UNITED
STATES


SECURITIES
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, 2007




or




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




For
the transition period from ___________ to ___________




Commission
file number 000-27765





SYMYX
TECHNOLOGIES, INC.


(Exact
name of registrant as specified in its charter)





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




SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


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




SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


None





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




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.oYes  ýNo





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





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one).


o         Large
accelerated
filer                                x        
Accelerated
filer                          o        
Non-accelerated filer (Do not check if a smaller reporting
company)              
o         Smaller
Reporting Company





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).oYes ý
No





The
approximate aggregate market value of the registrant’s common stock held by
non-affiliates as of June 29, 2007 (the last business day of the registrant's
most recently completed second fiscal quarter) was $259.0 million, based on the
closing price for the common stock on the NASDAQ Global Select Market on such
date. The determination of affiliate status for the purposes of this calculation
is not necessarily a conclusive determination for other purposes. The
calculation excludes approximately 10,760,000 shares held by directors, officers
and stockholders whose ownership exceeded 5 percent of the registrant’s
outstanding common stock as of June 29, 2007. Exclusion of these shares should
not be construed to indicate that such person controls, is controlled by or is
under common control with the Registrant. As of February 29, 2008, 33,594,112
shares of the registrant’s common stock were outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Certain
sections of the Proxy Statement to be filed not later than 120 days after the
end of the fiscal year covered by this Annual Report on Form 10-K in connection
with the 2008 Annual Meeting of Stockholders are incorporated by reference into
Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K where
indicated. Except with respect to the information specifically incorporated by
reference in this Form 10-K, the proxy statement is not deemed to be filed as
part hereof.












TABLE OF CONTENTS




ITEM
              
              PAGEPart
      I1.
              Business
              11A.
              Risk Factors
              111B.
              Unresolved Staff Comments
              242.
              Properties
              243.
              Legal Proceedings
              244.
              Submission of Matters to a Vote of Security
      Holders
              24Part
      II5.
              Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
              256.
              Selected Financial Data
              277.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operation
              297A.
              Quantitative and Qualitative Disclosures About Market
      Risk
              468.
              Financial Statements and Supplementary
      Data
              479.
              Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
              879A.
              Controls and Procedures
              879B.
              Other Information
              89Part
      III10.
              Directors, Executive Officers and Corporate
      Governance
              9011.
              Executive Compensation
              9012.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              9213.
              Certain Relationships and Related Transactions and
      Director Independence
              9314.
              Principal Accounting Fees and
    Services
              93Part
      IV15.
              Exhibits and Financial Statement
    Schedules
              94Signatures
              97


i
 Table of Contents




PART
I





ITEM1.  BUSINESS





This
discussion and other parts of this Annual Report on Form 10-K ("Report"),
including the "Management’s Discussion and Analysis of Financial Condition and
Results of Operation," contain forward-looking statements that involve risks and
uncertainties, within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements typically may be identified by the use of forward-looking words
or phrases such as "may," "will," "believe," "expect," "plan," "intend," "goal,"
"anticipate," "should," "planned," "estimated," "potential," and "continue," or
the negative thereof or other comparable terminology regarding beliefs, plans,
expectations or intentions regarding the future. The cautionary statements made
in this Report should be read as being applicable to all related forward-looking
statements whenever they appear in this Report. Forward-looking statements
include, without limitation, statements regarding: our intentions, beliefs and
expectations regarding our future financial performance and operating results,
anticipated growth and trends in our business; the timing and success of our
collaborations with industry leaders; our belief that our cash and cash
equivalents will be sufficient to satisfy our anticipated cash requirements; our
expectations regarding our customers; our distributors and statements regarding
market penetration and expansion efforts; the potential impact and benefits of
our technology on our customers and on materials research and development; our
expectations regarding the development, effectiveness and acceptance of our
technology; the expansion of our capabilities and our portfolio of intellectual
property; our intent to continue to enter into new collaborative arrangements;
the effect of our past acquisitions; our belief regarding the adequacy of our
supply arrangements; our belief regarding current emerging development
candidates; and our belief regarding employee relations.




The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
such forward-looking statement. In order to comply with the terms of the safe
harbor, we note that a variety of factors could cause actual results and
experience to differ materially from the anticipated results or other
expectations expressed in such forward-looking statements. Among the factors
that could cause actual results to differ materially are the factors detailed
under the heading "Risk Factors." Given these uncertainties, readers are
cautioned not to place undue reliance on the forward-looking
statements.




Any
forward-looking statement speaks only as of the date on which it is made, and
except as required by law, we undertake no obligation to update forward-looking
statements to reflect events or circumstances occurring after the date of this
Report. You should also consult the risk factors listed from time to time in the
Company’s quarterly reports on Form 10-Q and other SEC filings.




General





Symyx
Technologies, Inc.  (“Symyx” or the “Company”) is a scientific
research and development (“R&D”) integration partner to leading companies in
the life sciences, chemical, energy, consumer products and electronics
industries. With scientific R&D under tremendous economic and technical
pressure, we help companies reduce R&D risk and enhance R&D
productivity to enable them to bring more and better products to market quickly
and cost-effectively. Our technology platform combines Symyx Software
(electronic lab notebooks, lab execution and analysis, logistics and decision
support software), Symyx Tools (modular and integrated workflows that can
be enhanced by Symyx Software) and Symyx Research (collaborative research and
directed services) to support the R&D process. Information about Symyx,
including reports and other information we have filed with the Securities and
Exchange Commission (“SEC”), is available free of charge at
www.symyx.com. The information posted on our website is not incorporated
into this Report.





Symyx was
incorporated in California on September 20, 1994 and reincorporated in Delaware
in February 1999. Symyx’ 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 common stock trades on the NASDAQ Global Select Market under the symbol
“SMMX.”





1
 Table of Contents


We work
with customers through our Symyx Software, Symyx Tools and Symyx Research
offerings. With Symyx Software, we help address customer needs for greater data
access and integration across the enterprise, improving their ability to search,
manage, manipulate and store internal and external research data as well as to
manage their intellectual property. On October 1, 2007, we acquired MDL
Information Systems, Inc. (“MDL”), a leading provider of innovative informatics
software, databases and services that accelerate successful scientific R&D
by improving the speed and quality of scientists’ decision making. With this
acquisition, Symyx Software became the largest of our three business
areas.





Symyx
Tools and Symyx Research provide different ways for customers to access our
proprietary high-throughput technologies for parallel (versus serial)
experimentation, enabling greater speed and breadth of research. Symyx develops
and applies high-throughput technologies that empower customers to engage in
faster, broader experimentation by working with small amounts of materials in an
automated fashion and utilizing parallel or array-based testing. Symyx Tools
enables customers to bring some of the capabilities of our laboratories into
their own organizations by purchasing instruments to integrate and automate
laboratory experimentation to increase research productivity. Customers leverage
our expertise and infrastructure through Symyx Research, with programs that
range from directed research to strategic collaborative relationships. A portion
of our resident expertise and resources within Symyx Research is also allocated
toward the development of intellectual property assets where Symyx partners with
a strategic or financial investor to develop materials science solutions in
areas where the Company has expertise.





Through
software licensing, automated workflow sales and research services, we provide
customers multiple ways to begin working with us. Our goal is to leverage and
integrate all of our offerings so that, over time, our customers can easily
access our entire technology platform to improve their R&D productivity and
reduce program risk.





Industry
Background





Materials
and their diverse properties contribute in vital ways to many of the products in
everyday use. These materials are discovered and evolve through advanced
chemical R&D.  Many of the world’s largest companies in our target
industries - life sciences, energy, chemical, consumer goods and electronics -
depend heavily upon these advancements. New drugs, cleaner and more efficient
fuels, cheaper and stronger plastics, new and improved personal care products
and faster and cheaper electronics share a common feature:  they
depend upon success in the chemical laboratories within an R&D
organization.





Traditional
materials research relies on an expensive and time-consuming process of trial
and error: identifying potentially promising areas for chemical research, making
one material, testing it, then making a different material, testing it and so
on.  At the rate of only a few experiments per day per person using
manual, paper-based processes, traditional discovery methods cannot keep pace
with today’s competitive environment, shorter product life cycles and revenue
growth expectations.





By
applying miniaturization, parallelization, automation and informatics to
chemical research - whether through the sale of Symyx Tools, licensing of Symyx
Software or through providing Symyx Research services - we believe we can help
transform our customers’ R&D operations, enabling them to discover new
materials faster and more cost-effectively than is possible using traditional
methods.





Symyx
primarily serves customers in two broad categories:





1)
            Life
      Sciences





The life
sciences industry is highly competitive, as pharmaceutical and biotechnology
R&D organizations tackle issues such as the growing costs of drug
development and marketing, more competition from generic drugs, patent
expiration on leading products and product families, increased partnering and
outsourcing and the need for more targeted therapeutics.




2
 Table of Contents





2)
            Chemicals
      and Energy





To
compete effectively and efficiently on a global scale, chemical and energy
companies must execute and innovate faster than ever before. Meeting this
imperative requires broader and more cost-effective experimentation,
implementing quicker, more efficient product application testing, reducing raw
materials costs, enhancing production yields, creating new product variants and
improving manufacturing quality.





The
market dynamics in these categories are changing product economics, especially
with respects to time-to-market and prices, and in turn, mandating better
information correlation across people, instruments and geographies, faster
experimentation and lower costs.  Symyx’ offerings help customers to meet
these demands. Symyx Software enables the integration of research data and
enterprise-wide information sharing.  Symyx Tools provide a 10 to 100-fold
improvement in experimentation speed and improved precision and accuracy,
leading to a substantial reduction in development time, costs per experiment and
risk.  And for those customers who wish to leverage Symyx’ deep
expertise in chemistry, materials science and high-throughput research, Symyx
Research can work with or for customers to solve discovery and development
challenges directly.





Symyx
Solutions





High-Throughput
Technologies





Since
1994, Symyx has been a pioneer in high-throughput R&D technologies with the
goal of modernizing, automating and digitizing chemical/materials R&D. These
technologies are the foundation of all of Symyx’ offerings.





Symyx’
high-throughput research begins with the rapid creation of large, directed
libraries of materials.  These materials are then synthesized and
tested using high-throughput primary and secondary screens. During primary
screening, we conduct experiments across broad material and processing
parameters - varying chemicals, mixtures, temperatures, pressures, etc. -
enabling researchers to quickly identify the smaller, more promising areas on
which to focus. During secondary screening, we carry out further experiments to
make a more detailed evaluation of the focused areas.





In
conventional terms, creating and testing a single material is considered one
experiment. Using our miniaturized, automated technology to execute hundreds to
thousands of experiments at a time and our software applications to design,
schedule, run, manage and share the data from those experiments, scientists can
dramatically increase the probability of success and reduce the time and costs
per experiment to discover new materials. For example, using traditional
methods, a team consisting of a chemist plus a technician could perform 500 to
1,000 experiments per year. In our laboratories, that same team could perform 10
to 50 times more experiments at a vastly reduced cost per experiment. As a
result, Symyx-enabled scientists can generate significantly more data, increase
the possibility of successful discoveries within a given timeframe and reduce
associated program costs dramatically.





To
achieve these efficiencies, we have developed extensive capabilities in
materials synthesis, screening and data analysis. A particular challenge is the
ability to screen materials for a wide range of properties. For example, to
discover a new catalyst, we need to screen how well it performs a specific
chemical reaction. To discover a new polymer, we need to screen for physical and
mechanical properties such as molecular weight and toughness.





Our
multi-disciplined team of people with expertise in the fields of inorganic,
physical, polymer and organic chemistries, physics, engineering and software
programming has successfully designed, built and validated a powerful array of
highly specialized proprietary instruments and software. Our scientists can
synthesize a wide range of materials and screen for properties including
catalytic, chemical, physical, mechanical, electronic and optical properties. In
addition, we continue to expand our capabilities through the development of new
instruments and software and enhanced versions of existing systems.





We are
committed to retaining our position as a leading company that develops and
supplies high-throughput technologies for the discovery of new materials with
commercially valuable properties. In support of that objective, we have created
complementary offerings in our three business areas:  Symyx Software,
Symyx Tools and Symyx Research.





3
 Table of Contents


Symyx
Software





Our
software was initially developed to support our scientists’ experiment design,
execution and analysis needs. Our high-throughput technologies enabled broader
and faster experimentation, which in turn produce unprecedented quantities of
data. We could not find a commercial software solution to address our needs, and
thus, we developed Symyx’ lab execution and analysis software (“LEA”) to design
experiments, to execute those experiments on our automated workflows, and to
capture and analyze large quantities of multi-media data.





Through
the acquisitions of IntelliChem, Inc. (“IntelliChem”), Synthematix, Inc.
(“Synthematix”) and more recently MDL, we have significantly expanded the
capabilities of and potential markets for our software
offerings.  Today, Symyx Software encompasses:





Electronic Lab Notebook and Vault
Platform: Symyx’ Electronic Lab Notebook (“ELN”) replaces paper
notebooks traditionally used by scientists, providing a digital environment
where scientists can plan, execute, record, store, back up and share their daily
research activities.  We offer a universal ELN foundation, and
continue to develop domain-specific capabilities for scientists engaged in
discovery, process, analytical, formulations and biology functions that are
designed with their specific workflows in mind.  We believe having
front-ends customized based on specific functions and built on a common platform
facilitates adoption and use of Symyx Software, enables optimal use of research
data, and improves data quality, documentation and adherence to standard
operating procedures.





Our ELN
offerings are also integrated with our proprietary database solution, Symyx’
Vault platform, a repository for scientific data and documents that enables
scientific collaboration, IP protection and decision-support across the
enterprise.





Lab Execution and
Analysis: Our Lab Execution applications enable scientists to
control, monitor and manage the acquisition of large amounts of data from
automated laboratory instruments, semi-automated instruments and manual
instrumentation.  We developed Symyx Lab Execution software on a
vendor-neutral architecture, so it can collect data from Symyx instruments as
well as from a broad range of third-party laboratory equipment resources,
delivering method development into the hands of scientists.





Our
Experiment Analysis applications deliver real-time data warehousing, querying,
visualization and reporting with unified and linked views across documents,
chemical structures, multi-step synthesis and sample lifecycles.  Members
of a team or an entire organization can utilize multiple query and browsing
tools to simplify reporting or to search by document or chemical
structure. With enterprise-level, worldwide scalability, Symyx Experiment
Analysis software is designed to meet the needs of companies as they
grow.





Experimental Logistics:With
the acquisition of MDL in October 2007, we offer the chemical presentation
capabilities that customers have utilized for the past 27 years as well as
systems that support laboratory operations and enhance laboratory productivity.
These applications provide a framework for information exchange and laboratory
workflow facilitation, and solutions for information management, work request
handling, ordering, purchasing and sample management.





Decision
Support:Through our MDL acquisition, we now offer Isentris®,
a comprehensive solution consisting of a number of industry-leading products
including:





(i)
            Symyx
      Isentris Client for searching, browsing, collating and sharing scientific
      data in an efficient, time-saving manner that is integrated with
      workflows;


(ii)
            Symyx
      Isentris for Excel® for accessing, browsing, collating, reporting,
      managing and sharing scientific data from a diverse range of public and
      proprietary data sources in the Microsoft Excel spreadsheet
      environment;


(iii)
            Symyx
      Draw for quickly drawing precise chemical structures and reactions, and
      creating publication-quality
graphics;






4
 Table of Contents




(iv)
            Symyx
      Isentris Controls for accessing and leveraging the underlying
      functionality of Isentris with a set of .NET controls that can be used in
      Microsoft Visual Studio to build custom scientific
      applications rapidly, extend applications and integrate existing
      applications;


(v)
            Symyx
      Cheshire® for defining cheminformatic business rules for different
      applications to perform particular operations, such as chemical convention
      checks, chemical structure validation, and physico-chemical property
      calculations;


(vi)
            Symyx
      Core Interface for accessing essential services for managing and
      supporting critical application workflows, building consistent,
      high-quality applications quickly, creating useful data views and finding
      information easier; and


(vii)
            Symyx
      Direct for searching and registering molecules and reactions in Oracle
      databases using a single, powerful chemistry data
    cartridge.





Customers
of our software include life science, chemical and energy companies, as well as
other industrial customers seeking to improve and integrate their research data
management. Pharmaceutical and biotechnology companies use Symyx Software to
support their pre-clinical research activities as well as some pharmaceutical
discovery research and chemical research. Chemical, energy and other industrial
companies use our software broadly across their research groups.





