidence, it is not more likely than not that the deferred tax assets will berealized.

***Software Development Costs***

Statement of FinancialAccounting Standards No. 86, *Accounting for the Costsof Computer Software to be Sold, Leased or Otherwise Marketed*,requires the capitalization of certain software development costs subsequent tothe establishment of technological feasibility. As the Company’s business modelhas evolved, it has commenced bundling with the Symyx Tools it sells licensesto software that was originally developed for internal research and developmentpurposes. Due to the unique nature of the Symyx Tool systems, and the requiredproduct development process, technological feasibility is established only uponthe completion of a working model. Costs incurred by the Company between thecompletion of the working model and the point at which the product is ready forgeneral release have been insignificant. Accordingly, the Company has chargedall such costs to research and development expense in the period incurred.

***Stock-Based Compensation***

Prior to January 1, 2006, the Company elected tofollow Accounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB No. 25”), and relatedinterpretations in accounting for stock awards to employees. Accordingly, nocompensation expense was recognized in the Company’s financial statements priorto January 1, 2006 in connection with stock-based awards granted toemployees with exercise prices not less than fair value on the grant date.Deferred compensation for unvested options assumed in connection with businesscombinations was determined as the difference between the exercise price andthe fair market value of the Company’s common stock on the date options wereassumed. Deferred compensation was amortized on a graded vesting method throughDecember 31, 2005.

The Company adopted Statement of Financial AccountingStandards No. 123 (revised 2004), *Share-Based Payment*(“SFAS 123R”), effective January 1, 2006, using the modifiedprospective transition method. Under that transition method, stock-based compensationexpense recognized during the year ended December 31, 2006 includes: (a) employeestock purchase plan (“ESPP”) awards with offering periods commencing, and stockoptions granted or assumed, prior to, but not yet vested as of 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

December 31, 2005,based on the grant-date fair value estimated in accordance with the originalprovisions of Statement of Financial Accounting Standard No. 123 (“SFAS123”); (b) ESPP awards with offering periods commencing subsequent to December 31,2005 in accordance with the provisions of SFAS 123R; and (c) restrictedstock units awarded subsequent to December 31, 2005 based on thegrant-date fair value estimated in accordance with the provisions of SFAS 123R.Under the modified prospective transition method, results for prior periods arenot restated. See Note 4 “Stockholders’ Equity” for further details.

Stock compensation expense for options granted tonon-employees has been determined in accordance with SFAS 123 and EITF 96-18,*Accounting for Equity Instruments That Are Issuedto Other Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices,* usingthe Black-Scholes option pricing model. Stock compensation expense for optionsgranted to non-employees is periodically re-measured as the underlying optionsvest.

Proforma net loss information is required by SFAS 123, computed as if the Companyhad accounted for its employee stock options granted under the fair valuemethod of that Statement. Options granted following the Company’s November 1999initial public offering have been valued using the Black-Scholes method withvaluation assumptions as follows:

| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Expected dividend  yield         |       | 0        | %          | 0        | %          |
| Expected stock  price volatility |       | 0.52     |       | 0.53     |       |
| Risk-free  interest rate         |       | 3.8      | %          | 3.0      | %          |
| Expected life (years)            |       | 3.5      |       | 3.5      |       |

 

Thefair value of issuances under the Employee Stock Purchase Plan is estimated onthe issuance date using the Black-Scholes model assuming no expected dividendsand the following weighted average assumptions for issuance made in 2005 and2004.

| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Expected stock  price volatility |       | 0.52     |       | 0.51     |       |
| Risk-free  interest rate         |       | 2.6      | %          | 1.7      | %          |
| Expected life (years)            |       | 0.67     |       | 1.62     |       |

 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Hadthe Company valued its stock options and stock purchase rights according to thefair value provisions of SFAS 123, pro forma net loss and pro forma net lossper share would have been as follows (in thousands, except per share data):

| ** **                                                                                                                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Net income (loss):                                                                                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| As reported                                                                                                                             |       | $                                           | 12,002     |   | $ | 12,882 |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax effects                             |       | 243                                         |       | 40 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value method for all awards, net of related tax  effects |       | (20,541                                     | )          | (13,057 | ) |
| Pro forma                                                                                                                               |       | $                                           | (8,296     | ) | $ | (135 | ) |
| Basic net income (loss)  per share:                                                                                                     |       |                                        |       |   |   |
| As reported                                                                                                                             |       | $                                           | 0.37       |   | $ | 0.40 |   |
| Pro forma                                                                                                                               |       | $                                           | (0.25      | ) | $ | * |   |
| Diluted net income  (loss) per share:                                                                                                   |       |                                        |       |   |   |
| As reported                                                                                                                             |       | $                                           | 0.35       |   | $ | 0.38 |   |
| Pro forma                                                                                                                               |       | $                                           | (0.25      | ) | $ | * |   |

----

*                    Less than($0.01) per share

On two separate occasionsduring the three month period ended September 30, 2005, the CompensationCommittee of the Company’s Board of Directors approved amendments to the termsof outstanding options to purchase shares of the Company’s common stock. Oneach occasion, the terms of options with exercise prices above a designatedthreshold were amended to become fully-vested and exercisable on December 30,2005, provided that the holder of such option remains an employee or consultantof the Company on such date. The first occasion was on September 13, 2005,when the Company amended the terms of outstanding options to purchaseapproximately 251,000 shares of the Company’s common stock with exercise pricesabove $30 per share. The second occasion was on September 22, 2005, whenthe Company amended the terms of outstanding options to purchase approximately159,000 shares of the Company’s common stock with exercise prices equal orgreater than $24.67 per share. All such options were issued pursuant to theterms of the Company’s 1997 Stock Plan, the Company’s 2001 Nonstatutory StockOption Plan or Symyx IntelliChem’s 2003 Stock Option Plan. No options held byexecutive officers or directors of the Company were accelerated pursuant tothis authorization. The Company accelerated the vesting schedule for the aboveoptions to avoid future compensation expenses to be recorded in accordance withSFAS 123(R). No compensation expense was recorded in connection with theacceleration of the vesting schedule of the above options because the fairmarket value of the common stock was less than the exercise price of theaccelerated options on each of the respective measurement dates. The impact onpro forma loss from these accelerations has been included in the above table.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

***Net Income Per Share***

Basic net income per share has been computed using theweighted-average number of shares of common stock outstanding during theperiod. Diluted net income per share has been calculated based on the sharesused in the calculation of basic net income per share and the dilutive effectof stock options and restricted stock units.

Thefollowing table presents the calculation of basic and diluted net income pershare (in thousands, except per share data):

| ** **                                                                                              | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                                                                              |       | $                                           | 8,284      |   | $ | 12,002 |   | $ | 12,882 |   |
| Weighted-average  shares of common stock outstanding                                                    |       | 33,199                                      |       | 32,819 |   | 32,067 |   |
| Dilutive effect  of employee stock options and restricted stock units, using the treasury  stock method |       | 1,015                                       |       | 1,745 |   | 1,805 |   |
| Weighted-average  shares used in computing diluted net income per share                                 |       | 34,214                                      |       | 34,564 |   | 33,872 |   |
| Basic net income  per share                                                                             |       | $                                           | 0.25       |   | $ | 0.37 |   | $ | 0.40 |   |
| Diluted net income per  share                                                                           |       | $                                           | 0.24       |   | $ | 0.35 |   | $ | 0.38 |   |

 

The Company has excludedoptions for the purchase of 3,938,000, 3,375,000, and 3,160,000 shares ofcommon stock from the calculation of diluted net income per share in 2006,2005, and 2004, respectively, because all such securities are anti-dilutive forthe respective periods.

***Employee Savings Plan***

The Company has a savingsplan in the United States that qualifies under Section 401(k) of theInternal Revenue Code. Participating U.S. employees may contribute up to 60% oftheir pretax salary, but not more than statutory limits. The Company started tomake employer contribution to the plan in 2004. In 2005 the Company increasedthe employer contributions from 25 cents in 2004 to 50 cents in 2005 for eachdollar a participant contributes under this plan, with a maximum matchingcontribution of 2% of a participant’s earnings (increased from 1% of aparticipant’s earnings in 2004). Matching contributions for the plan were$629,000, $504,000, and $250,000 in 2006, 2005, and 2004, respectively.Matching contributions are invested proportionate to each participant’svoluntary contributions in the investment options provided under the plan.Investment options in the plan do not include Symyx common stock.

***Foreign Currency Translation***

The financial statementsof the Company’s wholly-owned subsidiaries, Symyx Technologies Europe S.A.,Symyx Technologies AG, Symyx Technologies (France) SARL, Symyx Technologies(Germany) GmbH, and Symyx Technologies (UK) Ltd., are measured using the localcurrency as the functional currency. Assets and liabilities of the subsidiariesare translated at the rates of exchange at the balance sheet date. Theresultant translation adjustments are recorded as a separate component ofstockholders’ equity as accumulated other comprehensive income (loss) and havenot been significant to date. Income and expense items are translated ataverage monthly rates of exchange.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

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

The Company accounts forthe impairment and disposal of long-lived assets utilizing Statement ofFinancial Accounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (“SFAS 144”).SFAS 144 requires that long-lived assets, such as property, plant andequipment, and purchased intangible assets subject to amortization, be reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. The recoverability of anasset is measured by a comparison of the carrying amount of an asset to itsestimated undiscounted future cash flows expected to be generated. If thecarrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized for the amount by which the carrying amount ofthe asset exceeds the fair value of the asset. Assets to be disposed of wouldbe separately presented in the balance sheet and reported at the lower of thecarrying amount or fair value less costs to sell, and would no longer bedepreciated. The assets and liabilities of a disposed group classified as heldfor sale would be presented separately in the appropriate asset and liabilitysections of the balance sheet.

***Comprehensive Income (loss)***

The components of other comprehensive income (loss)consist of unrealized gains and losses on available-for-sale securities andforeign currency translation adjustments, both net of tax. Comprehensive incomehas been disclosed in the statement of stockholders’ equity for all periodspresented.

Thecomponents of accumulated other comprehensive income (loss) at December 31,2006, 2005, and 2004 are as follows (in thousands):

| ** **                                                          | ** ** | **Foreign  Currency  Translation  Adjustments** | ** ** | **Unrealized  Gain (Loss) On  Available-For-  Sale Securities** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-----------|------------|
| Balance at  January 1, 2004                                    |       |                                            | $          | (11                                                                            | )          |      |       | $ | 42 |   |   | $ | 31 |   |
| Foreign currency  translation adjustment                            |       |                                            | (1         | )                                                                              |       |      | —     |   |   | (1 | ) |
| Unrealized loss  on available-for-sale securities, net of $28 taxes |       |                                            | —     |                                                                           |       |      | (519       | ) |   | (519 | ) |
| Balance at  December 31, 2004                                  |       |                                            | (12        | )                                                                              |       |      | (477       | ) |   | (489 | ) |
| Foreign currency  translation adjustment                            |       |                                            | (29        | )                                                                              |       |      | —     |   |   | (29 | ) |
| Unrealized loss  on available-for-sale securities                   |       |                                            | —     |                                                                           |       |      | 220        |   |   | 220 |   |
| Balance at  December 31, 2005                                  |       |                                            | $          | (41                                                                            | )          |      |       | $ | (257 | ) |   | $ | (298 | ) |
| Foreign currency  translation adjustment                            |       |                                            | 13         |                                                                           |       |      | —     |   |   | 13 |   |
| Unrealized gain  on available-for-sale securities, net of $16 taxes |       |                                            | —     |                                                                           |       |      | 281        |   |   | 281 |   |
| Balance at  December 31, 2006                                  |       |                                            | $          | (28                                                                            | )          |      |       | $ | 24 |   |   | $ | (4 | ) |

 

***Effect of New Accounting Pronouncements***

***Accounting for Uncertainty in Income Taxes***

In June 2006, FASBissued Financial Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109*.FIN 48 clarifies the accounting for income taxes by prescribing the minimumrecognition threshold a tax position is required to meet before beingrecognized in financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 will be effective infiscal years beginning after December 15, 2006. The Company is currentlyevaluating the 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

effectthat the adoption of FIN 48 will have on its consolidated results of operationsand financial condition and is not yet in a position to determine such effects.The Company expects FIN 48 will result in increased volatility in futureeffective income tax rates, the extent of which has not been determined yet.

***Fair Value Measurements***

In September 2006,the FASB issued SFAS No. 157 (“SFAS 157”), *Fair ValueMeasurements*. SFAS 157 provides guidance for using fair valueto measure assets and liabilities. It also responds to investors’ requests forexpanded information about the extent to which companies measure assets andliabilities at fair value, the information used to measure fair value, and theeffect of fair value measurements on earnings. SFAS 157 applies wheneverother standards require (or permit) assets or liabilities to be measured atfair value, and does not expand the use of fair value in any new circumstances.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and is required to be adopted by the Companyin the first quarter of fiscal 2008. The Company is currently evaluating theeffect that the adoption of SFAS 157 will have on its consolidated resultsof operations and financial condition.

***Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements***

In September 2006,the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*. SAB 108 providesguidance on the consideration of the effects of prior year misstatements inquantifying current year misstatements for the purpose of a materialityassessment. SAB 108 establishes an approach that requires quantification offinancial statement errors based on the effects of each of the company’sbalance sheet and statement of operations and the related financial statementdisclosures. Early application of the guidance in SAB 108 is encouraged in anyreport for an interim period of the first fiscal year ending after November 15,2006, and will be adopted by the Company in the first quarter of fiscal 2007.The Company does not expect the adoption of SAB 108 to have a material impacton its consolidated results of operations and financial condition.