Symyx
Tools





Symyx
Tools designs, develops, manufactures and sells automated instruments to life
science companies to speed and improve preclinical testing of drug candidates,
and to chemical, energy and other companies for materials discovery research,
development and testing. Symyx Tools include high-throughput reactors, screening
systems, robotics and analytical equipment.  Our systems range from
modular, configurable, increasingly standardized units that can be integrated as
needed, up to very complex, multi-million dollar custom systems designed
specifically to meet a customer’s requirements.  By offering this
range of systems, we give our customers the flexibility of purchasing complete
systems, or purchasing individualized system components to build full
high-throughput experimentation capability gradually with the assurance that
they will be able to integrate the systems and data management of different
research processes at any time.





Our
instruments are integrated with Symyx Software to facilitate experiment design,
execution and evaluation.  In July 2006, we expanded our Symyx Tools
capabilities with the acquisition of Autodose SA (“Autodose”), a privately-held,
Geneva-based maker of precision powder-dispensing equipment, enhancing our
product portfolio and providing us increased customer opportunities in
Europe.





Using
Symyx Tools, our customers can implement our high-throughput technologies
reliably, predictably and at significant time and cost savings compared to
taking a license to operate from us and then developing and building systems
internally. Customers typically purchase Symyx Tools in either Benchtop System
or Integrated Workflow configurations. The Benchtop System is a self-contained
unit that automates multiple steps of experimental procedures and is scalable to
enable data and instrument integration with other equipment in the laboratory.
Integrated Workflows are validated, integrated systems that perform fully
automated experimentation for complete laboratory processes and include
integration with other laboratory equipment and software and the ability to
support document browsing and searching, enterprise-level security and auditing,
and configurable document workflow. Symyx Tools are used to help accelerate
research, product optimization and process development, enabling scientists to
significantly increase their research productivity.





Life
science companies use our instrumentation to automate and improve pre-clinical
research. The workflows we sell to life science companies include those for
solubility, polymorph and salt selection, liquid formulations, forced
degradation, excipient compatibility, organic synthesis, bio catalysis and
process optimization. Chemical companies use Symyx Tools to automate and
integrate their materials discovery and research and development processes. The
workflows we sell to chemical companies include those for formulations,
heterogeneous catalysis, homogeneous catalysis and polymerization catalysis.
Consumer products companies utilize Symyx Tools to design, formulate, and test
the performance characteristics of materials. The workflows we sell to consumer
products companies include those for additives, adhesives/coatings/sealants,
consumer and personal care and plastics.




5
 Table of Contents


We
assemble and ship our Symyx Tools from our facilities in California and in
Geneva, Switzerland. As we assemble our systems, we generally manufacture only
critical and proprietary components ourselves. We contract with others for the
manufacture and supply of the majority of components. We believe our supply
arrangements to be adequate and that there have not been material constraints on
the sources and availability of materials. From time to time, we rely on a
single supplier for all of our requirements of a particular
component.





Symyx
Research





In Symyx
Research, our scientific teams perform research on behalf of customers, with a
goal of producing breakthrough discoveries and often developing new
high-throughput technologies we then commercialize through Symyx Tools and Symyx
Software. These services have historically been provided in the context of an
alliance or collaboration agreement under which we provide the platform
technologies and effort, and our partners acquire rights to develop and
commercialize resulting materials within their defined field of
license.  Under these broader arrangements, of which our agreements
with ExxonMobil Corporation (“ExxonMobil”) and The Dow Chemical Company (“Dow”)
are the most extensive examples, we receive research funding, and in some cases,
rights to future royalties or other payments on materials we may discover once
our partner commercializes those materials. Our research programs also
contribute greatly toward the development of our intellectual property,
instrumentation and software, as we typically own or control all inventions
pertaining to high-throughput methodology conceived and reduced to practice in
connection with activities under the agreements and all know-how and
intellectual property rights related thereto.





Symyx
Research provides a variety of services with flexible scope, including research
services, collaborations and partnerships. Our Research Services provide
packaged offerings where clients direct the experiment goals, providing the
experiment design and data analysis. Symyx provides the R&D execution,
completing the experimentation by leveraging our proprietary infrastructure. In
this scenario, pricing is based on the number of experiments and the customer
owns rights to the intellectual property. Under Collaborative Research
agreements, customers are also able to access the expertise of Symyx scientists
and technology development. Partnerships within Symyx Research involve a shared
risk model that leverages the resources of Symyx and the partner company in
exchange for a higher share of the potential reward/outcome.





We
typically bill our customers for services over the term of the research
contract, which can vary from several months to several years. Due to the nature
of our research and our dependence on our collaborative partners to
commercialize the results of the research, we cannot predict with any certainty
whether any particular collaboration or research effort will ultimately result
in a commercial product or whether we will achieve future milestones or royalty
payments under our various collaborations.





We do not
track our fully burdened R&D costs by project. However, based on hours spent
on each project, we estimate our R&D efforts were allocated as
follows:





2007
            
            
            2006
            
            
            2005Projects
      funded by collaboration partners
            
            
            55
            %
            
            
            61
            %
            
            
            70
            %Internally
      funded projects:Software
      development
            
            
            31
            %
            
            
            29
            %
            
            
            23
            %Research
            
            
            7
            %
            
            
            8
            %
            
            
            6
            %Tools
      development
            
            
            7
            %
            
            
            2
            %
            
            
            1
            %Total
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %





Materials
and IP Licensing





Discovered
Materials





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





Our
portfolio of discovered materials provides us licensing opportunities, offers a
path to commercialization of new materials, and demonstrates the capabilities of
our high-throughput research technologies. At the time of this filing, our
discoveries include 7 commercialized materials. We have additional research
programs underway at various stages of research and multiple materials in
various stages of development by our clients.


6
 Table of Contents


IP
Licensing





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





Customers





We have a record of building enduring
relationships with customers as they apply our various offerings in flexible
ways to meet their needs. For some customers, we perform research and share
their successes through royalties on commercial discoveries.  For
others, we provide Symyx Software applications, Symyx Tools instruments or Symyx
Research services either alone or in combination.  Our goal in all
accounts is to provide a comprehensive set of solutions from each of our
business areas.





In
certain instances, we work with customers in alliances, where our customers work
with us across all of our business offerings under a substantial, multi-year
commitment. We currently have such relationships in place with ExxonMobil and
Dow.





Under our
April 1, 2003 alliance agreement with ExxonMobil, we provide research services
in certain exclusive areas, develop and sell Symyx Tools and license our Symyx
Software and intellectual property.  The original five-year commitment
under that agreement was approximately $200 million in the aggregate (of which
we have recognized approximately $187.5 million through December 31, 2007), and
continues through May 31, 2008.  As further discussed under Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation—Recent Development” below, effective January 1, 2008, we executed a
supplemental agreement with ExxonMobil which includes additional commitments to
us of approximately $13.1 million.  In addition, we are also entitled to
receive royalties from the commercialization of materials, processes and
products based on discoveries made in the fields covered by the original
alliance agreement.





Under our
January 1, 2005 alliance agreement with Dow, we contracted to perform research
in a number of exclusive areas, to develop and provide Symyx Tools, and to
license Symyx Software and intellectual property. Dow’s base commitment over the
five-year term was approximately $120 million, of which we have recognized
approximately $87.2 million through December 31, 2007.  The original
alliance agreement also entitles us to receive royalties from the
commercialization of materials, processes and products based on discoveries made
in the fields covered by that agreement.  As further discussed under Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operation—Recent Development” below, effective November 29, 2007, we executed a
supplemental agreement with Dow which includes additional commitments to us of
approximately $49.0 million for purchases of Symyx Tools and Symyx Research
services, establishes minimum royalties over the period 2008-2015, and reduces
applicable royalty rates to encourage Dow’s full use and broad commercialization
of technology developed under the original agreement.





For the
fiscal years ended December 31, 2007, 2006 and 2005, our Symyx Research, Symyx
Tools, and Symyx Software business segments each contributed more than 10% of
our total revenue. See detail in Note 6 of the Notes to the Consolidated
Financial Statements.




7
 Table of Contents


The
following table lists our major customers and the revenue they each contributed
in the fiscal years ended December 31, 2007, 2006 and 2005 (in
thousands):





Years
      Ended December 31,2007
            
            
            2006
            
            
            2005ExxonMobil
            
            $
            36,489
            
            
            $
            51,318
            
            
            $
            42,254Dow
            
            
            35,301
            
            
            
            29,302
            
            
            
            26,765Total
            
            $
            71,790
            
            
            $
            80,620
            
            
            $
            69,019





For the
fiscal years ended December 31, 2007, 2006 and 2005, approximately 12%, 11% and
17%, respectively, of our total revenue was generated from sales to customers
located in foreign countries. See Note 6 of the Notes to the Consolidated
Financial Statements for further detail. We are exposed to risks associated with
international operations. See “We are exposed to risks associated with export
sales and international operations that may limit our ability to generate
revenue from our products and international property” under Item 1A, “Risk
Factors.”





Sales
and Sales Support





Substantially
all of our sales are direct, though we have non-exclusive distribution
relationships in Japan, Korea and India.  As of December 31, 2007, our
sales organization was comprised of approximately 50 employees in the United
States, Europe and Japan, and is organized specifically to provide services to
the chemical/energy and life sciences industries.





We
believe service is an important component of the value we offer our customers.
Although sales representatives have direct responsibility for account
relationships, our sales support group works closely with our customers to
maximize the value of our offerings. Our sales organization includes field
application scientists who participate in the pre-sales effort to the customers’
R&D managers, technology support representatives and product managers to
gather a better understanding of customers’ needs. Our sales organization also
includes field service engineers dedicated to post-sales support, who train
users at our facilities in California and at customer sites, assist with
reassembly of certain instruments and install software for customers and provide
customizations requested by customers.





Intellectual
Property and Other Proprietary Rights





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





•
            library
      synthesis methods;





•
            the
      libraries themselves;





•
            screening
      or characterization methods;





•
            equipment
      and software; and





•
            new
      materials and their uses.





Our
patent portfolio as of December 31, 2007 consisted of 328 issued patents,
including 272 United States patents, 31 European patents, and 25 patents in
other countries, with over 200 additional applications pending worldwide. These
patents and applications cover composition of matter, instruments, and
methodology, and include issued patents with broad claims in high-throughput
combinatorial methodologies. We co-own with Lawrence Berkeley National
Laboratory, on behalf of The Regents of the University of California, 18 of the
issued patents in the United States and other countries. We have an exclusive
license to these patents and patent applications from Lawrence Berkeley National
Laboratory, which was agreed to upon our formation. In addition to patents, we
rely on copyright, trademark and trade secret rights, confidentiality
procedures, and licensing arrangements to establish and protect our proprietary
rights. The earliest filed patents will begin to expire in 2014.




8
 Table of Contents




Markets





Symyx
provides customers in the chemical, energy, life sciences, consumer products and
other industries with Symyx Software, Symyx Tools and proprietary Symyx Research
services and intellectual property to increase their research and development
effectiveness by achieving better results with shorter timelines and lower
costs. We realize value through the licensing of Symyx Software, the sale of
Symyx Tools, the provision of Symyx Research services and the licensing of
intellectual property and materials. Our market opportunities fall into two
primary areas: our customers’ research and development expenditures and the
market for sales of materials.





Research
and Development Expenditures Market





Leading
global companies in the chemical, energy, life science and consumer products
industries spent in excess of $100 billion on research and development in 2005,
and continue to seek to improve the return on their R&D investments. 
These investments include personnel costs, deployment of laboratory informatics
and purchase of technology, services and instruments.





Materials
Markets





The
materials we discover cover a broad range of applications, including catalysts
for the manufacture of plastics and commodity chemical, polymers for industrial,
consumer goods and life science applications, and diverse electronic materials.
Under certain contracts, Symyx earns a royalty in exchange for our research
collaborations associated with those discovered materials. Because our customers
and partners control the timing and scope of commercialization of materials we
discover, and cannot themselves necessarily predict opportunity sizes or sales
rates, we cannot currently reliably estimate the timing or size of our royalty
opportunities.





Competition





Symyx
Software competes in the life science research software market with companies
like CambridgeSoft Corporation, and in more limited areas, with other providers
of scientific data management software. In our assessment, the research software
market is highly fragmented and a large number of software providers offer spot
solutions targeted to particular areas within laboratory informatics. Thus,
within certain segments, Symyx Software competes with Accelrys, ChemAxon, IDBS
and others. We believe that the ability of Symyx Software to enable
enterprise-wide data integration and access to experiment design, execution and
analysis enables us to compete favorably.





Symyx
Tools workflows compete with certain instrument manufacturers, including
Chemspeed Technologies, Zinsser Analytic, Tecan Group Ltd. and others. We
believe that the modular design of our Tools offerings, which allows customers
to purchase an initial tool and then expand by adding additional Symyx and/or
third-party instruments and performance-enhancing Symyx Software to create a
complete, integrated workflow, enables us to compete favorably.





In Symyx
Research, we compete primarily with the in-house efforts of certain chemical
companies with internal high-throughput materials discovery programs. In
addition, Accelergy Corporation, Avantium Technologies, HTE AG and others offer
certain high-throughput approaches to materials discovery.





Financial
Information about Geographic Areas





Revenue
is attributed to the following geographic locations based on the physical
location of Symyx’ customers (as a percentage of total revenue in the respective
periods):


9
 Table of Contents





2007
            
            
            2006
            
            
            2005United
      States
            
            
            88
            %
            
            
            89
            %
            
            
            83
            %North
      America (excluding United States)
            
            
            *
            %
            
            
            *
            %
            
            
            *
            %Asia
            
            
            3
            %
            
            
            3
            %
            
            
            2
            %Europe
            
            
            9
            %
            
            
            8
            %
            
            
            15
            %Total
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %


*Less
than 1%





Backlog
of Committed Revenue


As of
December 31, 2007, our backlog was approximately $100 million, compared with
backlog of approximately $90 million at December 31, 2006. Our backlog includes
contractual commitments from our customers for products to be shipped, research,
consulting and maintenance services to be provided, and license and content
revenue to be recognized within the next 12 months. Because of the occasional
customer driven changes in delivery schedules or cancellation of orders without
significant penalty, we do not believe that our backlog, as of any particular
date, is necessarily indicative of actual revenue for any future
period.


Employees





As of
December 31, 2007, we have approximately 600 employees, including approximately
450 scientific and technical employees and over 150 employees in business
development, legal, sales, and general and administrative services. Our
headcount increased by approximately 220 during 2007 primarily because of the
MDL acquisition in October 2007. None of our employees is represented by a labor
union, and we consider our employee relations to be good. We believe that our
future success depends in part upon our continued ability to identify, hire and
retain qualified personnel.





Executive
Officers of the Registrant




Set forth
below is information regarding our executive officers as of February 29,
2008:





Name of
      Executive Officer
            
            Age
            
            Position
      with the CompanySteven
      D. Goldby (1)
            
            67
            
            Executive
      Chairman of the BoardIsy
      Goldwasser (2)
            
            38
            
            Chief
      Executive OfficerRex
      S. Jackson (3)
            
            47
            
            Executive
      Vice President and Chief Financial OfficerRichard
      J. Rosenthal (4)
            
            52
            
            Senior
      Vice President of Finance  and Principal Accounting
      OfficerTimothy
      Campbell (5)
            
            46
            
            President,
      Symyx SoftwareRichard
      Boehner (6)
            
            60
            
            President,
      Symyx ResearchGerard
      Abraham (7)
            
            60
            
            President,
      Symyx ToolsKevin
      Cronin (8)
            
            48
            
            Senior
      Vice President, Symyx Sales


-----------------------------------


(1) Mr.
Goldby joined Symyx in 1998 as Chief Executive Officer.  Prior to
joining Symyx, Mr. Goldby served as Chief Executive Officer for more than ten
years at MDL. Previously Mr. Goldby held various management positions at ALZA
Corporation, including President of ALZA Pharmaceuticals. Mr. Goldby received a
B.S. degree in chemistry from the University of North Carolina and a law degree
from Georgetown University Law Center.





(2) Mr.
Goldwasser has been with Symyx since its founding, was appointed President and
Chief Operating Officer in 1998, and was appointed Chief Executive Officer in
June 2007. Mr. Goldwasser received a B.S. degree in chemical engineering from
the Massachusetts Institute of Technology and an M.S. degree in chemical
engineering from Stanford University.




10
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(3) Mr.
Jackson joined Symyx in February 2007 as Executive Vice President, General
Counsel and Secretary.  In June 2007, Mr. Jackson assumed the role of
interim Chief Financial Officer, and in October 2007, was appointed Chief
Financial Officer. Prior to joining the Company, he served as Senior Vice
President and General Counsel at Avago Technologies Ltd. and held multiple
positions at Synopsys, Inc., most recently as Senior Vice President, General
Counsel and acting Chief Financial Officer. Mr. Jackson obtained a B.A. degree
in political science from Duke University and a J.D. degree from Stanford
University.





(4)               Mr.
Rosenthal joined Symyx as Senior Vice President of Finance and Principal
Accounting Officer in December 2007. Prior to Symyx, he was employed by LSI
Corporation (“LSI”), a manufacturer of communications, consumer and storage
semiconductors, from 1997 until December 2007, most recently serving
as Vice President and Corporate Controller.  Mr. Rosenthal obtained a
B.S. degree in accounting from San Jose State University, and an M.B.A. from
Santa Clara University.





(5) Mr.
Campbell joined Symyx in February 2007 as president of Symyx Software. Prior to
Symyx, he served as president and chief executive officer of Steelwedge
Software, an enterprise software company, and chief executive officer of
Industri-Matematik International and ePIT Systems. Mr. Campbell graduated from
Conestoga College of Applied Arts and Technology where he studied Electronics
Engineering Technology – Computer Systems.





(6) Mr.
Boehner joined Symyx in April 2007 to lead the Company's business development
efforts as Executive Vice President, Chemicals and Energy, and was appointed
President of Symyx Research in November 2007. Previously, Mr. Boehner served in
corporate development and strategic planning roles at Sun Chemical Corporation,
MacDermid Incorporated, Great Lakes Chemical and Allied Signal. Mr. Boehner has
a B.S. and an M.B.A. from Colorado State University.





(7) Mr.
Abraham joined Symyx in July 2007, assuming leadership for the global Symyx
Tools organization. He served most recently in several senior positions in the
U.S. and overseas at Thermo Fisher Scientific Inc., including president of its
process systems and process instruments divisions. Previously, he was with
Hewlett-Packard and Matra-Harris. Mr. Abraham has a B.A. from the University of
Paris, France and an Engineering degree from the Paris School of
Optics.





(8) Mr.
Cronin joined Symyx in January 2001 as Vice President for sales and business
development for Symyx Tools, and was appointed Senior Vice President, Symyx
Sales, in April 2007.  Prior to Symyx, he spent 15 years developing and
implementing discovery informatics systems for the pharmaceutical industry,
first as a research scientist and then business leader at MDL Information
Systems. Mr. Cronin received his B.S. degree in chemistry from the University of
Washington in Seattle and his M.S. degree in chemistry from the University of
California, Berkeley.





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





Environmental
Matters





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





Company
Website and Available Information





We are subject to the informational
requirements of the Securities and Exchange Act of 1934, as amended. Therefore,
we file periodic reports, proxy statements and other information with the SEC.
Our website can be found at www.symyx.com and it contains information about
Symyx, our products and services, and our operations. Copies of our filings with
the SEC on Form 10-K, Form 10-Q, and Form 8-K and all amendments to those
reports can be viewed and downloaded free of charge at our website as soon as
reasonably practicable after they are filed with the SEC.  Any
materials we file with the SEC may be read at the SEC’s Public Reference Room at
100 F Street, NE, Washington, DC 20549. Anyone may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.




11
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Our website also contains our
Corporate Governance Guidelines, charter and membership of the Board’s Audit,
Compensation and Nominating and Governance Committees, as well as our Code of
Conduct and Ethics.





ITEM1A. RISK FACTORS





The risks
and uncertainties described below are not the only risks and uncertainties we
face. Additional risks and uncertainties we do not presently know or anticipate
or that we currently deem immaterial also may affect our results of operations
and financial condition.





We
depend on a small number of key customers for a large portion of our
revenues.  If we lose any of our key customers or a key customer
significantly reduces its business with us, our business, financial condition
and results of operations would be adversely affected.





We have
depended on a relatively small number of key customers, such as ExxonMobil and
Dow, for a large portion of our revenues, and expect ExxonMobil, Dow and a
select list of other companies will, in the aggregate, continue to account for a
substantial portion of our revenues for the foreseeable future.  Given this
customer concentration, the loss of any of our key customers or a material
reduction in business from one or more of these customers would materially harm
our business, financial condition and operating results.   In
particular, our revenue from ExxonMobil declined from $51.3 million in fiscal
2006 to $36.5 million in fiscal 2007, and is expected to be approximately $25 to
$27 million in fiscal 2008 and approximately $16 to $19 million in fiscal
2009.  Our revenue from Dow increased from $29.3 million in fiscal 2006 to
$35.3 million in fiscal 2007, but is expected to decline to approximately $25 to
$27 million in fiscal 2008 and approximately $21 to $25 million in fiscal
2009.  The combined decrease in fiscal 2007 materially and adversely
affected our operating results.  Further, if we are not able to replace the
anticipated decreases in fiscal 2008-2009 with new revenue from ExxonMobil, Dow
or other customers, our business, operating results and financial condition will
be materially and adversely affected.





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





We have
acquired a number of businesses in the past, including, in the last four years,
IntelliChem, Inc., Synthematix, Inc., Autodose SA, and MDL.  In the future,
we may engage in additional acquisitions and expand our business focus in order
to exploit technology or market opportunities.  In the event of any
future acquisitions or business expansions, we may issue stock that would dilute
our current stockholders’ percentage ownership, pay cash, incur debts or assume
liabilities. Our success depends upon our ability to successfully integrate the
products, people, and systems we acquired in these transactions. We may not be
able to successfully integrate our acquired businesses into our existing
business in a timely and non-disruptive manner or at all.  In
addition, acquisitions could result in, among other things, large one-time
charges associated with acquired in-process research and development, future
write-offs of goodwill and other acquisition-related intangible assets that are
deemed to be impaired, restructuring charges related to consolidation of
operations, charges associated with unknown or unforeseen liabilities of
acquired businesses, increased general and administrative expenses, and the loss
of key employees. Specifically in 2007 we completed the acquisition of MDL Group
Companies which increased the goodwill balance by $95 million and combined with
the recent decrease in our market capitalization may result in future
impairments of our goodwill. If we develop a new line of business, our
management’s attention may be diverted from normal daily operations of the
business. Furthermore, an acquisition or business expansion may not produce the
revenue, earnings or business synergies that we anticipate. The time, capital
management and other resources spent on an acquisition or business expansion
that fails to meet our expectations could cause our business and financial
condition to be materially and adversely affected. Further, if we do not
successfully execute on our integration and operational initiatives, or if our
integrated product lines do not achieve substantial market acceptance with our
existing and new customers, our operating results and financial condition will
be materially and adversely affected.




12
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The
length of our sales cycle for Symyx Tools and our Symyx Software products
requires us to invest substantial resources in a potential sale before we know
whether the sale will occur.  There is no guarantee that the sale will
ever occur and if we are unsuccessful in our marketing and sales efforts, our
financial condition and results of operations would be adversely
affected.





We have a
limited number of contracts for our Symyx Tools and pre-MDL Symyx Software
product offerings.  Our sales efforts require us to educate our
potential customers about the full benefits of our solutions, which often
requires significant time and expense. Our sales cycle is typically from 6 to 18
months, and we incur significant expenses, and in many cases begin to build
customer-specific Tools prior to obtaining contractual commitments, as part of
this process without any assurance of resulting revenues.  Factors
impacting sales and the length of our sales cycle include, but are not limited
to, the following:





•
            complexity and cost of our
      systems and difficulties we may encounter in meeting individual customer
      specifications and
commitments;




•
            our ability to build new systems
      and design software and workflows to meet our customers’
      demands;




•
            customers’ willingness to renew
      annual right to use software licenses or maintenance and support
      agreements;




•
            limited number of customers that
      are willing to purchase our larger systems or enter into licensing
      agreements with us;




•
            customers' budgetary constraints
      and internal acceptance review
  procedures;




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




•
            increased competition;
      and




•
            potential general or
      industry-specific downturns.





If we are
unable to continue to build the infrastructure to support our sales, or if the
sales or build cycles for our products and services lengthen, or if we begin
customer-specific Tools development but do not ultimately obtain the customer
commitments, our revenue may not grow as anticipated, and could decline, and our
results from operations may be harmed.




We
recently launched new service offerings in our Symyx Research
business.  We can provide no assurances these new offerings will be
successful.




In the
third quarter of fiscal 2007, we established a range of new service offerings
for our Symyx Research business.  These services are intended to
leverage the expertise and experience of our technical staff and provide new
revenue opportunities to replace the expected decline in research-related
revenues from ExxonMobil in 2008.  We have not yet proven the marketability
or commercial viability of these service offerings.  If we are unable to
achieve significant sales from these new offerings, our revenue will be lower
than what we anticipate and we may need to incur restructuring and personnel
termination charges, as a result of which our financial condition and results of
operations will be materially and adversely affected.




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Failure
to successfully commercialize our discoveries, either independently or in
collaboration with our customers and licensees, would reduce our long-term
revenue and profitability.





In order
for us to commercialize development candidates ourselves, we need to develop, or
obtain through outsourcing arrangements, the capability to manufacture, market
and sell products. Currently, we do not have these capabilities and we may not
be able to develop or otherwise obtain them.   Most of our
commercialization efforts are currently being done through collaborations with
our customers and licensees.  We typically receive royalties on sales
of products by our partners only if their products containing materials
developed by us or if the products are produced using our methods.
Commercialization of discovered materials is a long, uncertain and expensive
process and we cannot control our partners’ activities in this regard. The
failure of our partners to commercialize development candidates resulting from
our research efforts could reduce our future revenue and would harm our business
and operating results. In addition, our partners may delay or cancel
commercialization of development candidates which may harm our business and
operating results.  If we are unable to successfully commercialize
products resulting from our proprietary research efforts, our future revenue and
operating results would decline.





Strategic
investment projects such as royalty-bearing programs, spin-offs and joint
ventures may affect our operating results and financial condition and distract
our management team.





We are
constantly assessing strategic investment projects with potential to deliver
significant value creation opportunity for our shareholders. These projects
include, but are not limited to, royalty-bearing programs, spin-offs and joint
ventures. The process of investigating and implementing these projects is risky
and may create unforeseen operating difficulties and expenditures. For example,
these projects may involve significant additional operating expenses or
investments, and may distract our management team. Failure of any such
investment project, if pursued, would have a material adverse effect on our
operating results and financial condition.





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





Our
quarterly operating results have fluctuated in the past and are likely to do so
in the future. The fourth quarter historically has been our strongest quarter as
our customers expend their remaining capital budgets for the year.These
fluctuations could cause our stock price to fluctuate significantly or decline.
Revenue in future fiscal periods may be greater or less than revenue in the
immediately preceding period or in the comparable period of the prior year. Some
of the factors that could cause our operating results to fluctuate
include:




•
            expiration of or reduction in
      revenue derived from research contracts with major collaborative partners,
      which may not be renewed or replaced with contracts with other
      companies;




•
            the size and timing of customer
      orders for shipments of, and payments related to, Symyx
      Tools;




•
            the sale of integrated workflows
      including software and tools that may cause our tools revenue to be
      recognized ratably over future periods under our revenue recognition
      policy;




•
            the technical risks associated
      with the delivery of Symyx Tools and the timing of customer acceptance of
      Symyx Tools;




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




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




•
            the size and timing of royalties
      we receive from third parties, including those who license Symyx Tools and
      Symyx Software for resale;




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




14
 Table of Contents






•
            special charges related to
      completed or potential
acquisitions;




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




•
            developments or disputes
      concerning patent or other proprietary
  rights;




•
            the structure, timing and
      integration of acquisitions of businesses, products and technologies and
      related disruption of our current
  business;




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




•
            changes in accounting rules and
      regulations, including those related to revenue recognition, stock-based
      compensation and accounting for uncertainty in income taxes;
      and




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





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





We
may revise the guidance we give to our stockholders regarding our anticipated
financial results.  If the revised guidance is not well received by
our stockholders, market analysts or investors, our stock price may be adversely
affected.





Due to
the possibility of fluctuations in our revenue and expenses, it is difficult for
our management to predict or estimate our quarterly or annual operating
results and to give accurate guidance. Our operating results in some
quarters may not meet the expectations of stock market analysts and
investors.  In addition, as in the case of the revised guidance for
the balance of fiscal 2007 communicated in April 2007, we may update the
financial guidance we communicate to our stockholders from time to time to
address recent developments, though we undertake no obligation to do so. In
these cases, our stock price will likely decline, and investors will experience
a decrease in the value of their investment.





Our
stock price has been and may continue to be volatile.





The
market price of our common stock has been highly volatile since our initial
public offering. For example, in 2007, the lowest bid price for our common stock
was $6.90 and the highest bid price for our common stock was
$21.87.  Volatility in the market price for our common stock can be
affected by a number of factors, including, but not limited to, the
following:




•
            failure to achieve operating
      results within the guidance our senior management provides, or downward
      revisions in guidance relative to previous
    forecasts;




•
            changes in our growth
      rates;




•
            quarterly variations in our or
      our competitors' results of
operations;




•
            failure to achieve operating
      results projected by securities
analysts;




15
 Table of Contents






•
            changes in earnings estimates or
      recommendations by securities
analysts;




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




•
            changes in investors’ acceptable
      levels of risk;




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




•
            changes in
      management;




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




•
            speculation in the press or
      analyst community;




•
            developments in our industry;
      and




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





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





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





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




•
            extend current research and
      development relationships and add new
  ones;




•
            secure new Symyx Tools
      customers;




•
            add additional licensees of our
      software, discovered materials, and intellectual property;
      and




•
            make discoveries that our
      customers choose to commercialize that generate a substantial stream of
      royalties and other revenue.





Our
ability to achieve our objectives and maintain or increase the profitability of
our business will depend, in large part, on potential customers accepting our
high-throughput screening technologies and methodologies as effective tools in
the discovery of new materials. Historically, life science and chemical
companies have conducted materials research and discovery activities internally
using traditional manual discovery methods. In order for us to achieve our
business objectives, we must convince these companies that our technology and
capabilities justify outsourcing part of their basic research and discovery
programs. We cannot assure you we will achieve the levels of customer acceptance
necessary for us to maintain and grow a profitable business. Failure to achieve
the necessary customer acceptance, extend current research relationships and add
new ones, secure new Symyx Tools customers, and add additional licensees of our
software, discovered materials, and intellectual property would adversely affect
our revenue and profitability and may cause our stock price to
decrease.




16
 Table of Contents




Our
failure to raise capital when needed, or on terms favorable to us, to satisfy
cash needs for working capital, capital expenditures, investment requirements
and other liquidity requirements associated with our existing operations, will
harm our business and operating results.





We
believe our current cash, cash equivalents and available-for-sale securities,
our bank credit facility, and the cash flows generated by operations will be
sufficient to satisfy our anticipated cash needs for working capital, capital
expenditures, investment requirements and other liquidity requirements
associated with our existing operations for at least the next twelve
months.  Nonetheless, we may be required to raise additional funds
through a public or private financing, collaborative relationships or other
arrangements. We cannot provide assurance that additional funding, if sought,
will be available or be on terms favorable to us. Further, any additional equity
financing may be dilutive to our stockholders, and debt financing, if available,
may contain restrictive covenants which can restrict our business. Collaborative
arrangements and licensing may require us to relinquish our rights to some of
our technologies or products. Our failure to raise capital when needed, or on
terms favorable to us, will harm our business and operating
results.




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





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





We
depend upon the research and development activities of companies in the
chemical, energy, life science and consumer product industries, among others,
and declines or reductions in the research and development activities of these
industries could harm our business.





The
market for our research services, Symyx Tools, and Symyx Software within the
chemical, energy, electronics, life science and consumer product industries
depends on our customers' ability and willingness to invest in research and
development. If we cannot renew existing contracts or enter into new
arrangements at the pace we expect, our business and operating results will be
harmed.