**2.   Researchand Development Arrangements**

The Company has entered into a number of multi-yearresearch and development collaborations to perform research for partners inexclusive fields over multiple years. The major collaborative arrangements havesimilar contractual terms and are non-cancelable other than for material breachor certain other conditions. Under the collaborative arrangements, the Companyis responsible for performing research at levels defined in the agreements,including synthesis, screening, and informatics. The partner, in turn, isentitled to develop and commercialize materials discovered in or undercollaboration within the defined field. The Company typically receives researchand development funding at specified amounts per full time equivalent employeeworking on the project and is entitled to receive royalties on the sale of anyproducts commercialized under the agreement or payments on the achievement ofspecified research milestones. The agreements also contain procedures by which theCompany and the partner will determine royalty rates for the sale or license ofproducts under the agreements.

Thetable below indicates some of the significant collaborative partners for whomthe Company conducted research and development in 2006, together with theprimary focus of the collaborations. In 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

addition to these partners the Company has a number ofother undisclosed partners, none of which individually constituted more than 5%of total revenue in 2006:

| **Partner**               | ** ** | ** ** | ** ** | **Current  Research  Contract Ends** | ** ** | **Primary focus of current collaborative efforts** | ** ** |
|---------------------------|------------|------------|------------|-------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| The Dow Chemical  Company |       |       | 12/31/2009 |                                      |       | Polyolefin  catalysts for certain commodity chemicals                       |       |
| ExxonMobil                |       |       | 5/31/2008  |                                      |       | Catalysts for certain  commodity chemicals including olefins                |       |

 

The Company’s collaborative agreements may provide fora variety of structures with respect to ownership of inventions conceived andreduced to practice in connection with activities under the agreements, butunder a typical collaborative arrangement, the Company owns all inventionsconceived and reduced to practice solely by the Company and all know-how andintellectual property rights related thereto; and the Company and thecollaborative partner jointly own all inventions made, conceived, reduced topractice, or otherwise developed jointly by employees or consultants of theCompany and those of the collaborative partner in connection with activitiesunder the agreement and all know-how and intellectual property rights relatedthereto. The Company’s collaborative partner typically receives exclusiverights in the defined field of the collaborative agreement.

The agreements are typically cancelable only in theevent of breach by either party or certain other conditions. As of December 31,2006, the Company had committed funding from existing collaborative partners,excluding milestone payments that are contingent upon the success of theresearch, of approximately $73 million. Revenue from collaborative partners whoindividually comprised more than 10% of revenue is included within Note 1 “Concentrationof Revenue.”

In 2003, Symyx entered into an Alliance, TechnologyTransfer and License Agreement effective April 1, 2003 with ExxonMobilResearch and Engineering Company under which the Company is contracted toprovide research services, develop and sell Symyx Tools, and license itssoftware and intellectual property. The ExxonMobil alliance provides Symyx withan expected five-year revenue stream of over $200 million from currentlyplanned alliance activities, purchases of Symyx Tools, and licensing fees. Inaddition, Symyx is entitled to receive royalties from the commercialization ofmaterials, processes, and products based on discoveries made in the fields ofagreement.

In December 2004, Symyx entered into an Alliance,Technology Transfer, Research and License Agreement effective January 1,2005 with The Dow Chemical Company under which the Company is contracted toperform research in a number of exclusive areas, develop and provide SymyxTools, and license Symyx Software as well as certain intellectual property. Dowwill make payments to Symyx over the five-year term of approximately $120million. In addition, Symyx is entitled to receive royalties on commercializeddiscoveries resulting from the collaborative research.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

TheCompany does not track or allocate actual costs by collaboration or project, asthe requirement from its collaborative partners is to staff the variousprojects on a full-time-equivalent (“FTE”) employee basis. Accordingly, theCompany tracks the hours incurred by assigned research scientists and engineersto each project. Based on hours spent on each project, the Company estimatesthe research and development efforts undertaken for various projects were asfollows:

| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Projects funded  by collaboration partners |       |     | 65         | %        |       |     | 73         | % |   |   | 79 | % |   |
| Projects funded  internally:               |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Software development                       |       |     | 26         | %        |       |     | 21         | % |   |   | 5 | % |   |
| Research                                   |       |     | 7          | %        |       |     | 5          | % |   |   | 10 | % |   |
| Tools development                          |       |     | 2          | %        |       |     | 1          | % |   |   | 6 | % |   |
| Total                                      |       |     | 100        | %        |       |     | 100        | % |   |   | 100 | % |   |

 

Due to the nature of theCompany’s research and dependence on its collaborative partners tocommercialize the results of the research, the Company cannot predict with anycertainty whether any particular collaboration or research effort willultimately result in a commercial product and therefore whether the Companywill achieve future milestones or royalty payments under its variouscollaborations.

**3.   Commitmentsand Contingencies**

***Leases***

TheCompany has entered into various operating lease agreements for facilities infive states and two foreign countries with lease terms ranging from one to tenyears. Rent expense, which is being recognized on a straight-line basis overthe lease terms, was approximately $2,724,000, $2,317,000, and $1,955,000 forthe years ended December 31, 2006, 2005, and 2004, respectively. Futurecommitments and obligations under the operating leases for the Company’sfacilities, to be satisfied as they become due over the next nine years, are asfollows as of December 31, 2006 (in thousands):

| **Years ending December 31,** | ** ** | ** ** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                         |       | $          | 2,985      |       |
| 2008                                         |       | 2,626      |       |
| 2009                                         |       | 2,358      |       |
| 2010                                         |       | 1,981      |       |
| 2011                                         |       | 760        |       |
| Thereafter                                   |       | 2,530      |       |
| Total                                        |       | $          | 13,240     |       |

 

Subsequently in January 2007,the Company extended its lease for one of its facilities in Sunnyvale,California, until November 2015, which resulted in an incrementalcommitment of $5.9 million. The Company also has two options to extend thelease for a period of five consecutive years each.

***Other Commitments***

As of December 31, 2006, the Company had purchasecommitments for inventory, fixed assets and services of approximately$3,331,000.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

As discussed in Note 8 “*Related Party Transactions”*below*,*the Company’scommitment for future investments related to the CollaborativeDevelopment and License Agreement with Intermolecular, Inc. as of December 31,2006 were $1,879,000. The Company expects to meet this commitment in the nexttwo years with additional research efforts and capital expenditures.

As of December 31,2006, the Company had no amounts due under loan agreements and had no lines ofcredit or other finance facilities in place.

***Customer Indemnification***

From time to time, theCompany agrees to indemnify its customers against certain third partyliability, including liability if the Company’s products infringe a third party’sintellectual property rights. Such indemnification provisions are accounted forin accordance with FASB Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.* The indemnification istypically limited to no more than the amount paid by the customer. As of December 31,2006, the Company was not subject to any pending intellectual property-relatedlitigation.

***Contingencies***

As discussed in Note 7 “BusinessCombinations”, additional purchase price consideration of up to $6,262,000 maybe payable upon the achievement of certain 2007, 2008 and 2009 revenue targetsby Autodose. The Company will evaluate the possibility of achieving thesetargets from time to time and record the fair value of any additionalconsideration as an additional cost of the acquisition. No additionalconsideration was recorded as of December 31, 2006.

**4.   Stockholders’Equity**

***Stock Purchase Plan***

In October 1999, theCompany’s stockholders approved the adoption of the 1999 Employee StockPurchase Plan (the “Purchase Plan”). A total of 300,000 shares of the Company’scommon stock were initially reserved for issuance under the Purchase Plan. ThePurchase Plan permits eligible employees to purchase common stock at adiscount, but only through payroll deductions, during concurrent 24-monthoffering periods. Each offering period will be divided into four consecutivesix-month purchase periods. The price at which stock is purchased under thePurchase Plan is equal to 85% of the fair market value of the common stock onthe first or last day of the offering period, whichever is lower. In addition,the Purchase Plan provides for annual increases in the number of sharesavailable for issuance under the Purchase Plan on the first day of each fiscalyear, equal to the lesser of 1% of the outstanding shares of common stock onthe first day of the fiscal year, 350,000 shares, or a lesser amount asdetermined by the Board of Directors. At December 31, 2006, the number ofshares of common stock available for future issue under the Purchase Plan was1,789,350.

***Stock Option Plans***

The Company’s 1996 Stock Option Plan was adopted in March 1996and provided for the issuance of options for up to 1,153,444 shares of commonstock to employees, directors, and consultants.

During 1997, the Company’s Board of Directors approvedthe adoption of the 1997 Stock Option Plan with terms and conditions the sameas those of the 1996 Stock Option Plan (collectively, the “Qualified 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Plans”). The 1997 StockOption Plan provides for the issuance of options for up to 14,090,572 shares ofcommon stock to employee and consultants. The Qualified Plans provide for anannual increase in the number of shares of common stock reserved for issuanceequal to the lesser of 1,500,000 shares, 4% of the outstanding shares on thedate of the annual increase, or a lesser amount as determined by the Board ofDirectors. As of December 31, 2006, options to purchase 1,804,311 sharesof common stock were available for future grant under the Qualified Plans,though the Qualified Plans expire in February 2007.

In October 2001, the Company’s Board of Directorsapproved the adoption of the 2001 Nonstatutory Stock Option Plan (the “NSO Plan”).The NSO Plan provides for the issuance of options for up to 1,000,000 shares ofcommon stock to non-executive employees and consultants. As of December 31,2006, options to purchase 702,500 shares of common stock were available forfuture grant under the NSO Plan.

In connection with the acquisition of IntelliChem (SeeNote 7), the Company assumed all the unvested outstanding stock options issuedpursuant to IntelliChem’s 2003 Stock Option Plan (“IntelliChem Plan”) andconverted them into options to purchase 44,126 shares of Symyx’s common stock.In connection with the acquisition of Synthematix (See Note 7), the Companyassumed all the unvested outstanding stock options issued pursuant toSynthematix’s 2000 Equity Compensation Plan (“Synthematix Plan”), as amended,and converted them into options to purchase 23,876 shares of Symyx’s commonstock. These options generally retained all of the rights, terms, andconditions of the plan under which they were originally granted. As of December 31,2006, options to purchase 10,971 and 479 shares of common stock were availablefor future grant under the IntelliChem Plan and Synthematix Plan, respectively.

Stock options granted under the Qualified Plans may beeither incentive stock options or nonstatutory stock options, whereas stock optionsgranted under the NSO Plan are nonstatutory stock options. Options aregenerally granted with exercise prices equal to the fair value of the commonstock on the grant date, as determined by the Board of Directors. The optionsexpire no more than 10 years after the date of grant or earlier if employmentor relationship as a director or consultant is terminated. The Board ofDirectors shall determine the times during the term when the options may beexercised and the number of shares for which an option may be granted. Optionsmay be granted with different vesting terms from time to time but will providefor annual vesting of at least 20% of the total number of shares subject to theoption.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Asummary of activity under the 1996 and 1997 Stock Option Plans, the NSO Plan,the IntelliChem Plan and the Synthematix Plan, is as follows:

| ** **                         | ** ** | **Outstanding Stock Options** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|
| ** **                         | ** ** | **Number of  Shares**              | ** ** | **Exercise  Price** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Balance at January 1,  2004   |       | 6,527,000                               |       | $0.19 - $58.25 |   |   | $ | 23.33 |   |   |
| Options granted                    |       | 1,950,851                               |       | $2.63 - $32.00 |   |   | $ | 26.11 |   |   |
| Options exercised                  |       | (741,302                                | )          | $0.39 - $30.25 |   |   | $ | 14.26 |   |   |
| Options cancelled                  |       | (302,064                                | )          | $3.86 - $57.00 |   |   | $ | 32.19 |   |   |
| Balance at  December 31, 2004 |       | 7,434,485                               |       | $0.19 - $58.25 |   |   | $ | 24.98 |   |   |
| Options granted  and assumed       |       | 1,599,226                               |       | $0.51 - $31.00 |   |   | $ | 26.68 |   |   |
| Options exercised                  |       | (632,058                                | )          | $0.39 - $30.25 |   |   | $ | 15.39 |   |   |
| Options cancelled                  |       | (307,841                                | )          | $0.51 - $57.00 |   |   | $ | 28.90 |   |   |
| Balance at  December 31, 2005 |       | 8,093,812                               |       | $0.19 - $58.25 |   |   | $ | 25.91 |   |   |
| Options exercised                  |       | (940,496                                | )          | $0.39 - $27.99 |   |   | $ | 14.92 |   |   |
| Options cancelled                  |       | (390,724                                | )          | $0.39 - $51.50 |   |   | $ | 27.58 |   |   |
| Balance at  December 31, 2006 |       | 6,762,592                               |       | $0.19 - $58.25 |   |   | $ | 27.35 |   |   |

 

At December 31, 2006, 2005, and 2004, vested andoutstanding options for the purchase of 6,514,413, 7,313,292, and 5,125,025shares of common stock were exercisable at weighted-average exercise prices of$27.62, $26.75, and $26.51, respectively. The weighted-average grant date fairvalue of options granted during the years ended December 31, 2005 and 2004was $12.20 and $12.12, respectively. No options were granted in 2006.