In
particular, many companies in the chemical and life science industries have, in
the past several years, experienced declining profitability, and in many cases,
losses. There also has been considerable consolidation and restructuring among
many companies in the life sciences industry. As a result, some chemical and
life science companies have reduced their research and development activities
and/or delayed investments in new technologies. In addition, many chemical
products have become commodity products that compete primarily on the basis of
price. If commoditization of chemical products and other pressures affecting the
industry, including governmental regulations and governmental spending, continue
in the future, more companies could adopt strategies that involve significant
reductions in their research and development programs. Although we believe that
our technologies can help chemical, energy, life science, consumer product, and
other companies increase the efficiency of their research and development
activities, our efforts to convince them of this value may be unsuccessful. To
the extent these companies reduce their research and development activities or
external investments; they will be less likely to do business with us. As a
result of current industry consolidation, a number of our pharmaceutical
companies have recently reduced or postponed decisions relative to research and
development spending. Decisions by these companies to reduce or postpone their
research and development activities could result in fewer or smaller scale
collaborations with us, fewer or smaller scale intellectual property and
software licenses, fewer sales of our Symyx Tools, or choosing not to work with
Symyx, any of which could reduce our revenue and harm our business and operating
results.




17
 Table of Contents





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





We have
experienced substantial growth since our inception. We have grown from 170
employees at the end of 1999 to approximately 600 employees as of December 31,
2007, and expanded our offices from one country in 1999 to 7 countries in 2007.
Growth places strain on our research, administrative and operational
infrastructure. As our operations expand domestically and internationally, and
as we continue to acquire new businesses, we will need to continue to manage
multiple locations and additional relationships with various collaborative
partners, suppliers and other third parties. Our ability to manage our
operations and further growth effectively requires us to continue improving our
reporting systems and procedures and our operational, financial and management
controls. In addition, recent SEC rules and regulations have increased the
internal control and regulatory requirements under which we operate. We may not
be able to successfully improve our management information and control systems
to a level necessary to manage our growth and we may discover deficiencies in
existing systems and controls that we may not be able to remediate in an
efficient or timely manner.





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





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





We
depend on skilled and experienced personnel to operate our business
effectively. If we are unable to recruit, hire and retain these employees,
our ability to manage and expand our business will be harmed, which would impair
our future revenue and operating performance.





Our
success will depend on our ability to retain our current management and to
attract and retain qualified personnel, including key scientific and highly
skilled personnel. As we seek to expand our operations, the hiring of
qualified scientific and technical personnel will be difficult, as the number of
people with experience in high-throughput materials science is limited and we
may face competition for qualified professionals, especially in the San
Francisco Bay Area, where we are headquartered. Further, as we form new
alliances with other collaborative partners or expand on our Symyx Software,
Symyx Tools and Symyx Research relationships, we may need personnel with
specific skill sets that may be difficult to locate or attract. Although we have
entered into employment contracts with most of our senior management, any of
them may terminate their employment at any time.  In addition, we do
not maintain “key person” life insurance policies covering any of our
employees.  Competition for senior management personnel, as well as
key scientific and other highly skilled personnel, is intense and we may not be
able to retain our personnel.  The loss of the services of members of
our senior management, as well as key scientific and other highly skilled
personnel, could prevent the implementation and completion of our
objectives.   Upon joining or promotion, new senior personnel
must spend a significant amount of time learning our business model and
management systems or their new roles, in addition to performing their regular
duties. Accordingly, until new senior personnel become familiar with our
business model and systems or with their new roles, we may experience some
disruption to our ongoing operations.  Moreover, the loss of a member
of our senior management or our professional staff would require the remaining
executive officers to divert immediate and substantial attention to seeking a
replacement.





Our
ability to retain our skilled labor force and our success in attracting and
hiring new skilled employees will be a critical factor in determining whether we
will be successful in the future.  We may not be able to meet our
future hiring needs or retain existing personnel.  We will face
particularly significant challenges and risks in hiring, training, managing and
retaining engineering and sales and marketing employees, as well as independent
distributors, most of who are geographically dispersed and must be trained in
the use and benefits of our products. Failure to attract and retain personnel,
particularly scientific and technical personnel, would impair our ability to
grow our business.




18
 Table of Contents





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





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





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





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





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





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





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





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


19
 Table of Contents


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





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





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





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





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





We
have engaged in business relationships with early stage companies whose ability
to perform all their obligations is less certain than our traditional large
chemical, energy, life science, and consumer product customers.





We have
entered into collaborative, development and licensing relationships in certain
areas with early stage companies. These companies may lack established
businesses and there is no assurance that these companies will succeed. The
inability of these companies to perform all their financial and operational
contractual obligations to us in a timely manner could adversely affect our
results.


20
 Table of Contents


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





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





Even if
alternative sources of supply are available, it could be time-consuming and
expensive for us to qualify new vendors and integrate their components into our
tools. In addition, we depend upon our vendors to provide components of
appropriate quality and reliability. Consequently, if supplies from these
vendors were delayed or interrupted for any reason, we could be delayed in our
ability to develop and deliver products; these delays would materially and
adversely affect our business.





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





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





Investments
in both fixed rate and floating rate interest earning instruments carry varying
degrees of interest rate risk. Fixed rate securities may have their fair market
value adversely impacted due to a rise in interest rates. In general, securities
with longer maturities are subject to greater interest rate risk than those with
shorter maturities. Although floating rate securities generally are subject to
less interest rate risk than fixed rate securities, floating rate securities may
produce less income than expected if interest rates decrease. Due in part to
these factors, our investment income may fall short of expectations or we may
suffer losses in principal if securities are sold that have declined in market
value due to changes in interest rates.





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





Each year
we are required to document and test our internal control procedures in order to
satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which
requires annual management assessments of the effectiveness of our internal
controls over financial reporting and a report by our Independent Registered
Public Accounting Firm addressing these assessments and the effectiveness of
internal control over financial reporting.  During the course of our
testing we may identify deficiencies that we are required to remediate in order
to comply with the requirements of Section 404. In addition, if we fail to
maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time; we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.
Furthermore, there are certain areas of accounting such as income tax that
involve extremely complex rules that vary by country, where an inadvertent
error, not misconduct, could be deemed a material weakness in our internal
controls. Failure to maintain an effective internal control environment could
have a material adverse effect on our stock price.


21
 Table of Contents


If
our products contain defects, it could expose us to litigation and harm our
revenue.




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




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





We
are exposed to general global economic and market conditions.





Our
business is subject to the effects of general economic conditions in the United
States, Europe, Asia, and globally, and, in particular, market conditions in the
life science and chemical industries. A global economic slowdown, or a
particular slowdown in the life science and/or chemical industries, may
materially adversely impact our business, operating results and financial
condition.





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





We have
established operations in certain parts of Europe and Asia and intend to
continue to expand our international presence in order to increase our export
sales. Export sales to international customers and maintaining operations in
foreign countries entail a number of risks, including, but not limited
to:




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




•
            unexpected changes in, or
      impositions of, legislative or regulatory
    requirements;




•
            delays resulting from difficulty
      in obtaining export licenses for certain technology, and tariffs, quotas,
      and other trade barriers and
  restrictions;




•
            longer payment cycles and greater
      difficulty in accounts receivable
  collection;




•
            potentially adverse
      taxes;




•
            currency exchange
      fluctuations;




•
            greater difficulties in
      maintaining and enforcingUnited Statesaccounting and public reporting
      standards;


22
 Table of Contents


•
            greater difficulties in staffing
      and managing foreign operations;
and




•
            the burdens of complying with a
      variety of foreign laws.





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





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





Our
business involves the use of a broad range of hazardous chemicals and materials.
Environmental laws impose stringent civil and criminal penalties for improper
handling, disposal and storage of these materials. We cannot completely
eliminate the risk of accidental contamination or injury from the handling,
disposal or storage of these materials. In the event of an improper or
unauthorized release of, or exposure of individuals to, hazardous materials, we
could be subject to civil damages due to personal injury or property damage
caused by the release or exposure and the resulting liability could exceed our
resources. A failure to comply with environmental laws could result in fines and
the revocation of environmental permits, which could prevent us from conducting
our business. Accordingly, any violation of environmental laws or failure to
properly handle, store, or dispose of hazardous materials could result in
restrictions on our ability to operate our business and could require us to
incur potentially significant costs for personal injuries, property damage and
environmental cleanup and remediation.





Compliance
with current and future environmental regulations may be costly, which could
impact our future earnings.




We are
subject to environmental and other regulations due to our production and
marketing of products in certain states and countries. We also face increasing
complexity in our product design and procurement operations as we adjust to new
and upcoming requirements relating to the materials composition of our products,
including the restrictions on lead and certain other substances in electronics
that apply to specified electronics products put on the market in the European
Union as of July 1, 2006 (Restriction of Hazardous Substances in Electrical
and Electronic Equipment Directive (EU RoHS)). The European Union has also
finalized the Waste Electrical and Electronic Equipment Directive (WEEE), which
makes producers of electrical goods financially responsible for specified
collection, recycling, treatment and disposal of past and future covered
products. Other countries, such as the United States, China and Japan, have
enacted or may enact laws or regulations similar to the EU RoHS or WEEE
Legislation. These and other environmental regulations may require us to
reengineer certain of our existing policies and procedures to comply with
environmental regulations.





Our
primary facilities are located near known earthquake fault zones, and the
occurrence of an earthquake or other disaster could cause damage to our
facilities and equipment, could cause us to cease or curtail our
operations.





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


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 Table of Contents


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





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




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




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




•
            a
      provision authorizing the issuance of “blank check” preferred stock that
      could be issued by our board of directors to increase the number of
      outstanding shares and thwart a takeover
  attempt;





•
            a
      provision that permits only the Board of Directors, the President or the
      Chairman to call special meetings of stockholders;
  and




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





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




ITEM 1B. UNRESOLVED STAFF COMMENTS





None.





ITEM2. PROPERTIES





Our
facilities currently consist of an aggregate of approximately 326,000 square
feet of office, research and manufacturing space in several locations in
California, New Jersey, Oregon and other states, as well as Japan, Switzerland,
France, Germany, the United Kingdom and other countries. We own the 39,000
square-foot building at 3100 Central Expressway, Santa Clara, California and
lease the remaining office spaces under lease agreements that expire from May
2008 to January 2016. We believe our existing properties, including both owned
and leased sites, are in good condition and are adequate to meet our current and
foreseeable future requirements.





ITEM 3. LEGAL PROCEEDINGS





We are
not currently a party to any material pending legal proceedings.





ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.


24
 Table of Contents


PART
II





ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES





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





HIGH
            
            
            LOW2006First
      Quarter
            
            $
            29.58
            
            
            $
            24.00Second
      Quarter
            
            $
            30.40
            
            
            $
            22.21Third
      Quarter
            
            $
            25.14
            
            
            $
            20.96Fourth
      Quarter
            
            $
            25.20
            
            
            $
            19.402007First
      Quarter
            
            $
            21.87
            
            
            $
            16.01Second
      Quarter
            
            $
            18.21
            
            
            $
            9.86Third
      Quarter
            
            $
            11.55
            
            
            $
            8.09Fourth
      Quarter
            
            $
            10.42
            
            
            $
            6.90





As of
February 29, 2008, there were approximately 118 holders of record of our common
stock.





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





Stock
Performance Graph





The
following graph compares the cumulative total stockholder return on our common
stock with the cumulative total return for each of the NASDAQ composite and the
S & P Biotechnology index for the 60 months commencing ending December 31,
2007. The stock price performance shown on the graph below is not necessarily
indicative of future price performance.




25
 Table of Contents













12/02
            
            
            
            12/03
            
            
            
            12/04
            
            
            
            12/05
            
            
            
            12/06
            
            
            
            12/07Symyx
      Technologies, Inc.
            
            
            100.00
            
            
            
            163.22
            
            
            
            238.68
            
            
            
            216.76
            
            
            
            171.49
            
            
            
            61.00NASDAQ
      Composite
            
            
            100.00
            
            
            
            149.34
            
            
            
            161.86
            
            
            
            166.64
            
            
            
            186.18
            
            
            
            205.48S&P
      Biotechnology
            
            
            100.00
            
            
            
            128.86
            
            
            
            138.66
            
            
            
            164.00
            
            
            
            159.50
            
            
            
            154.04




26
 Table of Contents


ITEM 6.  SELECTED FINANCIAL DATA





The
following selected historical information has been derived from our audited
financial statements. Expenses related to software consulting and software and
hardware maintenance have been reclassified as costs of revenue. Amortization of
acquired core/developed technologies has also been reclassified as costs of
revenue. Statements of operations data for prior periods have been reclassified
to conform to current presentation. Cost of service revenue in 2004 and 2003 was
immaterial.





The
financial information as of December 31, 2007 and 2006 and for each of the three
years in the period ended December 31, 2007 is derived from audited financial
statements included elsewhere in this Annual Report on Form 10-K. The table
should be read in conjunction with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operation," and Item 8, "Financial
Statements and Supplementary Data."




For
      the Years Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(In
      thousands, except per share data)Consolidated
      Statements of Operations Data:Revenue:Service
              
              $
              59,034
              
              
              $
              57,933
              
              
              $
              56,980
              
              
              $
              42,251
              
              
              $
              38,689Product
              
              
              34,898
              
              
              
              33,526
              
              
              
              26,663
              
              
              
              27,060
              
              
              
              14,458License
      fees, content and royalties
              
              
              31,140
              
              
              
              33,441
              
              
              
              24,494
              
              
              
              13,874
              
              
              
              9,816Total
      revenue
              
              
              125,072
              
              
              
              124,900
              
              
              
              108,137
              
              
              
              83,185
              
              
              
              62,963Costs
      of revenue:Cost
      of service
              
              
              8,995
              
              
              
              6,519
              
              
              
              3,826
              
              
              
              --
              
              
              
              --Cost
      of products
              
              
              14,281
              
              
              
              11,811
              
              
              
              11,090
              
              
              
              7,857
              
              
              
              2,937Cost
      of license fees, content and royalties
              
              
              1,773
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Amortization
      of intangible assets
              
              
              3,873
              
              
              
              2,571
              
              
              
              2,252
              
              
              
              155
              
              
              
              --Total
      costs of revenue
              
              
              28,922
              
              
              
              20,901
              
              
              
              17,168
              
              
              
              8,012
              
              
              
              2,937Gross
      profit
              
              
              96,150
              
              
              
              103,999
              
              
              
              90,969
              
              
              
              75,173
              
              
              
              60,026


Operating
      expenses:Research
      and development
              
              
              66,186
              
              
              
              59,268
              
              
              
              47,151
              
              
              
              41,142
              
              
              
              40,058Sales,
      general and administrative
              
              
              41,935
              
              
              
              34,497
              
              
              
              25,249
              
              
              
              18,007
              
              
              
              14,933Acquired
      in-process research and development
              
              
              2,500
              
              
              
              1,392
              
              
              
              1,590
              
              
              
              2,260
              
              
              
              --Amortization
      of intangible assets arising from business combinations
              
              
              2,253
              
              
              
              1,699
              
              
              
              1,263
              
              
              
              76
              
              
              
              --Total
      operating expenses
              
              
              112,874
              
              
              
              96,856
              
              
              
              75,253
              
              
              
              61,485
              
              
              
              54,991Income
      (loss) from operations
              
              
              (16,724
              )
              
              
              7,143
              
              
              
              15,716
              
              
              
              13,688
              
              
              
              5,035Gain
      from sale of equity interest in Ilypsa, Inc.
              
              
              40,826
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Interest
      and other income, net
              
              
              5,694
              
              
              
              7,709
              
              
              
              4,427
              
              
              
              2,521
              
              
              
              1,996Income
      before income tax expense and equity loss
              
              
              29,796
              
              
              
              14,852
              
              
              
              20,143
              
              
              
              16,209
              
              
              
              7,031Income
      tax expense
              
              
              (10,698
              )
              
              
              (6,382
              )
              
              
              (8,141
              )
              
              
              (3,327
              )
              
              
              (1,290
              )Equity
      in loss from investment in Visyx Technologies Inc.
              
              
              (314
              )
              
              
              (186
              )
              
              
              --
              
              
              
              --
              
              
              
              --Net
      income
              
              $
              18,784
              
              
              $
              8,284
              
              
              $
              12,002
              
              
              $
              12,882
              
              
              $
              5,741Basic
      net income per share
              
              $
              0.57
              
              
              $
              0.25
              
              
              $
              0.37
              
              
              $
              0.40
              
              
              $
              0.18Shares
      used in computing basic net income per share
              
              
              33,199
              
              
              
              33,199
              
              
              
              32,819
              
              
              
              32,067
              
              
              
              31,199Diluted
      net income per share
              
              $
              0.56
              
              
              $
              0.24
              
              
              $
              0.35
              
              
              $
              0.38
              
              
              $
              0.18Shares
      used in computing diluted net income per share
              
              
              33,557
              
              
              
              34,214
              
              
              
              34,564
              
              
              
              33,872
              
              
              
              32,470


27
 Table of Contents




December
      31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(In
      thousands)Consolidated
      Balance Sheets Data:Cash,
      cash equivalents and available-for-sale securities
            
            $
            45,472
            
            
            $
            149,995
            
            
            $
            168,625
            
            
            $
            136,541
            
            
            $
            138,698Working
      capital
            
            $
            36,078
            
            
            $
            146,180
            
            
            $
            162,237
            
            
            $
            142,361
            
            
            $
            131,154Long-term
      investments
            
            $
            13,500
            
            
            $
            13,714
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --Goodwill
      and intangible assets
            
            $
            180,515
            
            
            $
            31,657
            
            
            $
            32,065
            
            
            $
            24,397
            
            
            $
            856Total
      assets
            
            $
            314,982
            
            
            $
            260,006
            
            
            $
            241,412
            
            
            $
            207,002
            
            
            $
            177,536Total
      stockholders' equity
            
            $
            252,241
            
            
            $
            228,376
            
            
            $
            218,529
            
            
            $
            191,009
            
            
            $
            159,438




28
 Table of Contents


ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION





All
percentage amounts and ratios were calculated using the underlying data in
thousands. Operating results for the year ended December 31, 2007 are not
necessarily indicative of the results that may be expected for future fiscal
years. The following discussion and analysis should be read in conjunction with
our historical financial statements and the notes to those financial statements
that are included in Item 8 of Part II of this Annual Report on Form
10-K.





Overview





Since our
inception, we have invested heavily in developing technology, laboratory systems
and software to automate, accelerate and digitize traditional R&D and pursue
high-throughput materials research.  Our scientific team has deep technical
expertise that enables us to provide research services to our customers and to
enter into longer-term, broad technical alliances for discovery and development
of new materials.  We apply our expertise in high-throughput research
technologies to offer a growing line of Symyx Tools to enable improved R&D
execution in our customers’ laboratories. We also continue to expand Symyx
Software, offering customers integrated R&D collaboration, execution and
analysis applications.  In October 2007, we acquired MDL Information
Systems, Inc., significantly augmenting our Symyx Software offerings with access
to scientific content and industry-leading chemical informatics, logistics and
decision-support applications.





We
generate revenue and cash flows from operations from licensing Symyx Software,
subscriptions to certain scientific content and accompanying services and
support, from selling and supporting Symyx Tools, from providing research
services, and from licenses and royalties from our discovered materials, and
intellectual property.





Recent
Developments





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




·
            Completion
      of the MDL acquisition -- On October 1, 2007, we completed the acquisition
      of MDL Information Systems, Inc., a Delaware corporation, MDL Information
      Systems AG, a company organized under the laws of Switzerland, MDL
      Information Systems Japan K.K., a company organized under the laws of
      Japan, and MDL Information Systems (Sweden) AB, a company organized under
      the laws of Sweden (collectively the “MDL Group Companies” or “MDL”),
      along with certain assets of Elsevier Limited, a company organized under
      the laws of England and Wales, and MDL Information Systems (UK) Limited, a
      company organized under the laws of England and Wales. The purchase price
      was $123 million in cash, subject to certain working capital adjustments
      of approximately $5.0 million.




·
            Sale
      of equity interest in Ilypsa, Inc. (“Ilypsa”) to Amgen, Inc. (“Amgen”) –
      In July 2007, Amgen acquired Ilypsa. At the time of this transaction, we
      held an approximately 10% of equity interest in Ilypsa, which we
      transferred to Amgen for $41.2 million in cash received in August 2007 and
      up to an additional $4.1 million cash to be received in July 2008, subject
      to claims against the holdback provided for in this transaction. In the
      fourth quarter of 2007, we paid approximately $15 million in income tax,
      primarily associated with this
transaction.




·
            Execution
      of restructuring plan – As part of the MDL acquisition, on October 2,
      2007, we announced a restructuring plan to eliminate approximately 120
      positions worldwide, comprised of approximately 100 positions in the
      United States and approximately 20 positions internationally. The
      estimated total restructuring charges are $7.0 million, of which $4.8
      million had been paid out as of December 31,
  2007.


29
 Table of Contents




·
            Entering
      into a supplemental agreement with The Dow Chemical Company (“Dow”) – On
      November 29, 2007, we entered into a supplemental agreement with Dow
      amending provisions of the (i) Collaborative Research and License
      Agreement effective as of January 1, 1999 by and between the Company and
      Dow, as amended to date; and (ii) the Alliance, Technology Transfer,
      Research and License Agreement effective as of January 1, 2005 by and
      among the Company, Symyx Discovery Tools, Inc. (currently Symyx Tools,
      Inc., a wholly-owned Symyx subsidiary), and Dow, as amended to date. Under
      the supplemental agreement, Dow has agreed to pay during the period 2008
      through 2015 approximately $49 million in (i) purchases of additional
      Symyx Tools and/or research services, and (ii) minimum royalties (payable
      quarterly and creditable against actual royalties earned). Symyx agreed to
      reduce royalty rates to encourage Dow’s full use and broad
      commercialization of technology developed under these agreements. The new
      business relationship is consistent with our objectives to increase
      further the adoption of Symyx technology within Dow and to secure a more
      predictable revenue stream.




·
            Entering
      into a Research and License Agreement with ExxonMobil - In January 2008,
      we entered into a Research and License Agreement (“RLA”) effective January
      1, 2008 with ExxonMobil Research and Engineering Company (“EMRE”) and
      ExxonMobil Chemical Company (and together with EMRE, collectively,
      “ExxonMobil”). We previously entered into an Alliance, Technology Transfer
      and License Agreement effective April 1, 2003 (as amended, the “ATTLA”)
      with EMRE. The RLA supplements the ATTLA, establishing certain terms
      governing a continuing relationship between Symyx and ExxonMobil as
      certain aspects of the ATTLA conclude effective May 31,
      2008.  Significant terms of the RLA include: (i) an agreement to
      extend two research projects we are currently performing for ExxonMobil
      beyond May 31, 2008 for periods of thirteen and three months,
      respectively, (ii) mechanisms and pricing for ExxonMobil to extend other
      existing ATTLA projects and to initiate new projects, (iii) Grant of
      certain Symyx software and intellectual property licenses to ExxonMobil,
      (iv) ExxonMobil’s commitment to the first year of maintenance support for
      such software and fixed pricing for an additional three years of support,
      (v) ExxonMobil’s grant of certain intellectual property licenses to us,
      (vi) the terms of our first year of software consulting services to
      ExxonMobil and pricing for additional services, and (vii) cost-based
      formulas for additional ExxonMobil purchases of our tools and extended
      warranties for both existing and new tools. Initial commitments in the RLA
      total approximately $13.1 million in revenue incremental to the revenue
      currently committed under ATTLA, of which we expect to recognize
      approximately $4.4 million in fiscal 2008, approximately $5.3 million in
      fiscal 2009, and substantially all of the balance in fiscal years 2010 and
      2011. The RLA did not modify the royalty provisions of the
      ATTLA.




·
            Changes
      to business unit structure and management team – During 2007, we
      reorganized our company along three distinct business areas: Symyx
      Software, Symyx Tools and Symyx Research.  In connection with
      these changes, we appointed new leaders for each of these units. In
      addition, our chief executive officer Steven Goldby was appointed
      Executive Chairman, our President Isy Goldwasser was appointed chief
      executive officer, and our executive vice president, general counsel and
      secretary Rex Jackson was appointed chief financial officer. We also
      appointed a senior vice president of sales and a principal accounting
      officer. We believe these structural and management changes were important
      to our future growth initiatives.




·
            Release
      of Isentris 3.0 – In October 2007, we announced the release of Symyx
      Isentris v3.0 which offers significant enhancements over its predecessor,
      ISIS. Isentris provides opportunities to our customers to improve
      productivity through better data management, lowered cost of ownership,
      faster workflow processes and easier information access and
      reporting.





In
the year ended December 31, 2007, we generated total revenue of $125.1 million,
with an operating loss of $16.7 million, net income of $18.8 million and diluted
earnings per share of $0.56. Included in the 2007 operating and net income were
purchase accounting adjustments and other special charges arising from
acquisitions, including an approximately $2.5 million in-process research and
development charge, $6.1 million of amortization of intangible assets, and other
merger-related expenses. Net income also included the gain from the sale of our
equity interest in Ilypsa of $40.8 million.





During
2007, we had a net cash outflow from operations largely due to the fact that the
income tax payment associated with the Ilypsa transaction impacted cash from
operations, while the proceeds from the sale were recorded in cash flows from
investing activities. After receiving $41.2 million from the Ilypsa sale and
paying $125.9 million net cash to acquire MDL, we ended the year with $45.5
million in cash, cash equivalents and available-for-sale
securities.


30
 Table of Contents




Our total
headcount increased from 347 employees at the end of 2005 to 380 employees at
the end of 2006 and to 606 employees at the end of 2007, primarily as the result
of acquisitions. We anticipate our headcount will not increase significantly in
fiscal 2008.





We
recognized stock-based compensation expenses of $5.7 million and $10.3 million
during the years ended December 31, 2007 and 2006, respectively. The decrease in
stock-based compensation expenses in 2007 was primarily due to the change in our
compensation structure toward granting equity awards only to selected key
employees and due to increase in forfeiture rate assumptions based on actual
turnover rate. Stock-based compensation expenses recognized in our results of
operations for the years ended December 31, 2007 and 2006 were as follows (in
thousands):





2007
            
            
            2006Costs
      of revenue
            
            $
            294
            
            
            $
            673Research
      and development
            
            
            2,627
            
            
            
            4,006Sales,
      general and administrative
            
            
            2,796
            
            
            
            5,617Total
            
            $
            5,717
            
            
            $
            10,296





Prior to
January 1, 2006, we elected to follow APB No. 25 and related interpretations in
accounting for stock awards to employees. Accordingly, no compensation expense
was recognized in our financial statements prior to January 1, 2006 in
connection with stock-based awards granted to employees with exercise prices not
less than fair value on the grant date.





Business
Acquisitions





Acquisition
of MDL Group Companies





On
October 1, 2007, we completed the MDL acquisition. We paid $123 million in cash
and expect to receive a working capital adjustment of $5.0 million pursuant to
the MDL Sale Agreement. Of the $123 million cash paid, the parties placed $10
million in escrow pending their determination of any detriments suffered or
benefits enjoyed by MDL as a result of pre-closing intercompany transactions
between certain MDL group companies and the seller. The results of MDL’s
operations have been included in the consolidated financial statements since
that date.





In
accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, we
allocated the preliminary purchase price to the tangible assets, deferred
compensation, liabilities and intangible assets acquired, as well as in-process
research and development, based on their estimated fair values. The excess
purchase price over the fair values was recorded as goodwill. The fair value
assigned to intangible assets acquired was based on estimates and assumptions
determined by management. The acquired goodwill was assigned entirely to our
software business. Purchased intangibles with finite lives are amortized on a
straight-line basis over their respective useful lives.





The total
preliminary purchase price recorded for this acquisition was $121.8 million,
consisting of approximately $118.1 million in cash (net of estimated working
capital adjustments), and $3.7 million in transaction costs, consisting of legal
and other professional service fees. The purchase price is preliminary because
we have not yet determined the disposition of the amount in the above-referenced
escrow.





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


AmountFair
      value of net liabilities assumed
            
            $
            (5,605
            )Accrued
      restructuring costs
            
            
            (6,823
            )In-process
      research and development
            
            
            2,500Intangible
      assets
            
            
            59,000Deferred
      tax liabilities
            
            
            (22,428
            )Goodwill
            
            
            95,150Total
            
            $
            121,794


31
 Table of Contents




The
fair values of MDL’s net liabilities as of the acquisition date were (in
thousands):





AmountAccounts
      receivable, net
            
            $
            4,417Prepaids
      and other assets
            
            
            2,538Plant,
      property and equipment
            
            
            4,851Accounts
      payable and other accrued liabilities
            
            
            (2,046
            )Accrued
      compensation
            
            
            (4,961
            )Deferred
      revenue
            
            
            (10,404
            )Fair
      value of MDL’s net liabilities
            
            $
            (5,605
            )





The
allocation of the consideration for the MDL acquisition to its individual assets
and liabilities was based on management’s analysis and estimates of the fair
values of the acquired assets and liabilities. In addition to the value assigned
to in-process research and development (“IPR&D”) projects and MDL’s tangible
assets, specific intangible assets were identified and valued. The identifiable
intangible assets included customer relationships, core technology, proprietary
content and various license agreements.





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





The value
of IPR&D was determined using a cost to recreate approach. This approach
combines the costs incurred to date by the MDL development department, the
product design department and development consultants.





In
performing this preliminary purchase price allocation, we considered, among
other factors, our intention for future use of the acquired assets, analyses of
historical financial performance and estimates of future performance of MDL’s
products. The fair value of intangible assets was primarily based on the income
approach. The relief from royalty method and the “with” and “without” method
under the income approach were utilized when appropriate. The rates utilized to
discount the after-tax cash flows to their present values ranged from 8% to 13%.
These discount rates were determined after consideration of our rate of return
and the weighted average return on assets. Risks we identified and considered in
this analysis included achieving anticipated levels of market acceptance and
penetration, successful completion of development efforts, market growth rates
and risks related to the impact of potential changes in future target
markets.





Identifiable
intangible assets purchased in the MDL acquisition consisted of the following
(in thousands, except for useful life) with a weighted average useful life of
7.1 years and no significant residual value:





Amount
            
            
            Useful
      Life
              (in
      years)Customer
      relationships
            
            $
            33,600
            
            
            
            8Core
      technology
            
            
            10,500
            
            
            
            7Proprietary
      content
            
            
            7,800
            
            
            
            6Elsevier
      license agreement
            
            
            3,100
            
            
            
            3Third
      party license agreements
            
            
            1,300
            
            
            
            3Trade
      name
            
            
            1,400
            
            
            
            3Bargain
      lease
            
            
            1,300
            
            
            
            8Total
            
            $
            59,000





No
goodwill will be deductible for income tax purposes.


32
 Table of Contents




Acquisition
of Autodose SA





On July
13, 2006, we completed the acquisition of 100% of the outstanding shares of
privately-held Autodose SA (“Autodose”), a Geneva, Switzerland-based maker of
precision powder-dispensing equipment. By acquiring Autodose, we now offer
customers tools that combine Autodose’s powder-handling technology with our
existing liquid-handling robotics technology. The acquisition was accounted for
as a business combination. Autodose has since been renamed Symyx Technologies
Europe SA and we include its results of operations in our consolidated financial
statements since that date.





The
purchase price for the Autodose acquisition was $7,103,000, consisting of
approximately $6,856,000 in cash and $247,000 in transaction costs, primarily
legal and other professional service fees.





Additional
purchase price consideration of up to $6,267,000 may be payable upon the
achievement of certain revenue targets in 2008 and 2009 by our Autodose product
line. We will evaluate the possibility of achieving these targets from time to
time and record the fair value of any further consideration as an additional
cost of the acquisition. No additional consideration was recorded as of December
31, 2007.





In
accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, we
allocated the purchase price to the tangible assets, liabilities and intangible
assets acquired, as well as IPR&D, based on their estimated fair values. The
excess preliminary purchase price over the fair values was recorded as goodwill.
The fair value assigned to intangible assets acquired was based on estimates and
assumptions determined by management. The acquired goodwill was assigned
entirely to our Symyx Tools business. Purchased intangibles with finite lives
are amortized on a straight-line basis over their respective useful lives. See
Note 7 of the Notes to Consolidated Financial Statements for information
regarding the allocation of the preliminary purchase price.





Acquisition
of Synthematix, Inc.