Ananalysis of options outstanding at December 31, 2006 is as follows:

| ** **                             | ** ** | ** ** | ** ** | **Weighted-  Average**                                        | ** ** | **Options**                                           | ** ** | **Options Exercisable**                | ** ** |
|----------------------------------------|------------|------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------|------------|
| **Exercise Price**                | ** ** | ** ** | ** ** | **Options  Outstanding at  December 31, 2006** | ** ** | **Remaining  Contractual Life  (in years)** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Exercisable at  December 31,  2006** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
| $  0.19  - $  8.63 |       |       | 184,097    |                                                          |       |                                                  | 3.2        |                                        |       |   | $ | 2.54 |   |   |   | 172,292 |   |   |   | $ | 2.42 |   |   |
| $10.39 - $14.75                        |       |       | 1,287,905  |                                                          |       |                                                  | 5.3        |                                        |       |   | $ | 12.95 |   |   |   | 1,252,879 |   |   |   | $ | 12.94 |   |   |
| $15.22 - $22.68                        |       |       | 855,855    |                                                          |       |                                                  | 6.3        |                                        |       |   | $ | 18.46 |   |   |   | 732,392 |   |   |   | $ | 18.01 |   |   |
| $23.11 - $24.67                        |       |       | 512,499    |                                                          |       |                                                  | 7.2        |                                        |       |   | $ | 24.07 |   |   |   | 434,614 |   |   |   | $ | 24.12 |   |   |
| $25.00 - $26.51                        |       |       | 915,959    |                                                          |       |                                                  | 4.8        |                                        |       |   | $ | 25.38 |   |   |   | 915,959 |   |   |   | $ | 25.38 |   |   |
| $26.70 - $27.99                        |       |       | 1,244,063  |                                                          |       |                                                  | 7.9        |                                        |       |   | $ | 27.64 |   |   |   | 1,244,063 |   |   |   | $ | 27.64 |   |   |
| $28.05 - $34.63                        |       |       | 654,953    |                                                          |       |                                                  | 7.1        |                                        |       |   | $ | 31.39 |   |   |   | 654,953 |   |   |   | $ | 31.39 |   |   |
| $36.50 - $58.25                        |       |       | 1,107,261  |                                                          |       |                                                  | 3.2        |                                        |       |   | $ | 55.49 |   |   |   | 1,107,261 |   |   |   | $ | 55.49 |   |   |
|                                   |       |       | 6,762,592  |                                                          |       |                                                  | 5.8        |                                        |       |   | $ | 27.35 |   |   |   | 6,514,413 |   |   |   | $ | 27.62 |   |   |
|                                        |            |            |            |                                                               |            |                                                       |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted-average remaining contractual life forthe above exercisable options was 5.7 years.

The aggregate intrinsic values for the aboveoutstanding and exercisable stock options were $17,405,000 and $16,807,000,respectively. The aggregate intrinsic value is calculated as the differencebetween the exercise price of the underlying awards and the close price of theCompany’s common stock 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

for in-the-money optionsat December 31, 2006. During the years ended December 31, 2006, 2005,2004, the aggregate intrinsic value of options exercised under the Company’sstock option plans was $11,716,000, $7,895,000 and $9,628,000, respectively. Asof December 31, 2006, $604,000 of total unrecognized compensation costrelated to unvested stock options granted and outstanding is expected to beamortized on a graded vesting basis through 2009.

Starting in March 2006, the Company grantedrestricted stock units to its employees and members of the Board of Directorsunder the Qualified Plans. The fair value of the Company’s restricted stockunits was calculated based upon the fair market value of the Company’s stock atthe date of grant. As of December 31, 2006, $1,704,000 of total unrecognizedcompensation cost related to unvested restricted stock units granted isexpected to be amortized on a straight-line basis over the remaining vestingperiod of 2 to 4 months. The Company plans to issue new common stock to settlethe restricted stock units.

Thefollowing table illustrates the changes in status of the Company’s restrictedstock units and stock options during the year ended December 31, 2006:

| ** **                          | ** ** | **Restricted Stock Units** | ** ** | **Stock Options**                            | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **Shares**                           | ** ** | **Weighted-Average  Grant-Date  Fair Value** | ** ** | **Shares** | ** ** | **Weighted-Average  Grant-Date  Fair Value** | ** ** |
| Unvested at  January 1, 2006   |       | —                               |       |                                              | —     |   |   | 780,520 |   |   | $ | 9.27 |   |   |
| Granted                             |       | 350,461                              |       |                                              | $          | 29.04 |   |   | — |   |   | — |   |   |
| Vested                              |       | —                               |       |                                              | —     |   |   | (476,264 | ) |   | $ | 8.90 |   |   |
| Cancelled                           |       | (22,411                              | )          |                                              | $          | 28.82 |   |   | (56,077 | ) |   | $ | 9.00 |   |   |
| Unvested at December 31,  2006 |       | 328,050                              |       |                                              | $          | 29.05 |   |   | 248,179 |   |   | $ | 10.07 |   |   |

 

The aggregated fair value of stock options vestedduring 2006 was $4,239,000.

Duringthe year ended December 31, 2006, the Company valued awards under thePurchase Plan using the Black-Scholes-Merton method with the followingvaluation assumptions:

| Expected dividend                          |   | 0.0  | %      |
|--------------------------------------------|--------|------|--------|
| Risk-free  interest rate                   |   | 4.9  | %      |
| Expected  volatility                       |   | 51   | %      |
| Weighted-average  expected life (in years) |   | 1.25 |   |

 

As of December 31, 2006, $335,000 of totalunrecognized compensation cost related to the Purchase Plan is expected to beamortized on a straight-line basis over a weighted-average remaining period of6 months.

As of December 31, 2006, the Company has reserved11,398,253 shares of common stock for future issuance in relation to theCompany’s stock option plans.

During the years ended December 31, 2005 and2004, in connection with the acquisitions of Synthematix and IntelliChem, theCompany recorded deferred stock compensation amounting to $216,000 and$651,000, respectively, for the unvested stock options assumed with an exerciseprice below the fair market value. Deferred stock compensation is included as areduction of stockholders’ equity and was being amortized to expense on agraded vesting method. During the years ended December 31, 2005 and 2004,the Company recorded amortization of deferred stock compensation expenseassociated with these 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

options of approximately$343,000 and $33,000, respectively. The Company also reduced the unamortizedbalance by $230,000 in 2005 due to the termination of certain employees to whomthese options were granted.

In prior years, the Company also issued stock optionsto an outside consultant, for which the Company recorded approximately $500,000of stock-based compensation during the year ended December 31, 2004. TheCompany did not issue any stock options to outside consultants in 2005 and2006.

Theamortization of deferred stock compensation, combined with the expenseassociated with stock options granted to non-employees, has been included inthe following items in the accompanying consolidated income statements (inthousands):

| ** **                         | ** ** | **Years Ended  December 31,** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|
| ** **                         | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Research and  development          |       | $                                       | 221        |   | $ | 22 |   |
| Sales, general  and administrative |       | 122                                     |       | 518 |   |
| Total                              |       | $                                       | 343        |   | $ | 540 |   |

 

***Impact of SFAS 123R***

The Company adopted SFAS 123R, effective January 1,2006. In accordance with SFAS 123R, stock-based compensation expenserecognized in the consolidated income statement for the year ended December 31,2006 was based on awards ultimately expected to vest. The forfeiture rate isestimated to be between 0% and 15% based on the historical turnover rates ofdifferent groups of employees. The forfeiture rate is subject to revision, ifnecessary, in subsequent periods if actual forfeitures differ from theseestimates. In the pro forma information required under SFAS 123 for theperiods prior to 2006, the Company accounted for forfeitures as they occurred.

TheCompany recognized stock-based compensation expenses of $10.3 million duringthe year ended December 31, 2006. Stock-based compensation expenserecognized in the Company’s results of operations for the year ended December 31,2006 was as follows (in thousands):

| Cost of products  sold             |   | $     | 163    |   |
|------------------------------------|--------|-------|--------|--------|
| Research and  development          |   | 4,450 |   |
| Sales, general  and administrative |   | 5,683 |   |
| Total                              |   | $     | 10,296 |   |

 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

TheCompany analyzed its stock-based compensation strategies prior to the adoptionof SFAS 123R and made the decision to grant restricted stock units rather thanstock options in 2006. The Company recognized stock-based compensation expensesof $10,296,000 during the year ended December 31, 2006. Included in theseamounts are expenses related to restricted stock units of $7,881,000, whichwould have been included in the Company’s consolidated income statements underthe provisions of Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB No. 25”)for 2006. The expense related to restricted stock units is therefore notconsidered as part of the impact of the adoption of SFAS 123R for the yearended December 31, 2006 in the following table (in thousands, except pershare amounts).

| ** **                                        | ** ** | **As Reported** | ** ** | **Effect of Adopting  SFAS 123R** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|--------------------------------------------------|------------|
| Income from  continuing operations                |       |                 | $          | 7,143                                            |       |   |   | $ | (2,415 | ) |   |
| Income before  income tax expense and equity loss |       |                 | $          | 14,852                                           |       |   |   | $ | (2,415 | ) |   |
| Net income                                        |       |                 | $          | 8,284                                            |       |   |   | $ | (2,010 | ) |   |
| Cash flow from  operations                        |       |                 | $          | 29,920                                           |       |   |   | $ | (2,262 | ) |   |
| Cash flow from  financing activities              |       |                 | $          | (11,425                                          | )          |   |   | $ | 2,667 |   |   |
| Basic net income  per share                       |       |                 | $          | 0.25                                             |       |   |   | $ | (0.06 | ) |   |
| Diluted net income per  share                     |       |                 | $          | 0.24                                             |       |   |   | $ | (0.06 | ) |   |

 

The income tax benefitrecognized in the consolidated income statements related to stock-basedcompensation expense was $2,995,000 in 2006. The estimated fair value of theCompany’s stock-based awards, less expected forfeitures, is amortized over theawards’ vesting period on a straight-line basis for awards granted after theadoption of SFAS 123R and on a graded vesting basis for awards granted prior tothe adoption of SFAS 123R.

**5.   IncomeTaxes**

Theprovision for income taxes consisted of the following (in thousands):

| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal                     |       | $                                           | 10,685     |   | $ | 6,856 |   | $ | 5,520 |   |
| State                       |       | 1,140                                       |       | 553 |   | 745 |   |
| Foreign                     |       | 259                                         |       | 25 |   | 18 |   |
| Total                       |       | 12,084                                      |       | 7,434 |   | 6,283 |   |
| Deferred:                   |       |                                        |       |   |   |   |   |
| Federal                     |       | (4,862                                      | )          | 366 |   | (760 | ) |
| State                       |       | (621                                        | )          | 341 |   | (2,196 | ) |
| Foreign                     |       | (219                                        | )          | — |   | — |   |
| Total                       |       | (5,702                                      | )          | 707 |   | (2,956 | ) |
| Provision for income  taxes |       | $                                           | 6,382      |   | $ | 8,141 |   | $ | 3,327 |   |

 

Tax benefits resulting from the exercise ofnonqualified stock options and the disqualifying dispositions of shares issuedunder the Company’s stock-based compensation plans were approximately 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

$5,045,000 in 2006,$3,334,000 in 2005 and $6,138,000 in 2004. Such benefits were credited toadditional paid-in capital.

Thereconciliation of federal statutory income tax (on pre-tax income afterconsideration of equity losses) to the Company’s provision for income taxes isas follows (in thousands):

| ** **                                                | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected  provision at federal statutory rate             |       | $                                           | 5,133      |   | $ | 7,050 |   | $ | 5,671 |   |
| State taxes, net  of federal impact                       |       | 519                                         |       | 894 |   | (1,451 | ) |
| Research and  development credits                         |       | (197                                        | )          | (351 | ) | (1,780 | ) |
| Permanent  difference related to stock-based compensation |       | 998                                         |       | — |   | — |   |
| Permanent  difference related to acquisitions             |       | 487                                         |       | 557 |   | 791 |   |
| Other  individually immaterial items                      |       | (558                                        | )          | (9 | ) | 96 |   |
| Provision for  income taxes                               |       | $                                           | 6,382      |   | $ | 8,141 |   | $ | 3,327 |   |

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of the Company’sdeferred tax assets and liabilities are as follows (in thousands):

| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax  assets:                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net operating loss carry-forwards          |       | $                     | 327        |   | $ | 693 |   |
| Deferred revenue                           |       | 30                    |       | 30 |   |
| Capitalized research and development       |       | 195                   |       | 348 |   |
| Depreciation                               |       | 6,386                 |       | 4,934 |   |
| Stock-based compensation                   |       | 2,995                 |       | — |   |
| Warranty expense accrual                   |       | 364                   |       | 263 |   |
| Research and development and other credits |       | 1,411                 |       | 1,850 |   |
| Other accruals and reserves                |       | 2,480                 |       | 1,838 |   |
| Total deferred tax assets                  |       | 14,188                |       | 9,956 |   |
| Deferred tax  liabilities:                 |       |                  |       |   |   |
| Investment holdings                        |       | (16                   | )          | — |   |
| Prepaid insurance and property tax         |       | (479                  | )          | (445 | ) |
| Intangible assets                          |       | (4,130                | )          | (4,687 | ) |
| Total deferred tax liabilities             |       | (4,625                | )          | (5,132 | ) |
| Net deferred tax  assets                   |       | $                     | 9,563      |   | $ | 4,824 |   |

 

U.S. income taxes were not provided on undistributedearnings from investments in certain non-U.S. subsidiaries. Determination ofthe amount of unrecognized deferred tax liability for temporary differencesrelated to investments in these non-U.S. subsidiaries that are essentiallypermanent in duration is not practicable. The Company currently intends toreinvest these earnings in operations outside the U.S.