On April
1, 2005, we completed the acquisition of 100% of the outstanding shares of
privately-held Synthematix, Inc., based in Durham, North Carolina. Synthematix
was a provider of organic synthesis reaction planning software systems for
scientific knowledge management in chemistry research, with customers primarily
in the pharmaceutical, biotechnology, and fine chemical industries. We have
included the results of Synthematix’s operations in our consolidated financial
statements since that date. On August 1, 2005, Synthematix was merged into one
of our subsidiaries, Symyx IntelliChem, Inc., whose name was subsequently
changed to Symyx Software, Inc.





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





In
accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, we
allocated the preliminary purchase price to the tangible assets, deferred
compensation, liabilities, and intangible assets acquired, as well as IPR&D,
based on their estimated fair values. The excess purchase price over the fair
values was recorded as goodwill. The fair value assigned to intangible assets
acquired was based on estimates and assumptions determined by management. The
acquired goodwill was assigned entirely to our software business. Purchased
intangibles with finite lives are amortized on a straight-line basis over their
respective useful lives. See Note 7 of Notes to Consolidated Financial
Statements for information regarding the purchase price allocation.





Critical
Accounting Policies





Our
financial statements and accompanying notes are prepared in accordance with
United States generally accepted accounting principles (“GAAP”). Note 1 of the
Notes to the Consolidated Financial Statements included under Item 8 in this
Annual Report on Form 10-K describes the significant accounting policies and
methods used in the preparation of the consolidated financial statements.
Preparing financial statements and related disclosures requires management to
exercise judgment in making estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. These estimates and
assumptions are affected by management’s application of accounting policies.
Estimates include the forfeiture rate for stock-based awards, future warranty
expenditures and product life cycles, and assumptions such as the elements
comprising a revenue arrangement, including the distinction between software
upgrades/enhancements and new products; when technological feasibility is
achieved for our products; the potential outcome of future tax consequences of
events that have been recognized in our financial statements or tax returns; and
determining when investment impairments are other-than-temporary. The following
critical accounting policies, among others, are impacted significantly by
judgments, estimates and assumptions used in the preparation of the consolidated
financial statements.


33
 Table of Contents




Source
of Revenue and Revenue Recognition Policy





We
recognize revenue in accordance with the SEC’s Staff Accounting Bulletin
No. 104 (“SAB 104”), Revenue Recognition, the
American Institute of Certified Public Accountants Statement of Position (“SOP”)
97-2, Software Revenue
Recognition, as amended by SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, Financial Accounting Standards Board
Technical Bulletin 90-1, Accounting for Separately Priced
Extended Warranty and Product Maintenance Contracts, the Emerging Issues
Task Force consensus on Issue 00-21 or EITF 00-21, Multiple-Deliverable Revenue
Arrangements, and other authoritative accounting literature. We generate
revenue from services provided under research collaborations, the sale of
products, license of software, content subscriptions, provision of support and
maintenance services, and the license of intellectual property. It is possible
for our customers to work with us in multiple areas of our business and
contracts may include multiple elements of service revenue, product revenue, and
license and royalty revenue. In determining the basis for non-software product
revenue recognition, we first determine the fair value of any extended warranty
services and defer this revenue to be recognized over the service period. For
those contracts that involve multiple element deliverables, we identify all
deliverables and allocate revenue among the units of accounting in accordance
with EITF 00-21. In an arrangement that includes software that is more than
incidental to the products or services as a whole, we recognize revenue from the
software and software-related elements, as well as any non-software
deliverable(s) for which a software deliverable is essential to its
functionality, in accordance with SOP 97-2.





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





Service
Revenue





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





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





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





For those
arrangements that require significant production, modification, or customization
of the software, such services are considered essential to software
functionality. Accordingly, revenue from the entire arrangement (i.e., software
license, database subscriptions, post contract customer support (“PCS”) and
professional services) is deferred until final delivery and acceptance of the
product and the revenue is recognized ratably over the remaining initial PCS
period or upon final delivery and acceptance when the initial PCS period has
already ended.


34
 Table of Contents




For many
customers, we have developed custom registration and other tools that are
typically delivered on a time and materials basis. These custom development
projects are generally not sold in connection with a new software license deal,
but rather to customers that have been using our software products for an
extended period of time. Revenue from these arrangements is usually recognized
on a monthly basis as the services are delivered and
invoiced.





Product
Sales





We
recognize revenue from the sale of Symyx Tools hardware and the license of
associated software, and all related costs of products sold are expensed, once
delivery has occurred and customer acceptance has been achieved. A determination
is made for each system delivered as to whether software is incidental to the
system as a whole. Revenue from the sale of the Symyx Tools is earned and
recognized when persuasive evidence of an arrangement exists, delivery of the
product has occurred, no significant obligations with regard to implementation
remain, the fee is fixed or determinable, and collectibility is reasonably
assured. If there are extended payment terms, we recognize product revenue as
these payments become due. We consider all arrangements with payment terms
extending beyond 12 months not to be fixed or determinable. If the fee is not
fixed or determinable, revenue is recognized as payments become due from the
customer. In multiple element arrangements, we use the residual method to
allocate revenue to delivered elements once we have established fair value for
all undelivered elements. A warranty expense accrual is established at the time
of delivery.





Software
License and Database Content Fees





For
database content and software licensed on an annual right to use basis, revenue
is recognized on a straight-line basis over the term of the license. For revenue
allocable to the software portion of a multiple element arrangement or licensed
on a perpetual basis, we recognize revenue upon delivery of the software product
to the end-user and commencement of the license, unless we have ongoing
obligations for which fair value cannot be established or the fee is not fixed
or determinable or collectibility is not probable, in which case we recognize
revenue only when each of these criteria have been met. By way of example, for
the ELN software products and the software products that we acquired from MDL,
we have not yet established the fair value of certain ongoing obligations and
accordingly, any perpetual license fees are recognized ratably over the period
of the ongoing obligations (typically a bundled support and maintenance
commitment of one year). We consider all arrangements with payment terms longer
than 12 months not to be fixed or determinable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the customer. If
evidence of the fair value of one or more undelivered elements does not exist,
the total revenue is deferred and recognized when delivery of those elements
occurs or when fair value for any remaining undelivered elements can be
established.





Intellectual
Property License Fees and Royalties





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





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





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


35
 Table of Contents




Stock-Based
Compensation





Prior to
January 1, 2006, we elected to follow APB No. 25 and related interpretations in
accounting for stock awards to employees. Accordingly, no compensation expense
was recognized in our financial statements prior to January 1, 2006 in
connection with stock-based awards granted to employees with exercise prices not
less than fair value on the grant date. Deferred compensation for options
assumed in connection with business combinations was determined as the
difference between the exercise price and the 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 transition method. Under that transition method, stock-based
compensation expense recognized during the years after January 1, 2006 includes:
(a)  ESPP awards with offering periods commencing, and stock options
granted or assumed, prior to, but not yet vested as of December 31, 2005, based
on the grant-date fair value estimated in accordance with the original
provisions of Statement of Financial Accounting Standard No. 123 (“SFAS 123”);
(b) ESPP awards with offering periods commencing subsequent to December 31, 2005
in accordance with the provisions of SFAS 123R; and (c) restricted stock units,
restricted stock and stock options awarded subsequent to December 31, 2005 based
on the grant-date fair value estimated in accordance with the provisions of SFAS
123R. Under the modified prospective transition method, results for prior
periods are not restated. See Notes 1 and 4 of the Notes to Consolidated
Financial Statements for further details.





Warranty
Expense Accrual





A
warranty expense accrual is established at the time of customer acceptance of a
Symyx Tools system and is included as a cost of product sold. Management is
required to exercise judgment in establishing the appropriate level of warranty
expense accrual for each Symyx Tools system delivered and establishes the
accrual based, in part, on reference to actual warranty costs incurred on
similar systems. The actual results with regard to warranty expenditures could
have a material impact on our financial statements. When actual warranty costs
are anticipated to be higher than our original estimates, an additional expense
is charged to cost of products sold in the period in which such a determination
is made. When actual warranty costs are lower than our original estimates, the
difference will have a favorable impact to cost of products sold at the time the
warranty expires for the systems. In 2007, 2006 and 2005, we recorded favorable
adjustments of approximately $128,000, $200,000 and $416,000,
respectively.





Research
and Development Costs





We
account for research and 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, or Otherwise Marketed(“SFAS 86”). SFAS 86 specifies that costs incurred internally in creating
a computer software product should be charged to expense when incurred as
research and development until technological feasibility has been established
for the product. Once technological feasibility is established, all software
costs should be capitalized until the product is available for general release
to customers. Judgment is required in determining when the technological
feasibility of a product is established. We have determined that technological
feasibility for our software products is reached shortly before the products are
released to market. Costs incurred after technological feasibility is
established have not been material, and accordingly, we have expensed our
software development costs when incurred.





Inventories





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


36
 Table of Contents




Intangible
Assets





We
amortize intangible assets, with the exception of goodwill which is not subject
to amortization, over their estimated economic lives. Determining the estimated
economic life of intangible assets requires judgment on the part of management
and can have a material effect on the result of operations. For example, if we
determined that the estimated economic lives of these assets were one year less
than those reported in Note 11 of the Notes to Consolidated Financial
Statements, the 2006 amortization expense of intangibles would have been
increased by $1.4 million. We conduct impairment reviews of intangible assets
annually or when circumstances indicate the potential impairment of intangible
assets. We also review the amortization periods for intangible assets when
circumstances indicate there may be a change in economic lives of intangible
assets.





Valuation
of Goodwill and Purchased Intangible Assets





We
evaluate the recoverability of goodwill and other intangible assets periodically
and take into account events or circumstances that warrant revised estimates of
useful lives or that indicate that impairment exists. No impairments of goodwill
or other intangible assets have been identified during any of the periods
presented.





Accounting
for Income Taxes





Income
taxes have been provided using the liability method. A deferred tax asset or
liability is determined based on the difference between the financial statement
and tax basis of assets and liabilities as measured by the enacted tax rates
that will be in effect when these differences reverse. We also recognize the
impact of an uncertain income tax position on the income tax return at the
largest amount that is more-likely-than-not to be sustained upon audit by the
relevant taxing authority accordingly to Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109. An uncertain income
tax position will not be recognized if it has less than a 50% likelihood of
being sustained.








RESULTS
OF OPERATIONS





Revenue


2007
            
            
            2006
            
            
            2005Amount
      (in 000’s)
            
            
            Change
      over Previous Year
            
            
            Amount
      (in 000’s)
            
            
            Change
      over Previous Year
            
            
            Amount
      (in 000’s)Service
            
            $
            59,034
            
            
            
            2
            %
            
            $
            57,933
            
            
            
            2
            %
            
            $
            56,980Product
            
            
            34,898
            
            
            
            4
            %
            
            
            33,526
            
            
            
            26
            %
            
            
            26,663License
      fees, content and royalties
            
            
            31,140
            
            
            
            (7
            %)
            
            
            33,441
            
            
            
            37
            %
            
            
            24,494Total
      revenue
            
            $
            125,072
            
            
            
            *
            %
            
            $
            124,900
            
            
            
            16
            %
            
            $
            108,137


*Less
than 1%





Our total
revenue in 2007 was $172,000 above revenue in 2006, as increases in software
consulting and maintenance revenue and product revenue offset a decline in
research service revenue and license fees and royalties. Our total revenue
increased 16% from 2005 to 2006, primarily due to the expansion of revenue under
our alliances with ExxonMobil and Dow, particularly as a result of the increased
sale of Tools, as well as an increase in software license fees and royalties
from new and existing customers.




37
 Table of Contents


Revenue
is attributed to the following geographic locations based on the physical
location of Symyx’ customers (as a percentage of total revenue in the respective
periods):





2007
            
            
            2006
            
            
            2005United
      States
            
            
            88
            %
            
            
            89
            %
            
            
            83
            %North
      America (excluding United States)
            
            
            *
            %
            
            
            *
            %
            
            
            *
            %Asia
            
            
            3
            %
            
            
            3
            %
            
            
            2
            %Europe
            
            
            9
            %
            
            
            8
            %
            
            
            15
            %Total
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %


*Less
than 1%





The following table lists our major
customers for the years ended December 31, 2007, 2006 and 2005 and revenue
generated from these customers as a percentage of our total revenue in the
respective periods. We expect that a significant portion of our total revenue
will continue to be generated from a few key customers, though with the MDL
acquisition we have distributed revenue across a larger base of
customers.





2007
            
            
            2006
            
            
            2005ExxonMobil
            
            
            29
            %
            
            
            41
            %
            
            
            39
            %Dow
            
            
            28
            %
            
            
            23
            %
            
            
            25
            %Total
            
            
            57
            %
            
            
            64
            %
            
            
            64
            %





We
segregate revenue by the following businesses:





2007
            
            
            2006
            
            
            2005Amount
      (in 000’s)
            
            
            Change
      over Previous Year
            
            
            Amount
      (in 000’s)
            
            
            Change
      over Previous Year
            
            
            Amount
      (in 000’s)Symyx
      Research
            
            $
            47,867
            
            
            
            (8
            %)
            
            $
            52,218
            
            
            
            (3
            %)
            
            $
            53,818Symyx
      Tools
            
            
            39,474
            
            
            
            4
            %
            
            
            37,847
            
            
            
            23
            %
            
            
            30,829Symyx
      Software
            
            
            31,893
            
            
            
            25
            %
            
            
            25,495
            
            
            
            66
            %
            
            
            15,315Materials
      and IP Licensing
            
            
            5,838
            
            
            
            3
            %
            
            
            5,650
            
            
            
            7
            %
            
            
            5,268Symyx
      Sensors
            
            
            --
            
            
            
            (100
            %)
            
            
            3,690
            
            
            
            27
            %
            
            
            2,907Total
            
            $
            125,072
            
            
            
            *
            %
            
            $
            124,900
            
            
            
            16
            %
            
            $
            108,137





The
reconciliation of segment revenue above to the revenue disclosed in the
consolidated income statements is provided in Note 6 “Segment Disclosure” of
Notes to Consolidated Financial Statements.





Symyx
Research Revenue





The Symyx
Research group generates revenue primarily from the providing collaborative and
direct research services to our customers.





The
decrease in Symyx Research Revenue in 2007 was primarily due to the expiration
of a number of collaborations.  In 2006, revenue from Symyx Research
decreased due to the expiration of our collaboration with British Petroleum,
partially offset by a new collaboration we started with 3D Systems.





ExxonMobil
and Dow continued to be our biggest customers, together contributing $40.2
million revenue in 2007 to Symyx Research. In November 2007, we entered into a
supplemental agreement with Dow, and in January 2008, we entered into a Research
and License Agreement with ExxonMobil. Both agreements provided additional
commitments and guidelines for future business relationships between Symyx and
the respective customers. We believe ExxonMobil and Dow will continue to be the
major contributors to our Symyx Research revenue in the near term, but expect
Symyx Research revenue to decrease significantly in 2008 as our main alliance
agreement with ExxonMobil expires mid-year.


38
 Table of Contents




Symyx
Tools Revenue





Symyx
Tools generates revenue primarily from the sale of Symyx Tools and associated
services.





Symyx
Tools revenue increased to $39.5 million in 2007 from $37.8 million in 2006 and
$30.8 million in 2005. For the year ended December 31, 2007, Symyx Tools revenue
included $34.9 million of product sales, $4.5 million of services and $29,000 of
license revenue. For the year ended December 31, 2006, Symyx Tools revenue
included $33.5 million of product sales, $4.3 million of 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 million of service
revenue, and $70,000 of license revenue. The increase in Symyx Tools revenue was
primarily due to increased shipments of Symyx Tools partially offset by lower
average selling price. During the years ended December 31, 2007, 2006 and 2005,
we shipped 41, 26 and 20 tools, respectively, including our CORE(x) modules
and  benchtop products, to chemical, life science, academic
institutions, and several other customers.





Included
in 2007 shipments were 8 tools for ExxonMobil and Dow as contracted according to
their respective alliance agreements. We also benefited from our strategy
adopted in 2005 to provide modular systems to a broader customer base that we
expect will contribute to Symyx Tools’ future results.





Symyx
Software Revenue





Symyx
Software generates revenue primarily from the licensing of software, including
Isentris, Laboratory Execution and Analysis (“LEA”) and Electronic Laboratory
Notebook (“ELN”) software, licensing of content, and providing associated
support, maintenance and consulting services.





Symyx
Software revenue increased from $15.3 million in 2005 to $25.5 million in 2006
and $31.9 million in 2007. The increase in Symyx Software revenue in 2007 was
primarily due to the MDL acquisition and an increase in software consulting
revenue, partially offset by lower software licensing revenue from certain large
pharmaceutical companies. The increase in Symyx Software revenue in 2006 was due
primarily to increased revenue from software licenses and services provided
particularly to large life science companies where our ELN software has been
adopted. We expect Symyx Software revenue will grow the fastest in 2008 as we
expand our customer base through the MDL acquisition.





Materials
Licensing and IP Revenue





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





Materials
and IP Licensing revenue has not changed materially in the past three years. We
currently have seven materials commercialized by Celanese, Dow, JSR Corporation
and Agfa-Gevaert N.V. We have additional materials eligible for customer
commercialization, but cannot reliably predict if or when these materials will
be commercialized, or the revenue impact to us in the event of commercial
successes.





Symyx
Sensors Revenue





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





Costs
of Revenue





With the
MDL acquisition, we have significantly increased our software consulting and
maintenance revenue and the costs associated with these revenue streams.
Starting 2007 we reclassified certain operating expenses related to software
consulting and software and hardware maintenance as cost of service revenue. We
also reclassified certain operating expenses to costs of revenue related to
amortization expenses of intangible assets arising from business combinations
that were related to software licensed or product sold. Costs associated with
providing collaborative research services are included with research and
development expenses.


39
 Table of Contents


Cost of
products sold in 2007 was $14.3 million or 41% of product sales revenue,
compared to $11.8 million, or 35% of product sales revenue in 2006, and $11.1
million, or 42% of product sales revenue in 2005. The increase in the total cost
of products sold in 2007 and 2006 was due to the change in product mix and the
increase of products sold. Cost of products sold as a percentage of product
sales revenue in 2006 was lower compared to other years due to the change in the
product mix shipped in the respective years, and the development costs related
to prototypes sold being expensed in prior periods as development costs, as
discussed below.





The
majority of Symyx Tools are built to order or to particular specifications. We
generally charge the development costs incurred prior to the commercial
production of these systems to research and development expenses, resulting in a
lower cost of products sold and a higher margin for these systems. Therefore,
the cost of products sold as a percentage of product sales may fluctuate
significantly from period to period due to variability of product
mix.





The cost
of products sold may also be affected by adjustments to the warranty expense
accrual for pre-existing sales. When actual warranty costs are lower than our
estimates, the difference will have a favorable impact to cost of products sold
at the time the warranty expires for the systems. When actual warranty costs are
anticipated to be higher than our original estimates, an additional expense is
charged to cost of products sold in the period when such a determination is
made.





Operating
Expenses





2007
            
            
            2006
            
            
            2005Amount
      (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 RevenueResearch
      and
      development
            
            $
            66,186
            
            
            
            53
            %
            
            
            12
            %
            
            $
            59,268
            
            
            
            47
            %
            
            
            26
            %
            
            $
            47,151
            
            
            
            44
            %Sales,
      general and administrative
            
            
            41,935
            
            
            
            33
            %
            
            
            22
            %
            
            
            34,497
            
            
            
            28
            %
            
            
            37
            %
            
            
            25,249
            
            
            
            23
            %Acquired
      in-process research and development
            
            
            2,500
            
            
            
            2
            %
            
            
            80
            %
            
            
            1,392
            
            
            
            1
            %
            
            
            (12
            %)
            
            
            1,590
            
            
            
            1
            %Amortization
      of intangible assets arising from business combinations
            
            
            2,253
            
            
            
            2
            %
            
            
            33
            %
            
            
            1,699
            
            
            
            1
            %
            
            
            35
            %
            
            
            1,263
            
            
            
            1
            %Total
      operating
      expenses
            
            $
            112,874
            
            
            
            90
            %
            
            
            17
            %
            
            $
            96,856
            
            
            
            77
            %
            
            
            29
            %
            
            $
            75,253
            
            
            
            69
            %





*      Less
than 1%





Research
and Development (“R&D”) Expenses





Our
R&D expenses consist primarily of salaries and other personnel-related
expenses, facility costs, supplies and depreciation of facilities and laboratory
equipment.





The table
below indicates the major collaborative partners, defined as those contributing
greater than 10% of collaborative research revenue in 2007, for whom we
conducted research and development, together with the date upon which the
current contract ends and the primary focus of the collaborations.


40
 Table of Contents




Partner
            
            Current Research Contract
    Ends
            
            Primary focus of current collaborative
      effortsDow
            
            12/31/2009
            
            Polyolefin
      catalysts for certain commodity chemicalsExxonMobil
            
            5/31/2008
            
            Catalysts
      for certain commodity chemicals including
  olefins





We do not
track our fully burdened R&D costs or capital expenditures by project.
However, based on hours spent on each project, we estimate the R&D efforts
were allocated as follows:




2007
              
              
              2006
              
              
              2005Projects
      funded by collaboration partners
              
              
              55
              %
              
              
              61
              %
              
              
              70
              %Projects
      funded internally:Software
      development
              
              
              31
              %
              
              
              29
              %
              
              
              23
              %Research
              
              
              7
              %
              
              
              8
              %
              
              
              6
              %Tools
      development
              
              
              7
              %
              
              
              2
              %
              
              
              1
              %Total
              
              
              100
              %
              
              
              100
              %
              
              
              100
              %


We expect
the percentage of our R&D efforts funded by collaborative partners to
continue to decline in 2008 as our main collaborative agreement with ExxonMobil
expires mid-year. We also expect our investments in software and tools
development and internal research to increase on a percentage basis in the
near-term as MDL’s expenses are reflected for the full year in fiscal 2008 and
we continue to invest in new tools solutions and new internal research
projects.





The
increase of R&D expenses in 2007 resulted primarily from approximately $4.5
million in additional salary-related expenses and consulting fees for MDL Group
Companies. The increase of R&D expenses in 2006 was driven primarily by the
increases in salary-related expenses due to the hiring of additional scientific
and technical staff to work on R&D projects for ExxonMobil and Dow and
increased headcount to develop our software platform.





R&D
expenses as a percentage of total revenue increased in 2007 compared to 2006
primarily due to the increase in personnel-related expense without a
compensating revenue increase. This increase in R&D expenses as a percentage
of total revenue was partially attributable to the requirement to write down the
MDL deferred revenue at acquisition to the fair value of costs to perform the
obligation. R&D expenses as a percentage of total revenue increased in 2006
compared to 2005 primarily due to the recognition of stock-based compensation
expense. As we strive to grow our Symyx Software, Symyx Tools and Symyx Research
businesses, we expect to continue to devote substantial resources to R&D,
and thus that our R&D expenses will continue to increase in absolute
dollars.





Sales,
General and Administrative (“SG&A”) Expenses





Our
SG&A expenses consist primarily of personnel costs for sales, business
development, legal, general management, finance and human resources, including
stock-based compensation expenses totaling $2.8 million and $5.6 million,
respectively, in 2007 and 2006, as well as payments of commissions to our sales
agents and professional expenses, such as legal and accounting. The increase in
SG&A expenses in 2007 was due to the MDL acquisition and to the increased
personnel costs associated with our expanded sales and marketing organizations
and the reorganization of our management team. The increase in sales, general
and administrative expenses in 2006 compared to 2005 was primarily due to the
recognition of stock-based compensation and an increase in personnel costs. We
have increased our SG&A expenses generally to invest in sales and marketing
initiatives necessary to achieve growth across our businesses and to address the
financial, legal, compliance and other complexities of operating multiple
business lines. However, we believe our infrastructure can now support near to
mid-term growth opportunities without comparable further increases in these
expenses.





SG&A
expenses represented 33%, 28% and 23% of total revenue for years ended December
31, 2007, 2006 and 2005, respectively. The increase in SG&A expenses as a
percentage of total revenue from 2006 to 2007 was primarily due to the fact that
we could not recognize certain acquisition-related MDL deferred revenue under
U.S. generally accepted accounting principles to compensate for the increase in
personnel costs. The increase in SG&A expenses as a percentage of total
revenue from 2005 to 2006 was primarily due to the recognition of stock-based
compensation expense in 2006. Going forward, we expect SG&A expenses as a
percentage of total revenue will decrease as we believe our revenue will grow
faster than SG&A expenses.


41
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Acquired
In-Process Research and Development





In
October 2007, we acquired MDL in a transaction accounted for as a business
combination using the purchase method. The preliminary purchase price was
allocated to the assets acquired, including intangible assets, based on their
estimated fair values. The intangible assets include approximately $2.5 million
for acquired in-process technology for projects that did not have future
alternative uses. The value of the purchased in-process technology was
determined using the income approach. At the date of the MDL acquisition, the
development of these projects had not yet reached technological feasibility, and
the technology in process had no alternative future uses. Accordingly, these
costs were expensed at the acquisition date in 2007.





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





In April
2005, we acquired Synthematix in a transaction accounted for as a business
combination. The purchase price was allocated to the assets acquired, including
intangible assets, based on their estimated fair values. The intangible assets
include approximately $1.6 million for acquired in-process technology for
projects that did not have future alternative uses. The value of the purchased
in-process technology was determined using the income approach. At the date of
the Synthematix acquisition, the development of these projects had not yet
reached technological feasibility, and the technology in process had no
alternative future uses. Accordingly, these costs were expensed at the
acquisition date in 2005.





Amortization
of Intangible Assets Arising from Business Acquisitions





In
connection with acquisitions, we recorded an aggregate of $78.8 million of
intangible assets (See Note 11 of the Notes to Consolidated Financial
Statements). These intangible assets are being amortized on a straight-line
basis over the estimated useful lives of the assets.  For the years
ended December 31, 2007, 2006 and 2005, we recorded $6.1 million, $4.3 million
and $3.5 million, respectively, of amortization of intangible assets expense
related to these acquisitions. The total amortization of intangible assets in
each of these years was recorded partially as costs of revenue and partially as
operating expenses depending on the nature of these intangible assets. Because
we only included $2.3 million of amortization of intangible assets from the MDL
acquisition in the fourth quarter of 2007, we expect 2008 amortization of
intangible assets from business acquisitions will increase to approximately $13
million.





Interest
and Other Income, Net





Interest
and other income, net, for the years ended December 31, 2007, 2006 and 2005
consisted primarily of interest income of approximately $5.7 million, $7.7
million and $4.3 million, respectively. Interest income represents interest
income earned on our cash, cash equivalents and available-for-sale securities.
Interest income decreased in 2007 from 2006 due to the impact of decreasing
average interest rates and a decrease in our average investment balance after
the MDL acquisition. Interest income increased in 2006 and 2005 due to the
impact of rising average interest rates and a higher average investment balance
in 2006. Interest and other income in 2006 included a settlement received in
relation to a legal proceeding.





Gain
from Sale of Equity Interest in Ilypsa





We
recorded a $40.8 million gain from the sale of our equity interest in Ilypsa in
2007. We expect to receive up to another $4.1 million in cash in the third
quarter of fiscal 2008, subject to claims against the holdback provided for in
this transaction. We expect to record the additional cash payment, net of any
related costs, as other income when we receive the payment.


42
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Provision
for Income Taxes





We
recorded an income tax expense of $10.7 million in 2007, $6.4 million in 2006
and $8.1 million in 2005. Our effective income tax rate was 36.3% for 2007,
43.5% for 2006 and 40.4% for 2005. The effective income tax rate was lower than
our statutory combined federal and state rate of 40% in 2007 due to income tax
benefits from research and development credits and tax-exempt interest income.
The effective income tax rate for 2006 is higher than our statutory rate
principally due to the non-deductibility of both the in-process research and
development charge from the Autodose acquisition and certain stock-based
compensation expenses.





As of
December 31, 2007, we had net deferred tax liabilities of approximately $9.3
million. In the MDL acquisition, we recorded approximately $22.4 million of
deferred tax liabilities associated with intangible assets and deferred revenue
revaluation, which was partially offset by our deferred tax assets primarily
related to state research and development credits, the temporary difference
between book and tax depreciation expenses and stock-based compensation. As of
December 31, 2007, we had federal net operating loss carryforwards of
approximately $107,000 and foreign net operating loss carryforwards of
approximately $407,000. The net operating losses from the acquisitions of
Synthematix may be subject to an annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization. The net operating loss
carryforwards will start to expire in 2010, if not utilized. The net operating
losses from our operation in Switzerland will expire in 2014, if not
utilized.





As of
December 31, 2007, we had California research and development tax credits of
approximately $1.0 million. The state research and development credits have no
expiration date.





On
January 1, 2007, we adopted Financial Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109. As a result, we
recognized a $1.0 million increase in liability for unrecognized tax benefits.
As of December 31, 2007, our total unrecognized tax benefits were $5.0 million,
of which $3.5 million of tax benefits, if recognized, would affect the effective
income tax rate and the balance of $1.5 million, if recognized, would result in
adjustments to other tax accounts, primarily additional paid-in capital and
deferred income taxes. We do not anticipate the total amounts of unrecognized
income tax benefits will significantly increase or decrease in the next 12
months.





Equity
in Loss from Investment in Visyx Technologies Inc.





In
November 2006, we invested $400,000 in cash and licensed certain sensor
technology in exchange for approximately 38% of the outstanding shares of Visyx
Technologies Inc. In July 2007, we provided Visyx a $100,000 loan in exchange
for a convertible promissory note on the same terms and conditions as the other
principal investor. During the years ended December 31, 2007 and 2006,
we reported $314,000 and $186,000 of equity losses, respectively, including
the write-off of the $100,000 loan (which was subsequently converted to shares
of preferred stock), based on our share of the loss reported by Visyx, in
accordance with the equity method of accounting. In November 2007, Visyx sold
all its assets to MeasurementSpecialities, Inc. As of December 31, 2007, we
carried this investment at $0 value. We do not expect to incur significant
additional loans to or costs related to our interest in Visyx. We will share in
future distributions, if any, subject to certain preferred stock liquidation
preferences.





Recent
Accounting Pronouncements





Fair
Value Measures





In
September 2006, the FASB issued Statement No. 157 ("SFAS 157"),
Fair Value
Measurements.  SFAS 157 provides guidance for using fair
value to measure assets and liabilities. It also responds to investors' requests
for expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings.  SFAS 157 applies
whenever other standards require (or permit) assets or liabilities to be measured at fair
value, and does not expand the use of fair value in any new
circumstances.  SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and is required
to be adopted by us in the first quarter of fiscal 2008.  We are
currently evaluating the effect that the adoption of SFAS 157 will have on
our consolidated results of operations and financial condition.


43
 Table of Contents




In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115. SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. It is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Early adoption is
permitted as of the first interim period of earlier fiscal years, provided the
entity also elects to early adopt SFAS 157. We are currently evaluating the
effect that the adoption of SFAS 159 will have on our consolidated results of
operations and financial condition.





In June
2007, the FASB ratified EITF Issue No. 07-3, “Accounting for Nonrefundable
Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities” (EITF 07-3). EITF 07-3 requires non-refundable
advance payments for goods and services to be used in future research and
development (R&D) activities to be recorded as assets and the payments to be
expensed when the R&D activities are performed. EITF 07-3 applies
prospectively for new contractual arrangements entered into beginning in the
first quarter of fiscal year 2008. Prior to adoption, we recognized these
non-refundable advance payments as an expense upon payment. The adoption of
EITF 07-3 is not expected to have a significant impact on our consolidated
financial statements.





In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business Combinations(“SFAS
141(R)”). Under SFAS
No. 141(R), an entity is required to recognize the assets acquired,
liabilities assumed, contractual contingencies, and contingent consideration at
their fair value on the acquisition date. It further requires that:
acquisition-related costs be recognized separately from the acquisition and
expensed as incurred, restructuring costs generally be expensed in periods
subsequent to the acquisition date, and changes in accounting for deferred tax
asset valuation allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. In addition, acquired in-process
research and development (IPR&D) is capitalized as an intangible asset and
amortized over its estimated useful life. The adoption of SFAS No. 141(R)
will change our accounting treatment for business combinations on a prospective
basis beginning in the first quarter of fiscal year 2009. We are currently
assessing SFAS No. 141R and have not yet determined the impact that the
adoption will have on our financial position and results of
operations.