Deferred tax assets are recognized if realization ofsuch assets is more likely than not. Based upon the weight of availableevidence, which includes the Company’s historical operating performance, the 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Company did not provide avaluation allowance against deferred tax assets as of December 31, 2006and 2005 because it determined all its deferred tax assets are more likely thannot to be realizable. The net valuation allowance decreased by approximately$95,000 and $6,427,000 during the years ended December 31, 2005, and 2004,respectively.

The reduction of valuation allowance in 2004 consistedof three major components: (1) $4,151,000 was used to reduce goodwill whena deferred tax liability was recorded on the acquisition of IntelliChem, duringwhich $1,667,000 of tax benefits related to the exercise of stock options wereabsorbed; (2) $1,162,000 was related to the exercise of stock optionswhich is not reflected as an expense for financial reporting purposes (accordingly,this amount had been credited directly to stockholders’ equity and notreflected as an income tax benefit in the consolidated income statement); and (3) theremaining $1,114,000 was recognized as a state deferred tax benefit in theconsolidated income statement.

As of December 31, 2006, the Company had federalnet operating loss carryforwards of approximately $999,000. The net operatinglosses from the acquisition of Synthematix may be subject to an annuallimitation due to the ownership change limitations provided by the InternalRevenue Code of 1986, as amended, and similar state provisions. The annuallimitation may result in the expiration of net operating losses and creditsbefore utilization. The net operating loss carryforwards will start to expirein 2010, if not utilized.

As of December 31, 2006, the Company hadCalifornia research and development tax credit carryforwards of approximately$2,116,000. The state research and development credits have no expiration date.The research and development tax credits arose from the acquisitions ofIntellichem and Synthematix may be subject to an annual limitation of Section 383due to ownership change limitations provided by the Internal Revenue Code of1986, as amended, and similar state provisions.

The Internal RevenueService may examine the Company’s federal income tax returns and, in the courseof which, may propose adjustments to the Company’s federal income tax liabilityreported on such returns.

**6.   SegmentDisclosure**

Statement of Financial Accounting Standards No. 131,*Disclosures about Segments of an Enterprise andRelated Information* (“SFAS 131”), requires disclosures of certaininformation regarding operating segments, products and services, geographicareas of operation and major customers. The method for determining whatinformation to report under SFAS 131 is based upon the “management approach,”or the way that management organizes the operating segments within a company,for which separate financial information is available that is evaluatedregularly by the Chief Operating Decision Maker (“CODM”) in deciding how toallocate resources and in assessing performance. Symyx’s CODM is the ChiefExecutive Officer. The CODM evaluates the performance of the Company based onconsolidated profit or loss from operations before income taxes. For thepurpose of making operating decisions, the CODM primarily considers financialinformation presented on a consolidated basis accompanied by disaggregatedinformation about revenue. Revenue is defined as revenue from externalcustomers.

Symyx allocates research personnel time to eachcollaboration arrangement on a full-time-equivalent basis but does not allocateactual research and development expenses to each collaboration or businesssegment. The Company does not assess segment performance below the revenuelevel or allocate sales, general and administrative expenses or assets to theindividual segments and, therefore, financial 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

performance includingdepreciation and amortization and capital expenditures is not reported on asegment basis.

Revenue isdisaggregated into:

·       Collaborations- research services on behalf of collaborative partners

·       SymyxTools - sale of select proprietary instruments and associated software andintellectual property

·       SymyxSoftware - license of automation and data mining applications as well asELN software and provision of associated support, maintenance, andconsulting services

·       Materialsand IP Licensing - license of discovered materials and methodology patents, androyalties due to the Company upon successful commercialization of productsincorporating materials discovered in the Company’s industry collaborations

·       SymyxSensors - development services and licenses for specific applications tointellectual property associated with the Company’s sensor technology

In 2005, the Company commenced bifurcating Symyx Toolssales transactions into product sales revenue (reported under the Symyx Toolssegment) and software license fees revenue (the majority of which was reportedunder the Symyx Software segment). Prior to 2005, Symyx Tools salestransactions were reported solely in the product sales revenue line in theconsolidated income statements. It is not practical for the Company tobifurcate Symyx Tools sales transactions prior to 2005 into product salesrevenue and software license fees revenue.

Thedisaggregated financial information reviewed by the CODM is as follows (inthousands):

| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Collaborations              |       | $                                           | 52,218     |   | $ | 53,818 |   | $ | 42,131 |   |
| Symyx Tools                 |       | 37,847                                      |       | 30,829 |   | 28,576 |   |
| Symyx Software              |       | 25,495                                      |       | 15,315 |   | 6,815 |   |
| Materials and IP  Licensing |       | 5,650                                       |       | 5,268 |   | 4,191 |   |
| Symyx Sensors               |       | 3,690                                       |       | 2,907 |   | 1,472 |   |
| Total                       |       | $                                           | 124,900    |   | $ | 108,137 |   | $ | 83,185 |   |

 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Thedisaggregated financial information reviewed by the CODM can be reconciled tothe revenue disclosed in the Consolidated Income Statements as follows (inthousands):

| ** **                  | ** ** | **Year Ended December 31, 2006** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **Service  Revenue**                                 | ** ** | **Product  Sales** | ** ** | **License  Fees  and  Royalties** | ** ** | **Total  Revenue** | ** ** |
| Collaborations              |       | $                                                    | 42,220     |   | $ | — |   | $ | 9,998 |   | $ | 52,218 |   |
| Symyx Tools                 |       | 4,270                                                |       | 33,526 |   | 51 |   | 37,847 |   |
| Symyx Software              |       | 10,733                                               |       | — |   | 14,762 |   | 25,495 |   |
| Materials and IP  Licensing |       | —                                               |       | — |   | 5,650 |   | 5,650 |   |
| Symyx Sensors               |       | 710                                                  |       | — |   | 2,980 |   | 3,690 |   |
| Total                       |       | $                                                    | 57,933     |   | $ | 33,526 |   | $ | 33,441 |   | $ | 124,900 |   |

 

| ** **                  | ** ** | **Year Ended December 31, 2005** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **Service  Revenue**                                 | ** ** | **Product  Sales** | ** ** | **License  Fees  and  Royalties** | ** ** | **Total  Revenue** | ** ** |
| Collaborations              |       | $                                                    | 43,818     |   | $ | — |   | $ | 10,000 |   | $ | 53,818 |   |
| Symyx Tools                 |       | 4,096                                                |       | 26,663 |   | 70 |   | 30,829 |   |
| Symyx Software              |       | 7,134                                                |       | — |   | 8,181 |   | 15,315 |   |
| Materials and IP  Licensing |       | —                                               |       | — |   | 5,268 |   | 5,268 |   |
| Symyx Sensors               |       | 1,932                                                |       | — |   | 975 |   | 2,907 |   |
| Total                       |       | $                                                    | 56,980     |   | $ | 26,663 |   | $ | 24,494 |   | $ | 108,137 |   |

 

| ** **                  | ** ** | **Year Ended December 31, 2004** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **Service  Revenue**                                 | ** ** | **Product  Sales** | ** ** | **License  Fees  and  Royalties** | ** ** | **Total  Revenue** | ** ** |
| Collaborations              |       | $                                                    | 36,131     |   | $ | — |   | $ | 6,000 |   | $ | 42,131 |   |
| Symyx Tools                 |       | 2,831                                                |       | 25,714 |   | 31 |   | 28,576 |   |
| Symyx Software              |       | 2,599                                                |       | 1,329 |   | 2,887 |   | 6,815 |   |
| Materials and IP  Licensing |       | —                                               |       | — |   | 4,191 |   | 4,191 |   |
| Symyx Sensors               |       | 690                                                  |       | 17 |   | 765 |   | 1,472 |   |
| Total                       |       | $                                                    | 42,251     |   | $ | 27,060 |   | $ | 13,874 |   | $ | 83,185 |   |

 

***Geographic AreaData***

Thetable below shows revenue by physical location of the Company’s customers (inthousands).

| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States               |       | $                                           | 111,158    |   | $ | 89,571 |   | $ | 64,630 |   |
| Rest of North  America      |       | 508                                         |       | 257 |   | 1,977 |   |
| Japan                       |       | 3,953                                       |       | 1,841 |   | 5,432 |   |
| Belgium                     |       | 1,896                                       |       | 2,261 |   | 8,334 |   |
| Europe (excluding  Belgium) |       | 7,385                                       |       | 14,207 |   | 2,812 |   |
| Total                       |       | $                                           | 124,900    |   | $ | 108,137 |   | $ | 83,185 |   |

 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Priorto 2006, the Company generated all its revenue from its U.S. operations. In2006, the Company generated revenue from both its U.S. and Swiss operations.The table below shows revenue and long-lived assets by location (in thousands):

| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue generated  by U.S. operations     |       | $                                           | 122,997    |   | $ | 108,137 |   | $ | 83,185 |   |
| Revenue generated  by Swiss operations    |       | 1,903                                       |       | — |   | — |   |
| Total revenue from unaffiliated customers |       | $                                           | 124,900    |   | $ | 108,137 |   | $ | 83,185 |   |
| Long-lived assets  in U.S.                |       | $                                           | 82,487     |   | $ | 60,951 |   | $ | 53,380 |   |
| Long-lived assets  in Switzerland         |       | 3,902                                       |       | 28 |   | 41 |   |
| Total long-lived  assets                  |       | $                                           | 86,389     |   | $ | 60,979 |   | $ | 53,421 |   |

 

**Themajority of the long-lived assets in Switzerland were intangible assetsassociated with the Autodose acquisition as discussed in Note 7 “BusinessCombinations.”**

**7.   BusinessCombinations**

***Acquisition of Autodose SA.***

On July 13, 2006, the Company completed theacquisition of 100% of the outstanding shares of privately-held Autodose SA (“Autodose”),a Geneva, Switzerland-based maker of precision powder-dispensing equipment. Byacquiring Autodose, the Company will be able to offer customers Symyx Toolsthat combine Autodose’s powder-handling technology with its existingliquid-handling robotics technology. The acquisition was accounted for as abusiness combination using the purchase method. Autodose has since been renamedSymyx Technologies Europe SA and its results of operations have been includedin the Company’s consolidated financial statements since that date.

The preliminary purchase price for this acquisitionwas $7,103,000, consisting of approximately $6,856,000 in cash (including$1,024,000 to be paid to Autodose’s stockholders within 12 months of the dateof acquisition) and $247,000 in transaction costs, consisting of legal andother professional service fees, net of foreign currency exchange variance.

The above purchase price was preliminary becauseadditional purchase price consideration of up to $6,262,000 may be payable uponthe achievement of certain 2007, 2008 and 2009 revenue targets by Autodose. TheCompany will evaluate the possibility of achieving these targets from time totime and record the fair value of any additional consideration as an additionalcost of the acquisition. No additional consideration was recorded as of December 31,2006.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Inaccordance with Statement of Financial Accounting Standards No. 141, *Business Combinations*, the Company allocated the preliminarypurchase price to the tangible assets, liabilities, and intangible assetsacquired, as well as in-process research and development (“IPR&D”), basedon their estimated fair values. The excess purchase price over the fair valueswas recorded as goodwill. The allocation of the preliminary purchase price isas follows (in thousands):

| ** **                                   | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
| Fair value of net  tangible assets purchased |       |       | $          | 2,546 |   |   |
| In-process  research and development         |       |       | 1,392      |   |   |
| Customer backlog                             |       |       | 144        |   |   |
| Trade name                                   |       |       | 343        |   |   |
| Developed  technology                        |       |       | 2,061      |   |   |
| Customer  relationships                      |       |       | 1,141      |   |   |
| Deferred tax  liabilities                    |       |       | (894       | ) |   |
| Goodwill                                     |       |       | 370        |   |   |
| Total                                        |       |       | $          | 7,103 |   |   |

 

Thefair values of Autodose’s net tangible assets as of the acquisition date were(in thousands):

| ** **                                      | ** ** | **Amount** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| Cash                                            |       |       | $          | 1,863 |   |   |
| Accounts  receivable                            |       |       | 333        |   |   |
| Inventory                                       |       |       | 988        |   |   |
| Current deferred  tax assets                    |       |       | 1          |   |   |
| Prepaid expenses  and other assets              |       |       | 22         |   |   |
| Plant, property  and equipment                  |       |       | 31         |   |   |
| Other non-current  assets                       |       |       | 27         |   |   |
| Accounts payable  and other accrued liabilities |       |       | (255       | ) |   |
| Accrued  compensation                           |       |       | (150       | ) |   |
| Income tax  payable                             |       |       | (235       | ) |   |
| Warranty expense  accrual                       |       |       | (40        | ) |   |
| Deferred revenue                                |       |       | (39        | ) |   |
| Total                                           |       |       | $          | 2,546 |   |   |

 

Pro forma financialinformation is not provided because the results of operations of the acquiredentity were not material to the historical results of operations of theCompany.

***Acquisition of Synthematix, Inc.***

On April 1, 2005, Symyx completed the acquisitionof 100% of the outstanding shares of privately-held Synthematix, Inc. (“Synthematix”),based in Durham, North Carolina. Synthematix is a provider of organic synthesisreaction planning software systems for scientific knowledge management inchemistry research, with customers primarily in the pharmaceutical,biotechnology, and fine chemical industries. The acquisition was accounted foras a business combination using the purchase method. The results of Synthematix’soperations have been included in the Company’s consolidated financialstatements since that date.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

The purchase price for this acquisition was$14,015,000, consisting of approximately $13,079,000 in cash, $571,000 in fairvalue of assumed stock options to purchase 23,876 shares of Symyx common stock,and $365,000 in transaction costs, consisting of legal and other professionalservice fees.

Stockoptions were valued using the Black-Scholes option pricing model. Theassumptions used in calculating fair value were as follows:

| ** **               | ** ** | **Group A  Options** | ** ** | **Group B  Options** | ** ** | **Group C  Options** | ** ** |
|--------------------------|------------|---------------------------|------------|---------------------------|------------|---------------------------|------------|
| Expected life  (years)   |       |                      | 2          |                      |       |                      | 0.5        |   |   |   | 2 |   |   |
| Risk-free rate           |       |                      | 2.0        | %                         |       |                      | 1.7        | % |   |   | 2.0 | % |   |
| Expected dividend  yield |       |                      | 0          | %                         |       |                      | 0          | % |   |   | 0 | % |   |
| Volatility               |       |                      | 51.0       | %                         |       |                      | 51.0       | % |   |   | 51.0 | % |   |
| Fair value per share     |       |                      | $          | 26.42                     |       |                      |       | $ | 24.77 |   |   |   | $ | 18.79 |   |   |
|                          |            |                           |            |                           |            |                           |            |  |  |  |  |  |  |  |  |  |

 

The intrinsic value of these options, totalingapproximately $216,000, has been recorded as deferred stock compensation.

Inaccordance with Statement of Financial Accounting Standards No. 141, *Business Combinations*, the Company allocated the purchaseprice to the tangible assets, deferred compensation, liabilities, andintangible assets acquired, as well as IPR&D, based on their estimated fairvalues. The excess purchase price over the fair values was recorded as goodwill.The purchase price was allocated as follows (in thousands):

| ** **                                   | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
| Fair value of net  tangible assets purchased |       | $          | 708        |   |
| Current deferred  tax assets                 |       | 143        |       |
| In-process  research and development         |       | 1,590      |       |
| Bargain lease  arrangement                   |       | 10         |       |
| Trade name                                   |       | 280        |       |
| Developed  technology                        |       | 2,350      |       |
| Customer  relationships                      |       | 500        |       |
| Unearned stock  compensation                 |       | 216        |       |
| Deferred tax  liabilities                    |       | (188       | )          |
| Goodwill                                     |       | 8,406      |       |
| Total                                        |       | $          | 14,015     |   |

 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Thefair values of Synthematix’s net tangible assets as of the acquisition datewere (in thousands):

| ** **                                      | ** ** | **Amount** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| Cash                                            |       |       | $          | 616 |   |   |
| Restricted cash                                 |       |       | 25         |   |   |
| Accounts  receivable, net                       |       |       | 543        |   |   |
| Prepaid expenses  and other assets              |       |       | 100        |   |   |
| Plant, property  and equipment                  |       |       | 71         |   |   |
| Investments and  other non-current assets       |       |       | 40         |   |   |
| Accounts payable  and other accrued liabilities |       |       | (307       | ) |   |
| Accrued  compensation                           |       |       | (184       | ) |   |
| Deferred revenue                                |       |       | (196       | ) |   |
| Total                                           |       |       | $          | 708 |   |   |

 

Pro forma financialinformation is not provided because the results of operations of the acquiredentity were not material to the historical results of operations of theCompany.

***Acquisition of IntelliChem, Inc.***

On November 30, 2004, Symyx acquired 100% ofoutstanding common and preferred shares of IntelliChem, Inc. (“IntelliChem”),a provider of intelligent electronic laboratory notebooks for customers in thepharmaceutical, biotechnology, and chemical industries. The results ofIntelliChem’s operations have been included in the consolidated financialstatements since that date.

In accordance with Statement of Financial AccountingStandards No. 141, *Business Combinations*,the Company allocated the purchase price to the tangible assets, deferredcompensation, liabilities, and intangible assets acquired, as well asin-process research and development, based on their estimated fair values. Theexcess purchase price over the fair values was recorded as goodwill. The fairvalue assigned to intangible assets acquired was based on estimates andassumptions determined by management. The acquired goodwill was assignedentirely to the Company’s software segment. Purchased intangibles with finitelives are amortized on a straight-line basis over their respective usefullives.

Thetotal purchase price for this acquisition was $30,600,000, consisting ofapproximately $29,259,000 in cash, $1,041,000 in fair value of assumed stockoptions to purchase 44,126 shares of Symyx common stock, and $300,000 intransaction costs, consisting of legal and other professional service fees.Stock options were valued using the Black-Scholes option pricing model. Theassumptions used in calculating fair value were as follows:

| ** **               | ** ** | **Group A  Options** | ** ** | **Group B  Options** | ** ** |
|--------------------------|------------|---------------------------|------------|---------------------------|------------|
| Expected life  (years)   |       |                      | 3          |                      |       |   | 4 |   |   |
| Risk-free rate           |       |                      | 3.23       | %                         |       |   | 3.44 | % |   |
| Expected dividend  yield |       |                      | 0          | %                         |       |   | 0 | % |   |
| Volatility               |       |                      | 55.7       | %                         |       |   | 55.7 | % |   |
| Fair value per share     |       |                      | $          | 26.05                     |       |   |   | $ | 13.37 |   |   |
|                          |            |                           |            |                           |            |  |  |  |  |  |  |

 

The intrinsic value of these options, totalingapproximately $651,000, has been recorded as deferred stock compensation.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Thepurchase price allocation was as follows (in thousands):

| ** **                                                                                                                                                                                                                        | ** ** | **Amount** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Fair value of net  tangible assets purchased                                                                                                                                                                                      |       | $          | 4,476      |   |
| Deferred tax  assets                                                                                                                                                                                                              |       | 145        |       |
| In-process  research and development                                                                                                                                                                                              |       | 2,260      |       |
| Trade name                                                                                                                                                                                                                        |       | 860        |       |
| Developed  technology                                                                                                                                                                                                             |       | 8,370      |       |
| Customer  relationships                                                                                                                                                                                                           |       | 4,700      |       |
| Unearned stock  compensation                                                                                                                                                                                                      |       | 651        |       |
| Deferred tax  liabilities                                                                                                                                                                                                         |       | (4,151     | )          |
| Release of  valuation allowance against acquirer’s deferred income tax assets upon  recognition of deferred income tax liabilities on acquired identifiable  intangible assets in connection with acquisition of IntelliChem |       | 4,151      |       |
| Goodwill                                                                                                                                                                                                                          |       | 9,138      |       |
| Total                                                                                                                                                                                                                             |       | $          | 30,600     |   |

 

Thefair values of IntelliChem’s net assets as of the acquisition date were (inthousands):

| ** **                                      | ** ** | **Amount** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| Cash                                            |       |       | $          | 2,492 |   |   |
| Restricted cash                                 |       |       | 104        |   |   |
| Accounts  receivable, net                       |       |       | 1,325      |   |   |
| Income tax  receivable                          |       |       | 855        |   |   |
| Prepaid expenses  and other assets              |       |       | 298        |   |   |
| Plant, property  and equipment                  |       |       | 323        |   |   |
| Accounts payable  and other accrued liabilities |       |       | (374       | ) |   |
| Accrued  compensation                           |       |       | (259       | ) |   |
| Deferred revenue                                |       |       | (288       | ) |   |
| Fair value of  IntelliChem’s net assets    |       |       | $          | 4,476 |   |   |

 

The allocation of theconsideration for the acquisition of IntelliChem to its individual assets andliabilities was based on management’s analysis and estimates of the fair valuesof the acquired assets and liabilities. In addition to the value assigned toIPR&D projects, and IntelliChem’s tangible assets, specific intangibleassets were identified and valued. The identifiable intangible assets includedcustomer relationships, a trade name, and developed technology.

The IPR&D project that IntelliChem had beenworking on was the development of next generation of IntelliChem software. Thatsoftware had not yet been proven to be technologically feasible, but had beendeveloped to a point where it had value associated with potential futurerevenue at the time of acquisition. Because technological feasibility was notyet proven and no alternative future uses were believed to exist for thein-process technologies, the assigned value was expensed immediately upon theclosing date of the acquisition, in accordance with FASB Interpretation No. 4,*Applicability of FASB Statement No. 2 toBusiness Combinations Accounted for by the Purchase Method*.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

The value of IPR&D was determined by estimatingthe expected cash flows from the projects once commercially viable, discountingthe net cash flows back to their present value and then applying a percentageof 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 ofcapital of 20% due to inherent risk surrounding the successful development ofthe IPR&D and the increase in projected financial results compared withhistorical results. This project has been completed in 2006 and costsassociated with this project were not material and were included in the researchand development expenses.

Inperforming this purchase price allocation, the Company considered, among otherfactors, its intention for future use of the acquired assets, analyses ofhistorical financial performance and estimates of future performance ofIntelliChem’s products. The fair value of intangible assets was primarily basedon the income approach. The relief from royalty approach  was also utilized when appropriate. The ratesutilized to discount the net cash flows to their present values ranged from 24%to 28%. These discount rates were determined after consideration of the Company’srate of return and the weighted average return on assets. Risks the Companyidentified and considered in this analysis included achieving anticipatedlevels of market acceptance and penetration, successful completion ofdevelopment efforts, market growth rates, and risks related to the impact ofpotential changes in future target markets. Identifiable intangible assetspurchased in the IntelliChem acquisition consisted of the following (inthousands, except for useful life) with a weighted average useful life of 5.0years. No significant residual value was estimated for these assets.

| ** **              | ** ** | **Amount** | ** ** | **Useful Life** | ** ** |
|-------------------------|------------|------------|------------|----------------------|------------|
| Trade name              |       | $          | 860        |                 |       | 1 year |   |   |
| Developed  technology   |       | 8,370      |       |                 | 4.5 years  |   |   |
| Customer  relationships |       | 4,700      |       |                 | 6.5 years  |   |   |
| Total                   |       | $          | 13,930     |                 |       |   |   |   |

 

***Pro Forma Financial Information (unaudited)***

Theunaudited financial information in the table below summarized the combinedresults of operations of Symyx and IntelliChem, on a pro forma basis, as thoughthe companies had been combined as of the beginning of each period presented.The impact of the IPR&D charge associated with the acquisition had beenexcluded. This pro forma financial information was presented for informationalpurposes only and was not necessarily indicative of the results of operationsthat would have been achieved had the acquisition taken place at the beginningof each period presented. The unaudited pro forma combined income statementdata listed below for the year ended December 31, 2004 combined thehistorical results for Symyx for the year ended December 31, 2004 and thehistorical results for IntelliChem for the period of January 1, 2004through November 30, 2004. The following amounts were in thousands, exceptper share amounts.

| Revenue                  |   | $ | 84,909 |   |
|--------------------------|--------|---|--------|--------|
| Net income               |   | $ | 10,971 |   |
| Basic income per  share  |   | $ | 0.34   |   |
| Diluted income per share |   | $ | 0.32   |   |

 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

Goodwill and intangibleassets arising from both the IntelliChem and Synthematix acquisitions wererecorded in the Company’s Software reporting unit. Goodwill and intangibleassets arising from the Autodose acquisition were recorded in the Company’sTools reporting unit. None of the goodwill will be deductible for tax purposes.

**8.   RelatedParty Transactions**

As of December 31, 2006, the Company owns aminority interest in Ilypsa, Inc. (“Ilypsa”). The Company accounts for itsownership interest in Ilypsa on the cost method as the Company does not havethe ability to exercise significant influence over the strategic, operating,investing, and financing activities of Ilypsa. Ilypsa has licensed software and purchased consumables from the Company.Revenue from Ilypsa for the years ended December 31, 2006, 2005 and 2004amounted to $181,000, $179,000, and $1,173,000,respectively.

In March 2005, theCompany entered into a Collaborative Development and License Agreementand on December 19, 2005, the Company entered into an Alliance Agreement,each with Intermolecular, Inc. (“Intermolecular”). In accordance with theagreements, the two companies work together to conduct research and developmentand other activities with respect to materials and high-throughput technologyfor use in semiconductor applications. Each party is bearing its own expenses.In August 2006, the Company invested $13,500,000 in exchange forapproximately 13% of the outstanding shares of Intermolecular. The Companyaccounts for its ownership interest in Intermolecular using the cost method asthe Company does not have the ability to exercise significant influence overthe strategic, operating, investing and financing activities of Intermolecular.Thomas Baruch, one of the Company’s board members, is a director ofIntermolecular and a general partner of CMEA Ventures, which holds a minorityinterest in Intermolecular. Steven D. Goldby, the Company’s chairman of Boardof Directors and chief executive officer, is a director of Intermolecular, Inc.Dr. W. Henry Weinberg, one of the Company’s executive officers, is ascientific advisory board member of Intermolecular. For the years ended December 31,2006, 2005, and 2004, the Company recognized revenue of $52,000, $88,000, and$0, respectively from Intermolecular. In 2005, the Company also recognized a$20,000 gain from the sale of a fixed asset with $130,000 net book value, whichwas sold to Intermolecular for its original cost of $150,000. As of December 31,2006, the Company had deferred revenue of $27,000 from Intermolecular. As of December 31,2005, the Company recorded $88,000 of accounts receivable related toIntermolecular.

In November 2005, theCompany entered into a Collaborative Research and License Agreement withSolyndra, Inc. (“Solyndra”). Thomas Baruch, one of the Company’s boardmembers, is a director of Solyndra, Inc. and a general partner of CMEAVentures, which holds a minority interest in Solyndra. During the years ended December 31,2006 and 2005, the Company recognized revenue in the amounts of $1,228,000 and$43,000, respectively, from providing research services to Solyndra. As of December 31,2006 and 2005, the Company had recorded $24,000 and $132,000, respectively ofdeferred revenue related to Solyndra.

In November 2006, theCompany invested $400,000 in cash plus certain intellectual property with nocost basis related to sensor technology in exchange for approximately 38% ofthe outstanding shares of Visyx Technologies Inc. The Company has a 45% votingright in relation to its shareholding. Isy Goldwasser, the Company’s president,is a board member of Visyx. Thomas Baruch, one of the Company’s board members,is a general partner of CMEA Ventures, which holds approximately 42% ofoutstanding shares of Visyx and has a 49% voting right in relation to itsshareholding. During the period from Visyx’s 

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

inceptionto December 31, 2006, the Company reported a $186,000 equity loss, basedon its share of the loss reported by Visyx, in accordance with the equitymethod of accounting.

**9.   FinancialInstruments**

The Company has notentered into any derivative contracts at December 31, 2006. The followingis a summary of the Company’s risk management strategies and the effect ofthese strategies on the Company’s consolidated financial statements.

***Concentrations of credit risk***

Financial instruments thatpotentially subject the Company to significant concentrations of credit riskconsist principally of cash, cash equivalents, investments in debt securitiesand trade accounts receivable. The Company carried a $8,538,000 trade accountsreceivable balance from Exxon Mobil at December 31, 2006 but did notconsider any portion of this accounts receivable to be at risk. The Companymaintains cash and cash equivalents and available-for-sale investments invarious debt securities and money market mutual funds. The Company’s policy isdesigned to limit exposure to any one institution or company. The relativecredit standing of the security issuers is monitored to ensure compliance withthe Company’s investment strategy. The Company does not require collateral onthese financial instruments.

***Financial Instruments***

The following methods and assumptions were used by theCompany in estimating its fair value disclosures for financial instruments:

*Cashand cash equivalents:*   The carrying amountsreported in the balance sheets for cash and cash equivalents are their fairvalues. The fair value for cash equivalents are based on quoted market prices.

*Accountsreceivable and accounts payable:*   The carryingamounts reported in the balance sheets for accounts receivable and accountspayable approximate their fair values.

*Available-for-salesecurities:*   The fair values foravailable-for-sale securities are based on quoted market prices. The fairvalues for available-for-sale securities together with information in relationto their maturity dates are included in Note 1 to these financial statements.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**10.   IntangibleAssets**

TheCompany acquired certain patent rights and know-how from third parties. It alsoobtained certain intangible assets in the acquisitions of IntelliChem,Synthematix, and Autodose. These intangible assets are being amortized on astraight-line basis over the estimated useful lives of the assets. Intangibleassets related to Autodose acquisition were recorded in Swiss Francs, thebalance of which may be affected by foreign currency exchange rate fluctuationswhen converted to U.S. dollars at each reporting period. The current estimateduseful lives and carrying amounts of these intangible assets are as follows (inthousands, except for useful lives):

| ** **              | ** ** | ** **                 | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------|------------|----------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Useful  Lives  (Years)** | ** ** | **Gross  Carrying  Amount**     | ** ** | **Accumulated  Amortization**   | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated**

**Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Acquired  technology    |       | 5.0                        |       | $                               | 3,130      |                            |       | $ | (2,299 | ) |   | $ | 831 |   | $ | 3,130 |   |   | $ | (2,007 | ) |   | $ | 1,123 |   |
| Trade name              |       | 1 - 5                      |       | 1,487                           |       |                            | (1,172     | ) |   | 315 |   | 1,140 |   |   | (493 | ) |   | 647 |   |
| Developed  technology   |       | 4.5                        |       | 12,804                          |       |                            | (4,980     | ) |   | 7,824 |   | 10,720 |   |   | (2,406 | ) |   | 8,314 |   |
| Customer backlog        |       | 0.5                        |       | 146                             |       |                            | (146       | ) |   | — |   | — |   |   | — |   |   | — |   |
| Customer  relationships |       | 6.5 - 7                    |       | 6,354                           |       |                            | (1,713     | ) |   | 4,641 |   | 5,200 |   |   | (837 | ) |   | 4,363 |   |
| Total intangibles       |       |                       |       | $                               | 23,921     |                            |       | $ | (10,310 | ) |   | $ | 13,611 |   | $ | 20,190 |   |   | $ | (5,743 | ) |   | $ | 14,447 |   |

 

In the years ended December 31, 2006, 2005 and2004, the Company recorded amortization expense for intangible assets of$4,562,000, $3,807,000, and $422,000, respectively. Assuming no subsequentimpairment of the underlying assets, the annual amortization expense of totalintangible assets is expected to be approximately $4,132,000 in 2007,$4,124,000 in 2008, $2,881,000 in 2009, $1,458,000 in 2010, $813,000 in 2011,and $203,000 thereafter.

The Company evaluates therecoverability of intangible assets periodically and takes into account eventsor circumstances that warrant revised estimates of useful lives or thatindicate that impairment may exist. All of the Company’s intangible assets,other than goodwill, are subject to amortization. No impairments of intangibleassets have been identified during any of the periods presented.

**11.   StockRepurchase Program**

On April 18, 2006,the Board of Directors of the Company adopted a program to repurchase up to anaggregate of $30,000,000 of value of the shares of the Company’s issued andoutstanding common stock in accordance with Rule 10b-18 under theSecurities Exchange Act of 1934, as amended, for the purpose of takingadvantage of the Company’s cash position to repurchase shares of its commonstock to maximize long-term value for its stockholders. During the period from May 2006to July 2006, the Company completed its $30 million stock repurchaseprogram by repurchasing 1,249,306 shares of its common stock at aweighted-average per share price of $24.01. All the shares of common stockrepurchased by the Company were immediately retired.

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**SYMYX TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**12.   QuarterlyResults of Operations (Unaudited)**

Thefollowing is a summary of the quarterly results of operations for the yearsended December 31, 2006 and 2005 (in thousands, except per share amounts).

| ** **                                                            | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**               | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31(b),** | ** ** |
| **2006**                                                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenue                                                         |       |                             | $          | 27,066 |   |   | $ | 28,424 |   |   | $ | 29,533 |   |   |   | $ | 39,877 |   |   |
| Operating expenses:                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of products sold                                                 |       |                             | 2,082      |   |   | 2,468 |   |   | 2,141 |   |   |   | 5,120 |   |   |
| Research and development                                              |       |                             | 14,787     |   |   | 16,717 |   |   | 15,687 |   |   |   | 17,869 |   |   |
| Sales, general and administrative                                     |       |                             | 7,768      |   |   | 8,885 |   |   | 8,511 |   |   |   | 10,060 |   |   |
| Acquired in-process research and development                          |       |                             | —     |   |   | — |   |   | 1,392 |   |   |   | — |   |   |
| Amortization of intangible assets arising from business  combinations |       |                             | 1,037      |   |   | 1,037 |   |   | 1,151 |   |   |   | 1,045 |   |   |
| Total operating expenses                                              |       |                             | 25,674     |   |   | 29,107 |   |   | 28,882 |   |   |   | 34,094 |   |   |
| Income (loss) from  operations                                        |       |                             | 1,392      |   |   | (683 | ) |   | 651 |   |   |   | 5,783 |   |   |
| Interest and other  income                                            |       |                             | 1,707      |   |   | 2,053 |   |   | 1,875 |   |   |   | 2,074 |   |   |
| Income before  income tax expense and equity loss                     |       |                             | 3,099      |   |   | 1,370 |   |   | 2,526 |   |   |   | 7,857 |   |   |
| Income tax expense                                                    |       |                             | (1,435     | ) |   | (605 | ) |   | (1,481 | ) |   |   | (2,861 | ) |   |
| Equity in loss  from investment in Visyx                              |       |                             | —     |   |   | — |   |   | — |   |   |   | (186 | ) |   |
| Net income                                                            |       |                             | $          | 1,664 |   |   | $ | 765 |   |   | $ | 1,045 |   |   |   | $ | 4,810 |   |   |
| Basic net income  per share(a)                                        |       |                             | $          | 0.05 |   |   | $ | 0.02 |   |   | $ | 0.03 |   |   |   | $ | 0.15 |   |   |
| Diluted net income per  share(a)                                      |       |                             | $          | 0.05 |   |   | $ | 0.02 |   |   | $ | 0.03 |   |   |   | $ | 0.14 |   |   |

 

| ** **                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **March 31,**               | ** ** | **June 30,** | ** ** | **September 30(c),** | ** ** | **December 31(c),** | ** ** |
| **2005**                                                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenue                                                        |       |                             | $          | 21,508 |   |   | $ | 24,052 |   |   | $ | 31,715 |   |   |   | $ | 30,862 |   |   |
| Operating expenses:                                                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of products sold                                                |       |                             | 1,368      |   |   | 1,962 |   |   | 3,533 |   |   |   | 4,227 |   |   |
| Research and development                                             |       |                             | 11,440     |   |   | 12,542 |   |   | 12,934 |   |   |   | 13,744 |   |   |
| Sales, general and administrative                                    |       |                             | 5,935      |   |   | 6,660 |   |   | 6,619 |   |   |   | 6,351 |   |   |
| Acquired in-process research and development                         |       |                             | —     |   |   | 1,590 |   |   | — |   |   |   | — |   |   |
| Amortization of intangible assets arising  frombusiness combinations |       |                             | 694        |   |   | 859 |   |   | 919 |   |   |   | 1,044 |   |   |
| Total operating expenses                                             |       |                             | 19,437     |   |   | 23,613 |   |   | 24,005 |   |   |   | 25,366 |   |   |
| Income from  operations                                              |       |                             | 2,071      |   |   | 439 |   |   | 7,710 |   |   |   | 5,496 |   |   |
| Interest and other  income                                           |       |                             | 802        |   |   | 873 |   |   | 1,172 |   |   |   | 1,580 |   |   |
| Income before  income tax expense                                    |       |                             | 2,873      |   |   | 1,312 |   |   | 8,882 |   |   |   | 7,076 |   |   |
| Income tax expense                                                   |       |                             | (1,171     | ) |   | (926 | ) |   | (2,964 | ) |   |   | (3,080 | ) |   |
| Net income                                                           |       |                             | $          | 1,702 |   |   | $ | 386 |   |   | $ | 5,918 |   |   |   | $ | 3,996 |   |   |
| Basic net income  per share(a)                                       |       |                             | $          | 0.05 |   |   | $ | 0.01 |   |   | $ | 0.18 |   |   |   | $ | 0.12 |   |   |
| Diluted net income per  share(a)                                     |       |                             | $          | 0.05 |   |   | $ | 0.01 |   |   | $ | 0.17 |   |   |   | $ | 0.11 |   |   |

----

(a)              Earnings per share, or EPS, for each quarter iscomputed using the weighted-average number of shares outstanding during thatquarter, while EPS for the fiscal year is computed using the weighted-averagenumber of shares outstanding during the year. Thus, the sum of the EPS for eachof the four quarters may not equal the EPS for the fiscal year.

(b)             In the final quarter of 2006, delivery of multipleSymyx Tools to the Company’s customers resulted in higher product salesrevenue, which contributed to the higher earnings per share in that quarterwhen compared with the other quarters in 2006.

(c)              In the second half of 2005, delivery of multiple SymyxTools to the Company’s customers resulted in higher product sales revenue thatcontributed to the higher earnings per share in the third and fourth quarterswhen compared with the other quarters in 2005.

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**Item 9.**                        *Changes inand Disagreements with Accountants on Accounting and Financial Disclosure*

Not applicable.

**Item 9A.**                *Controls andProcedures*

*Evaluation ofdisclosure controls and procedures*

Based on an evaluation ofour disclosure controls and procedures as of the end of the period covered bythis Annual Report on Form 10-K, our Chief Executive Officer andChief Financial Officer have concluded that our disclosure controls andprocedures (as defined in Rules 13a-14(c) and 15d-14(c) underthe Securities Exchange Act of 1934 (the “Exchange Act”)) are effective intimely alerting them to material information required to be disclosed by us inthis Annual Report on Form 10-K.

*Changes in internalcontrols*

There have been no changesin our internal controls or in other factors that could significantly affectinternal controls during our most recent fiscal quarter that has materiallyaffected or is reasonably likely to materially affect our internal control overfinancial reporting.

*Management reporton internal control over financial reporting*

Management of the Company is responsible forestablishing and maintaining adequate internal control over financialreporting. Internal control over financial reporting is defined in Rules 13a-15(f) and15d-15(f) promulgated under the Exchange Act, as a process designedby, or under the supervision of, the Company’s principal executive andprincipal financial officers and effected by the Company’s Board, management,and other personnel to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles andincludes those policies and procedures that: (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company;  (ii) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting  principles, and that receipts andexpenditures of the Company are being made only in accordance withauthorizations of management and Directors of the Company; and  (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of the Company’s assets that could have a material effect on thefinancial statements.

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

The Company’s management assessed the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2006. In making this assessment, the Company’s management used criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in Internal Control-Integrated Framework.

As allowed by guidance provided by the Securities andExchange Commission relating to current year acquisitions, the Company’smanagement excluded the internal controls of Symyx Technologies Europe SA(formerly Autodose SA), a wholly-owned subsidiary, from its assessment of andconclusion on the effectiveness of internal control over financial reporting asof December 31, 2006. The 2006 consolidated financial statements of SymyxTechnologies, Inc. included $7.9 million and $6.0 million, of total assetsand net assets, respectively, as of December 31, 2006 and $2.1 million ofrevenue and $1.2 million of net loss (including a $1.4 million charge foracquired in-process research and development) for the year then ended 

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in relation to SymyxTechnologies Europe SA. The Company acquired Symyx Technologies Europe SA in abusiness combination on July 13, 2006.

Based on its assessment, the Company’s managementbelieves that, as of December 31, 2006, the Company’s internal controlover financial reporting was effective based on the criteria set forth by COSO.

TheCompany’s independent registered public accounting firm, Ernst & YoungLLP, has issued an attestation report on management’s assessment of the Company’sinternal control over financial reporting. This report is included in Item 9A.
| /S/   STEVEN  D. GOLDBY     |   | /S/    JERYL L. HILLEMAN                   |
|---------------------------------------|--------|------------------------------------------------------|
| Steven D. Goldby                      |   | Jeryl L. Hilleman                                    |
| Chairman and Chief  Executive Officer |   | Executive Vice President and Chief Financial Officer |

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMON INTERNAL CONTROL OVER FINANCIAL REPORTING**

The Board of Directors and Stockholders of SymyxTechnologies, Inc.

We have audited management’s assessment, included inthe accompanying Management Report on Internal Control Over FinancialReporting, that Symyx Technologies, Inc. maintained effective internalcontrol over financial reporting as of December 31, 2006, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (the COSO criteria). Symyx Technologies, Inc.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the company’sinternal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk 

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that controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

As indicated in the accompanying Management Report onInternal Control over Financial Reporting, management’s assessment of andconclusion on the effectiveness of internal control over financial reportingdid not include the internal controls of Symyx Technologies Europe SA (formerlyAutodose SA), which is included in the 2006 consolidated financial statementsof Symyx Technologies, Inc. and constituted $7.9 million and $6.0 millionof total and net assets, respectively, as of December 31, 2006 and $2.1million of revenues and $1.2 million of net loss (including a $1.4 millioncharge for acquired in-process research and development) for the year thenended. Our audit of internal control over financial reporting of SymyxTechnologies, Inc. also did not include an evaluation of the internalcontrol over financial reporting of Symyx Technologies Europe SA.

In our opinion, management’s assessment that SymyxTechnologies, Inc. maintained effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, Symyx Technologies, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2006, based on the COSO criteria.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofSymyx Technologies, Inc. as of December 31, 2006 and 2005, and therelated consolidated income statements, consolidated statements of stockholders’equity and consolidated statements of cash flows for each of the three years inthe period ended December 31, 2006 of Symyx Technologies, Inc. andour report dated February 23, 2007 expressed an unqualified opinionthereon.

***/s/ ERNST & YOUNGLLP***

Palo Alto, CaliforniaFebruary 23, 2007

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

None

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**PART III**

**Item10.**                 *Directors, Executive Officers and Corporate Governance*

The information requiredby this item is hereby incorporated by reference from the information under thecaptions “Election of Directors,” “Executive Officers,” “Committees of the Boardof Directors,” and “Audit Committee” contained in the Company’s definitiveProxy Statement, to be filed with the Securities and Exchange Commission nolater than 120 days from the end of the Company’s last fiscal year inconnection with the solicitation of proxies for its 2007 Annual Meeting ofStockholders (the “Proxy Statement”). The information required by Section 16(a) isincorporated by reference from the information under the caption “Section 16(a) BeneficialOwnership Reporting Compliance” in the Proxy Statement.

The Company has adopted aCode of Conduct and Ethics that applies to its employees, including principalexecutive officer, principal financial officer and controller, within themeaning of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgatedthereunder. A copy of the Code of Conduct and Ethics is available at theCompany’s website: www.symyx.com and without charge upon written request to:Corporate Secretary, 415 Oakmead Parkway, Sunnyvale, CA 94085. To the extentrequired by the law, amendments to, and waivers from, any provision of theCompany’s Code of Conduct and Ethics will promptly be disclosed to the public.To the extent permitted by such legal requirements, the Company intends to makesuch public disclosure by posting such information on the Company’s website inaccordance with SEC rules.

**Item11.**                 *Executive Compensation*

The information requiredby this item is incorporated by reference from the information under thecaptions “Executive Officer and Director Compensation,” “Compensation CommitteeInterlocks and Insider Participations” and “Report of the CompensationCommittee” in the Proxy Statement.

**Item12.**                 *Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters*

The information appearingin our 2007 Proxy Statement under the heading “Security Ownership of CertainBeneficial Owners and Management” is incorporated by reference.

In order to diversifytheir investment portfolios, our five executive officers, Steven D. Goldby, IsyGoldwasser, Jeryl L. Hilleman, Dr. W. Henry Weinberg, and Paul Nowak, haveadopted stock trading plans to facilitate the sale of shares of our commonstock pursuant to Rule 10b5-1 of the Securities Exchange Act of1934, as amended.

See “Equity Compensation Plans”in Part II, Item 5 of this Annual Report on Form 10-K regardingshares authorized for issuance under equity compensation plans approved bystockholders and not approved by stockholders. For descriptions of our equitycompensation plans, see Note 4 “Stockholders’ Equity” of Notes to theConsolidated Financial Statements in Part II, Item 8 of this Annual Reporton Form 10-K.

**Item13.**                 *Certain Relationships and Related Transactions and Director Independence*

The information requiredby this item is incorporated by reference to the information under the captions“Certain Relationships and Related Transactions” and “Board of DirectorMeetings and Committees” in the Proxy Statement.

**Item14.**                 *Principal Accounting Fees and Services*

The information requiredby this item is incorporated by reference to the information under the caption “PrincipalAccounting Fees and Services” in the Proxy Statement.

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**PART IV**

**Item 15.**                 *Exhibits and Financial Statement Schedules*

(a)(1).                 *Financial Statements*

The following Financial Statements of SymyxTechnologies, Inc. and the Report of Ernst & Young LLP,Independent Registered Public Accounting Firm, have been filed as part of thisAnnual Report on Form 10-K. See index to Consolidated FinancialStatements under Item 8 above:

**Report of Independent RegisteredPublic Accounting Firm on Consolidated Financial Statements**

**Consolidated Balance Sheets at December 31,2006 and 2005**

**Consolidated Income Statements forthe Years Ended December 31, 2006, 2005 and 2004**

Consolidated Statements of Stockholders’ Equity forthe Years Ended December 31, 2006, 2005 and 2004

Consolidated Statements ofCash Flows for the Years Ended December 31, 2006, 2005 and 2004

**Notes to Consolidated FinancialStatements**

(a)(2).                 *Financial Statement Schedules*

All schedules are omitted as the required information is inapplicable orthe information is presented in the Consolidated Financial Statements and notesthereto in Item 8 above.

(a)(3).                 *Exhibits*

Refer to (b) below.

(b) EXHIBITS
| Exhibit  Number | ** ** | **Description of Document**                                                                                                                                                                                                                                         | ** ** |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| *2.1(7)         |       | Agreement and Plan of Merger, dated as of  November 12, 2004, by and among Symyx Technologies, Inc., and  IntelliChem, Inc.                                                                                                                                    |       |
| 3.1(1)          |       | Amended and Restated Certificate of Incorporation                                                                                                                                                                                                                             |       |
| 3.2(14)         |       | Amended and Restated Bylaws of Symyx  Technologies, Inc.                                                                                                                                                                                                                 |       |
| 3.3(8)          |       | Certificate of Amendment to the Amended and Restated  Bylaws of Symyx Technologies, Inc.                                                                                                                                                                                 |       |
| 4.1(2)          |       | Specimen Common Stock Certificate                                                                                                                                                                                                                                             |       |
| **10.1(9)       |       | Synthematix, Inc. Amended and Restated 2000  Equity Compensation Plan and forms of agreements thereunder                                                                                                                                                                 |       |
| **10.2(2)       |       | 1996 Stock Plan and forms of agreements thereunder                                                                                                                                                                                                                            |       |
| **10.3(11)      |       | Amended and Restated 1997 Stock Plan and forms of  agreements thereunder                                                                                                                                                                                                      |       |
| **10.4(2)       |       | 1999 Employee Stock Purchase Plan                                                                                                                                                                                                                                             |       |
| 10.5(2)         |       | Form of Director and Executive Officer  Indemnification Agreement                                                                                                                                                                                                        |       |
| **10.6(2)       |       | Form of Change of Control Agreement between  Symyx and the following individuals: Steven D. Goldby, Isy Goldwasser, Jeryl  L. Hilleman, and W. Henry Weinberg                                                                                                            |       |
| 10.7(2)         |       | Standard Industrial/Commercial Single-Tenant Lease  dated November 15, 1996 between Symyx and Patrick and Bette Ng,  Co-Trustees for The Ng Living Trust, for office space located at 3100 Central  Expressway, Santa Clara, California, and addenda and inserts thereto |       |

 

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| 10.7(a)(2)  |   | First Amendment to Lease between Symyx and Patrick  and Bette Ng, Co-Trustees for The Ng Living Trust                                                                                                                                                      |   |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **10.8(16)  |   | Form of Restricted Stock Agreement under the  Symyx Technologies, Inc. 1997 Stock Plan                                                                                                                                                           |   |
| 10.9(2)     |   | Celanese-Symyx Collaboration Agreement dated  August 1, 1998 between Symyx and Celanese Ltd.                                                                                                                                                          |   |
| 10.10(2)    |   | Collaborative Research and License Agreement dated  January 1, 1999 between Symyx and The Dow Chemical Company                                                                                                                                        |   |
| 10.11(2)    |   | License Agreement dated June 22, 1995 between  Symyx and Lawrence Berkeley Laboratory, on behalf of The Regents of the  University of California                                                                                                      |   |
| 10.12(2)    |   | License and Supply Agreement effective  August 6, 1999 between Symyx and Argonaut Technologies, Inc.                                                                                                                                             |   |
| 10.13(3)    |   | Lease by and between East Arques Sunnyvale, LLC and  Symyx Technologies, Inc. for the premises at 1263 E. Arques, Sunnyvale,  California, and addenda and inserts thereto                                                                             |   |
| 10.14(4)    |   | 2001 Nonstatutory Stock Option Plan                                                                                                                                                                                                                        |   |
| *10.15(1)   |   | License Agreement dated February 21, 2003  between Symyx Technologies, Inc. and Symyx Therapeutics, Inc.                                                                                                                                    |   |
| *10.16(5)   |   | Alliance, Technology Transfer, and License Agreement  effective April 1, 2003 between Symyx Technologies, Inc., Symyx  Discovery Tools, Inc. and ExxonMobil Research and Engineering Company                                                |   |
| *10.17(8)   |   | Alliance Agreement dated December 16, 2004  between Symyx Technologies, Inc., Symyx Discovery Tools, Inc. and  The Dow Chemical Company                                                                                                     |   |
| **10.18(8)  |   | 2003 IntelliChem, Inc. Stock Option Plan and  forms of agreements thereunder                                                                                                                                                                          |   |
| 10.19(10)   |   | Lease by and between Oakmead Ventures LLC and Symyx  Technologies, Inc. for the premises at 415 Oakmead Parkway, Sunnyvale,  California, and addenda and inserts thereto                                                                              |   |
| **10.20(16) |   | Form of Restricted Stock Unit Agreement under  the Symyx Technologies, Inc. 1997 Stock Plan.                                                                                                                                                     |   |
| 10.21(13)   |   | First Amendment to Lease dated January 19, 2007  by and between Symyx Technologies, Inc. and East Arques Sunnyvale, LLC  for the premises at 1263 East Arques Avenue, Sunnyvale, California and  addenda and inserts thereto                     |   |
| **10.22(15) |   | 2007 Annual Cash Incentive Plan for Executive  Officers                                                                                                                                                                                                    |   |
| 14(6)       |   | Symyx Technologies, Inc. Code of Conduct and  Ethics                                                                                                                                                                                                  |   |
| 21(16)      |   | List of Subsidiaries                                                                                                                                                                                                                                       |   |
| 23.1(16)    |   | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                                                  |   |
| 24.1        |   | Power of Attorney (reference is made to the  signature page of this report)                                                                                                                                                                           |   |
| 31.1(16)    |   | Certification of Chief Executive Officer pursuant to  Rules 13a-14(a) and 15d-14(a) promulgated under  the Securities Exchange Act of 1934, as amended, as adopted pursuant to  Section 302(a) of the Sarbanes-Oxley Act of 2002. |   |
| 31.2(16)    |   | Certification of Chief Financial Officer pursuant to  Rules 13a-14(a) and 15d-14(a) promulgated under  the Securities Exchange Act of 1934, as amended, as adopted pursuant to  Section 302(a) of the Sarbanes-Oxley Act of 2002. |   |
| 32.1(16)    |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                             |   |
| 32.2(16)    |   | Certification of  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                             |   |

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*                    Confidentialtreatment has been requested for portions of these exhibits.

**             Management contractsor compensatory plans or arrangements.

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(1)          Incorporated byreference to the same number exhibit filed with Registrant’s Quarterly Reporton Form 10-Q for the period ended June 30, 2003.

(2)          Incorporated byreference to the same number exhibit filed with Registrant’s RegistrationStatement on Form S-1 (File No. 333-87453), as amended.

(3)          Incorporated byreference to the same number exhibit filed with Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2000.

(4)          Incorporated byreference to exhibit 4.1 filed with Registrant’s Registration Statement on Form S-8(File No. 333-82166).

(5)          Incorporated byreference to the same number exhibit filed with Registrant’s Quarterly Reporton Form 10-Q for the period ended September 30, 2003.

(6)          Incorporated byreference to the same number exhibit filed with Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2003.

(7)          Incorporated byreference to the same number exhibit filed with Registrant’s Current Report on Form 8-Kon December 2, 2004.

(8)          Incorporated byreference to the same number exhibit filed with Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2004.

(9)          Incorporated byreference to the same number exhibit filed with Registrant’s Quarterly Reporton Form 10-Q for the period ended March 31, 2005.

(10)   Incorporated by reference tothe same number exhibit filed with Registrant’s Current Report on Form 8-Kon November 15, 2005.

(11)   Incorporated by reference tothe same number exhibit filed with Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2005.

(12)   Incorporated by reference tothe same number exhibit filed with Registrant’s Quarterly Report on Form 10-Qfor the period ended June 30, 2006.

(13)   Incorporated by reference tothe same number exhibit filed with Registrant’s Current Report on Form 8-Kon January 19, 2007.

(14)   Incorporated by reference tothe same number exhibit filed with Registrant’s Current Report on Form 8-Kon April 6, 2006.

(15)   Incorporated by reference tothe same number exhibit filed with Registrant’s Current Report on Form 8-Kon February 14, 2007.

(16)   Filed here within.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                               | SYMYX  TECHNOLOGIES, INC.                                                                           |   |
|-------------------------------|-----------------------------------------------------------------------------------------------------|--------|
|                          | (Registrant)                                                                                        |   |
| Date: February 27,  2007 |                                                                                                |
|                          | /s/  STEVEN D. GOLDBY                                                                               |
|                          | Steven D. Goldby                                                                                    |
|                          | *Chairman  of the Board,  Chief Executive Officer  (Principal Executive Officer)*                   |
| Date: February 27,  2007 |                                                                                                |
|                          | /s/  JERYL L. HILLEMAN                                                                              |
|                          | Jeryl L. Hilleman                                                                                   |
|                          | *Executive  Vice President,  Chief Financial Officer  (Principal Financial and Accounting Officer)* |

 

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**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Steven D. Goldby andJeryl L. Hilleman, or either of them, each with the power of substitution, hisattorney-in-fact, to sign any amendments to this Annual Report on Form 10-K(including post-effective amendments), and to file the same, with exhibitsthereto and other documents in connection therewith, with the Securities andExchange Commission, hereby ratifying and confirming all that each of saidattorneys-in-fact, or his substitute or substitutes, may do or cause to be doneby virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
|        | ** **                 | **Signature** | ** **                                                     | ** ** | ** **              | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|--------|----------------------------|---------------|----------------------------------------------------------------|------------|-------------------------|-----------|------------|------------|------------|----------|------------|
| By     | /s/ STEVEN D. GOLDBY       |          | Chief Executive Officer and                                    |       | February 27, 2007  |
|   | Steven D. Goldby           |          | Chairman of the Board  (Principal Executive Officer)           |       |                    |
| By     | /s/ JERYL L. HILLEMAN      |          | Executive Vice President and Chief                             |       | February 27, 2007  |
|   | Jeryl L. Hilleman          |          | Financial Officer(Principal Financial  and Accounting Officer) |       |                    |
| By     | /s/ THOMAS R.  BARUCH      |          | Director                                                       |       | February 27, 2007  |
|   | Thomas  R. Baruch          |          |                                                           |       |                    |
| By     | /s/ SAMUEL D.  COLELLA     |          | Director                                                       |       | February 27, 2007  |
|   | Samuel D. Colella          |          |                                                           |       |                    |
| By     | /s/ EDWIN F.  GAMBRELL     |          | Director                                                       |       | February 27, 2007  |
|   | Edwin  F. Gambrell         |          |                                                           |       |                    |
| By     | /s/ ANTHONY R. MULLER      |          | Director                                                       |       | February 27,  2007 |
|   | Anthony  R. Muller         |          |                                                           |       |                    |
| By     | /s/ KENNETH J.  NUSSBACHER |          | Director                                                       |       | February 27, 2007  |
|   | Kenneth  J. Nussbacher     |          |                                                           |       |                    |
| By     | /s/ MARIO M.  ROSATI       |          | Director                                                       |       | February 27, 2007  |
|   | Mario  M. Rosati           |          |                                                           |       |                    |

 

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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Description of Document**                                                                                                                                                                                                                                          | ** ** |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| *2.1(7)         |       | Agreement  and Plan of Merger, dated as of November 12, 2004, by and among Symyx  Technologies, Inc., and IntelliChem, Inc.                                                                                                                                     |       |
| 3.1(1)          |       | Amended  and Restated Certificate of Incorporation                                                                                                                                                                                                                             |       |
| 3.2(14)         |       | Amended  and Restated Bylaws of Symyx Technologies, Inc.                                                                                                                                                                                                                  |       |
| 3.3(8)          |       | Certificate  of Amendment to the Amended and Restated Bylaws of Symyx  Technologies, Inc.                                                                                                                                                                                 |       |
| 4.1(2)          |       | Specimen  Common Stock Certificate                                                                                                                                                                                                                                             |       |
| **10.1(9)       |       | Synthematix, Inc.  Amended and Restated 2000 Equity Compensation Plan and forms of agreements  thereunder                                                                                                                                                                 |       |
| **10.2(2)       |       | 1996  Stock Plan and forms of agreements thereunder                                                                                                                                                                                                                            |       |
| **10.3(11)      |       | Amended  and Restated 1997 Stock Plan and forms of agreements thereunder                                                                                                                                                                                                       |       |
| **10.4(2)       |       | 1999  Employee Stock Purchase Plan                                                                                                                                                                                                                                             |       |
| 10.5(2)         |       | Form of  Director and Executive Officer Indemnification Agreement                                                                                                                                                                                                         |       |
| **10.6(2)       |       | Form of  Change of Control Agreement between Symyx and the following individuals:  Steven D. Goldby, Isy Goldwasser, Jeryl L. Hilleman, and W. Henry Weinberg                                                                                                             |       |
| 10.7(2)         |       | Standard  Industrial/Commercial Single-Tenant Lease dated November 15, 1996  between Symyx and Patrick and Bette Ng, Co-Trustees for The Ng Living Trust,  for office space located at 3100 Central Expressway, Santa Clara, California,  and addenda and inserts thereto |       |
| 10.7(a)(2)      |       | First  Amendment to Lease between Symyx and Patrick and Bette Ng, Co-Trustees for  The Ng Living Trust                                                                                                                                                                         |       |
| **10.8(16)      |       | Form of  Restricted Stock Agreement under the Symyx Technologies, Inc. 1997 Stock  Plan.                                                                                                                                                                             |       |
| 10.9(2)         |       | Celanese-Symyx  Collaboration Agreement dated August 1, 1998 between Symyx and Celanese  Ltd.                                                                                                                                                                             |       |
| 10.10(2)        |       | Collaborative  Research and License Agreement dated January 1, 1999 between Symyx and  The Dow Chemical Company                                                                                                                                                           |       |
| 10.11(2)        |       | License  Agreement dated June 22, 1995 between Symyx and Lawrence Berkeley  Laboratory, on behalf of The Regents of the University of California                                                                                                                          |       |
| 10.12(2)        |       | License  and Supply Agreement effective August 6, 1999 between Symyx and Argonaut  Technologies, Inc.                                                                                                                                                                |       |
| 10.13(3)        |       | Lease  by and between East Arques Sunnyvale, LLC and Symyx Technologies, Inc.  for the premises at 1263 E. Arques, Sunnyvale, California, and addenda and  inserts thereto                                                                                                |       |
| 10.14(4)        |       | 2001  Nonstatutory Stock Option Plan                                                                                                                                                                                                                                           |       |
| *10.15(1)       |       | License  Agreement dated February 21, 2003 between Symyx Technologies, Inc.  and Symyx Therapeutics, Inc.                                                                                                                                                       |       |
| *10.16(5)       |       | Alliance,  Technology Transfer, and License Agreement effective April 1, 2003  between Symyx Technologies, Inc., Symyx Discovery Tools, Inc. and  ExxonMobil Research and Engineering Company                                                                   |       |
| *10.17(8)       |       | Alliance  Agreement dated December 16, 2004 between Symyx Technologies, Inc.,  Symyx Discovery Tools, Inc. and The Dow Chemical Company                                                                                                                         |       |
| **10.18(8)      |       | 2003  IntelliChem, Inc. Stock Option Plan and forms of agreements thereunder                                                                                                                                                                                              |       |
| 10.19(10)       |       | Lease  by and between Oakmead Ventures LLC and Symyx Technologies, Inc. for the  premises at 415 Oakmead Parkway, Sunnyvale, California, and addenda and  inserts thereto                                                                                                 |       |
| **10.20(16)     |       | Form of  Restricted Stock Unit Agreement under the Symyx Technologies, Inc. 1997  Stock Plan.                                                                                                                                                                        |       |

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| 10.21(13)   |   | First  Amendment to Lease dated January 19, 2007 by and between Symyx  Technologies, Inc. and East Arques Sunnyvale, LLC for the premises at  1263 East Arques Avenue, Sunnyvale, California and addenda and inserts  thereto                     |   |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **10.22(15) |   | 2007  Annual Cash Incentive Plan for Executive Officers                                                                                                                                                                                                     |   |
| 14(6)       |   | Symyx  Technologies, Inc. Code of Conduct and Ethics                                                                                                                                                                                                   |   |
| 21(16)      |   | List  of Subsidiaries                                                                                                                                                                                                                                       |   |
| 23.1(16)    |   | Consent  of Independent Registered Public Accounting Firm                                                                                                                                                                                                   |   |
| 24.1        |   | Power  of Attorney (reference is made to the signature page of this report)                                                                                                                                                                            |   |
| 31.1(16)    |   | Certification  of Chief Executive Officer pursuant to Rules 13a-14(a) and  15d-14(a) promulgated under the Securities Exchange Act of 1934,  as amended, as adopted pursuant to Section 302(a) of the  Sarbanes-Oxley Act of 2002. |   |
| 31.2(16)    |   | Certification  of Chief Financial Officer pursuant to Rules 13a-14(a) and  15d-14(a) promulgated under the Securities Exchange Act of 1934,  as amended, as adopted pursuant to Section 302(a) of the  Sarbanes-Oxley Act of 2002. |   |
| 32.1(16)    |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                              |   |
| 32.2(16)    |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                              |   |

----

*                    Confidentialtreatment has been requested for portions of these exhibits.

**             Management contractsor compensatory plans or arrangements.

(1)          Incorporated byreference to the same number exhibit filed with Registrant’s Quarterly Reporton Form 10-Q for the period ended June 30, 2003.

(2)          Incorporated byreference to the same number exhibit filed with Registrant’s RegistrationStatement on Form S-1 (File No. 333-87453), as amended.

(3)          Incorporated byreference to the same number exhibit filed with Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2000.

(4)          Incorporated byreference to exhibit 4.1 filed with Registrant’s Registration Statement on Form S-8(File No. 333-82166).

(5)          Incorporated byreference to the same number exhibit filed with Registrant’s Quarterly Reporton Form 10-Q for the period ended September 30, 2003.

(6)          Incorporated byreference to the same number exhibit filed with Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2003.

(7)          Incorporated byreference to the same number exhibit filed with Registrant’s Current Report on Form 8-Kon December 2, 2004.

(8)          Incorporated byreference to the same number exhibit filed with Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2004.

(9)          Incorporated byreference to the same number exhibit filed with Registrant’s Quarterly Reporton Form 10-Q for the period ended March 31, 2005.

(10)   Incorporated by reference tothe same number exhibit filed with Registrant’s Current Report on Form 8-Kon November 15, 2005.

(11)   Incorporated by reference tothe same number exhibit filed with Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2005.

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(12)   Incorporated by reference tothe same number exhibit filed with Registrant’s Quarterly Report on Form 10-Qfor the period ended June 30, 2006.

(13)   Incorporated by reference tothe same number exhibit filed with Registrant’s Current Report on Form 8-Kon January 19, 2007.

(14)   Incorporated by reference tothe same number exhibit filed with Registrant’s Current Report on Form 8-Kon April 6, 2006.

(15)   Incorporated by reference tothe same number exhibit filed with Registrant’s Current Report on Form 8-Kon February 14, 2007.

(16)   Filed here within.

108

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