In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), Noncontrolling interests in
Consolidated Financial Statements, an amendment of ARB No. 51.SFAS 160
is based on the economic entity concept of consolidated financial statements,
under which all residual economic interest holders in an entity have an equity
interest in the consolidated entity, even if the residual interest is relative
to only a portion of the entity. SFAS 160 requires that a noncontrolling
interest in a consolidated subsidiary be displayed in the consolidated statement
of financial position as a separate component of equity because the FASB
concluded that noncontrolling interests meet the definition of equity of the
consolidated entity. SFAS 160 is effective for the first annual reporting period
on or after December 15, 2008, and earlier adoption is prohibited. We are
currently evaluating the effect that the adoption of SFAS 160 will have on our
consolidated results of operations and financial condition.





Liquidity
and Capital Resources





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





Balance
Sheet and Cash Flows





We had
negative cash flow from operating activities and positive cash flows from
investing and financing activities for the year ended December 31, 2007. We
ended fiscal year 2007 with cash, cash equivalents and available-for-sale
securities of approximately $45.5 million.This
compared to cash, cash equivalents and available-for-sale securities of
approximately $150.0 million at December 31, 2006. During 2007, we used a net of
$125.9 million to acquire MDL, $20.9 million for income taxes and approximately
$4.6 million for restructuring charges, while receiving $41.2 million from the
sale of our equity interest in Ilypsa.


44
 Table of Contents




Our
operating activities used $14.7 million of cash in 2007 and provided $29.9
million and $42.6 million of cash in 2006 and 2005, respectively. The sources of
cash for the three years were primarily the receipt of funding from research
partners, payments from product sales and licensing fees. In 2007 we paid
approximately $20.9 million in income taxes, of which the majority was related
to the gain from the Ilypsa transaction. Because this tax payment was recorded
against operating cash flow while the original sales proceeds were recorded as
investing cash flow, our cash flow from operating activities was negative for
2007. We currently expect that our operating cash flow for 2008 will be
approximately neutral, and that our operating cash flow will fluctuate
significantly on a quarterly basis, reflecting the seasonality of our
businesses. Depending on the timing of tools deliveries and customer payments,
we may experience negative cash flows from operating activities in certain
periods.As a result of adopting SFAS 123R, $163,000 and $2.7 million of excess
tax benefits for the years ended December 31, 2007 and 2006, respectively, have
been classified as an operating cash outflow and a financing cash
inflow.





Net cash
from investing activities was $15.4 million in 2007. Net cash used in investing
activities was $53.0 million and $2.7 million, respectively, in 2006 and 2005.
Included in the cash used in investing activities were net cash payments for MDL
acquisition of $125.9 million. Included in the 2006 cash used in investing
activities were $13.9 million for long-term investments in Intermolecular and
Visyx and a net of $4.2 million for the acquisition of Autodose. Included in the
2005 cash used in investing activities was the $12.8 million net cash paid for
the acquisition of Synthematix. During 2006 and 2005, the majority of proceeds
from the maturities of available-for-sale securities was re-invested in
available-for-sale securities. The other fluctuations from period to period were
due primarily to the timing of purchases, sales, and maturity of our
available-for-sale securities. Cash used in purchases of property, plant and
equipment was $7.7 million, $19.6 million and $6.5 million, respectively, in
2007, 2006 and 2005. The increase of cash used in purchases of property, plant
and equipment in 2006 was primarily associated with the build-out of an
additional leased facility. We believe that we have built out sufficient
facilities spaces for our current business needs, but believe we may incur
additional one-time charges in facilities consolidation and reconfiguration in
the near-term to address the ongoing evolution of our businesses.





Financing
activities provided $745,000 and $11.3 million of cash in 2007 and 2005,
respectively, and used $11.4 million of cash in 2006. The cash inflows were
primarily the proceeds from the exercise of stock options and sale of stock
under the Employee Share Purchase Plan in each of the three years and for 2006,
excess tax benefits from stock-based compensation. Cash outflows from financing
activities in 2007 included approximately $2.0 million payment of employee
withholding tax in lieu of issuing common stock upon the vest of restricted
stock units. Cash outflows in 2006 consisted of $30.0 million of cash used to
repurchase our common stock.





Our
accounts receivable balance at December 31, 2007 increased significantly
compared to December 31, 2006 due to the acquisition of MDL. Current liabilities
increased by approximately $19.6 million at December 31, 2007 as compared to
December 31, 2006 due to the expansion of our operations in 2007, especially
after the MDL acquisition.





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





Principal
Commitments





Our
principal commitments consist of our obligations under operating leases, our
commitments to purchase inventory and fixed assets, and our commitments and
services for royalty payments. As of December 31, 2007 and 2006, our principal
commitments were $37.6 million and $16.6 million, respectively. The increase in
our principal commitments was due partially to lease commitments associated with
the MDL acquisition and partially associated with the January 2007 lease
extension for one of our facilities in Sunnyvale, California, until November
2015. We expect to satisfy these obligations as they become due over the next
eight years.


45
 Table of Contents




Future
principal commitments as of December 31, 2007 were as follows (in
thousands):





Total
            
            
            Less
      than 1 Year
            
            
            1-3
      Years
            
            
            3-5
      Years
            
            
            More
      Than 5 YearsFacility
      Commitments
            
            $
            32,423
            
            
            $
            5,202
            
            
            $
            8,031
            
            
            $
            7,822
            
            
            $
            11,368Purchase
      Commitments
            
            
            2,074
            
            
            
            1,929
            
            
            
            145
            
            
            
            --
            
            
            
            --Royalty
      Commitments
            
            
            2,501
            
            
            
            2,419
            
            
            
            59
            
            
            
            23
            
            
            
            --Collaboration
      Commitments
            
            
            643
            
            
            
            643
            
            
            
            --
            
            
            
            --
            
            
            
            --Total
            
            $
            37,641
            
            
            $
            10,193
            
            
            $
            8,235
            
            
            $
            7,845
            
            
            $
            11,368





Other
Commitments





As of
December 31, 2007, we carried a $4.0 million accrued liability associated with
uncertainties in income taxes. We are unable to make reasonably reliable
estimates of the periods of any cash settlement with the respective tax
authorities but have recorded the liability as a current liability on our
Condensed Consolidated Balance Sheet.





Customer
Indemnification





From time
to time, we agree to indemnify our customers against certain third party
liabilities, including liability if our products infringe third-party
intellectual property rights. Such indemnification provisions are accounted for
in accordance with FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The indemnification is typically limited to no
more than the amount paid by the customer. As of December 31, 2007, we were not
subject to any pending intellectual property-related litigation.





Contingencies





As
discussed in the Note 7 of Notes to Consolidated Financial Statements,
additional purchase price consideration of up to $6,267,000 may be payable upon
the achievement of certain 2008 and 2009 revenue targets by our Autodose product
line. We will evaluate the possibility of achieving these targets from time to
time and record the fair value of any additional consideration as an additional
cost of the acquisition. No additional consideration was recorded as of December
31, 2007.





Insurance





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





Off-Balance
Sheet Arrangements





We have
not entered into any off-balance sheet financing arrangements and have not
established any special purpose entities as of December 31, 2007. We have not
guaranteed any debt or commitments of other entities or entered into any options
on non-financial assets.


46
 Table of Contents




Dividend
Policy





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








ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK





Our
exposure to market risk is principally confined to our cash equivalents and
available-for-sale investments which have maturities of less than two years. We
maintain a non-trading investment portfolio of investment grade, liquid debt
securities that limit the amount of credit exposure to any one issue, issuer or
type of instrument. At December 31, 2007 our investment portfolio was comprised
of approximately $22.5 million in money market funds and $8.4 million in U.S.
corporate debt instruments. The securities in our investment portfolio are not
leveraged, are classified as available-for-sale and are subject to interest rate
risk. We currently do not hedge interest rate exposure. If market interest rates
were to increase by 100 basis points, or 1%, from December 31, 2007 levels, the
impact on the fair value of our portfolio would be insignificant. The modeling
technique used measures the change in fair values arising from an immediate
hypothetical shift in market interest rates and assumes ending fair values
include principal plus accrued interest.





Interest
Rate Sensitivity:


Principal
Amount by Expected Maturity (in thousands)


Average
Interest Rate


Mature
      in
              2008
            
            
            Fair
      Value
              As
      of December 31, 2007Available-for-sale
      securities
            
            $
            8,341
            
            
            $
            8,395Average
      interest
      rate
            
            
            5.43
            %




47
 Table of Contents





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA





Index
to Consolidated Financial StatementsPage




Index
      to Consolidated Financial Statements
              PageReport
      of Independent Registered Public Accounting Firm
              49Consolidated
      Balance Sheets at December 31, 2007 and 2006
              50Consolidated
      Income Statements for the Years Ended December 31, 2007, 2006 and
      2005
              51Consolidated
      Statements of Stockholders' Equity for the Years Ended December 31, 2007,
      2006 and 2005
              52Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
      2005
              53Notes
      to Consolidated Financial Statements
              55




48
 Table of Contents




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





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




We have
audited the accompanying consolidated balance sheets of Symyx Technologies, Inc.
as of December 31, 2007 and 2006, and the related consolidated statements of
income, stockholders’ equity and cash flows for each of the three years in the
period ended December 31, 2007. These financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.





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





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





As
discussed in Note 1 and Note 10  to the consolidated financial statements,
Symyx Technologies, Inc. changed its method of accounting for stock-based
compensation as of January 1, 2006 and changed its method of accounting for
uncertain income tax positions as of January 1, 2007.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Symyx Technologies, Inc.’s internal control
over financial reporting as of December 31, 2007, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 17, 2008
expressed an unqualified opinion thereon.








/s/ ERNST
& YOUNG LLP








San Jose,
California


March 17,
2008




49
 Table of Contents


SYMYX
TECHNOLOGIES, INC.


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share and per share information)




December
      31,2007
              
              
              2006ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              37,077
              
              
              $
              36,120Available-for-sale
      securities
              
              
              8,395
              
              
              
              113,875Accounts
      receivable, net
              
              
              23,047
              
              
              
              16,602Inventories
              
              
              4,077
              
              
              
              2,680Deferred
      tax assets, current
              
              
              2,984
              
              
              
              5,565Receivable
      from the seller of an acquired business
              
              
              4,954
              
              
              
              --Interest
      receivable and other current assets
              
              
              5,994
              
              
              
              2,177Total
      current assets
              
              
              86,528
              
              
              
              177,019Property,
      plant and equipment, net
              
              
              32,969
              
              
              
              31,222Goodwill
              
              
              114,110
              
              
              
              18,046Intangible
      assets, net
              
              
              66,405
              
              
              
              13,611Long-term
      investments
              
              
              13,500
              
              
              
              13,714Deferred
      tax and other assets
              
              
              1,470
              
              
              
              6,394Total
      assets
              
              $
              314,982
              
              
              $
              260,006LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              2,124
              
              
              $
              3,252Other
      accrued liabilities
              
              
              9,735
              
              
              
              6,301Accrued
      compensation and employee benefits
              
              
              11,364
              
              
              
              6,307Accrued
      royalty
              
              
              3,692
              
              
              
              --Income
      taxes payable
              
              
              2,756
              
              
              
              7,418Accrued
      restructuring costs
              
              
              2,275
              
              
              
              --Deferred
      payment to stockholders of acquired business
              
              
              --
              
              
              
              1,024Deferred
      rent
              
              
              871
              
              
              
              732Deferred
      revenue
              
              
              15,905
              
              
              
              4,853Warranty
      expense accrual
              
              
              1,728
              
              
              
              952Total
      current liabilities
              
              
              50,450
              
              
              
              30,839Noncurrent
      deferred tax liabilities
              
              
              12,291
              
              
              
              791Commitments
      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 33,589,426 and
      32,975,216 shares issued and outstanding at December 31, 2007 and 2006,
      respectively
              
              
              34
              
              
              
              33Additional
      paid-in capital
              
              
              203,237
              
              
              
              197,823Accumulated
      other comprehensive gain (loss)
              
              
              601
              
              
              
              (4
              )Retained
      earnings
              
              
              48,369
              
              
              
              30,524Total
      stockholders' equity
              
              
              252,241
              
              
              
              228,376Total
      liabilities and stockholders’ equity
              
              $
              314,982
              
              
              $
              260,006




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


50
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


CONSOLIDATED
INCOME STATEMENTS


(In
thousands, except per share amounts)





2007
            
            
            2006
            
            
            2005Revenue:Service
            
            $
            59,034
            
            
            $
            57,933
            
            
            $
            56,980Product
            
            
            34,898
            
            
            
            33,526
            
            
            
            26,663License
      fees, content and royalties
            
            
            31,140
            
            
            
            33,441
            
            
            
            24,494Total
      revenue
            
            
            125,072
            
            
            
            124,900
            
            
            
            108,137Costs:Cost
      of service
            
            
            8,995
            
            
            
            6,519
            
            
            
            3,826Cost
      of products
            
            
            14,281
            
            
            
            11,811
            
            
            
            11,090Cost
      of license fees, content and royalties
            
            
            1,773
            
            
            
            --
            
            
            
            --Amortization
      of intangible assets
            
            
            3,873
            
            
            
            2,571
            
            
            
            2,252Total
      costs
            
            
            28,922
            
            
            
            20,901
            
            
            
            17,168Gross
      profit
            
            
            96,150
            
            
            
            103,999
            
            
            
            90,969Operating
      expenses:Research
      and development
            
            
            66,186
            
            
            
            59,268
            
            
            
            47,151Sales,
      general and administrative
            
            
            41,935
            
            
            
            34,497
            
            
            
            25,249Acquired
      in-process research and development
            
            
            2,500
            
            
            
            1,392
            
            
            
            1,590Amortization
      of intangible assets arising from
    business combinations
            
            
            2,253
            
            
            
            1,699
            
            
            
            1,263Total
      operating expenses
            
            
            112,874
            
            
            
            96,856
            
            
            
            75,253Income
      (loss) from operations
            
            
            (16,724
            )
            
            
            7,143
            
            
            
            15,716Gain
      from sale of equity interest in Ilypsa, Inc.
            
            
            40,826
            
            
            
            --
            
            
            
            --Interest
      and other income, net
            
            
            5,694
            
            
            
            7,709
            
            
            
            4,427Income
      before income tax expense and equity loss
            
            
            29,796
            
            
            
            14,852
            
            
            
            20,143Income
      tax expense
            
            
            (10,698
            )
            
            
            (6,382
            )
            
            
            (8,141
            )Equity
      in loss from investment in Visyx Technologies Inc.
            
            
            (314
            )
            
            
            (186
            )
            
            
            --Net
      income
            
            $
            18,784
            
            
            $
            8,284
            
            
            $
            12,002Basic
      net income per share
            
            $
            0.57
            
            
            $
            0.25
            
            
            $
            0.37Diluted
      net income per share
            
            $
            0.56
            
            
            $
            0.24
            
            
            $
            0.35Shares
      used in computing basic net income per share
            
            
            33,199
            
            
            
            33,199
            
            
            
            32,819Shares
      used in computing diluted net income per share
            
            
            33,557
            
            
            
            34,214
            
            
            
            34,564




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




51
 Table of Contents


SYMYX
TECHNOLOGIES, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


(In
thousands)






Preferred
      Stock
              
              
              Common
      StockShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Additional
      Paid-In Capital
              
              
              Deferred
      Stock Compensation
              
              
              Accumulated
      Other Comprehensive Loss
              
              
              Retained
      Earnings
              
              
              Total
      Stockholders’ EquityBalance
      at January 1, 2005
              
              
              --
              
              
              $
              --
              
              
              
              32,485
              
              
              $
              32
              
              
              $
              181,846
              
              
              $
              (618
              )
              
              $
              (489
              )
              
              $
              10,238
              
              
              $
              191,009Issuance
      of common stock on exercise of options
              
              
              --
              
              
              
              --
              
              
              
              632
              
              
              
              1
              
              
              
              9,728
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              9,729Issuance
      of common stock under employee share purchase plan
              
              
              --
              
              
              
              --
              
              
              
              77
              
              
              
              --
              
              
              
              1,566
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,566Issuance
      of options in connection with acquisition
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              571
              
              
              
              (216
              )
              
              
              --
              
              
              
              --
              
              
              
              355Amortization
      of deferred stock compensation, net of reversals
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              343
              
              
              
              --
              
              
              
              --
              
              
              
              343Reversal
      of deferred stock compensation related to terminated
    employees
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (230
              )
              
              
              230
              
              
              
              --
              
              
              
              --
              
              
              
              --Tax
      benefit from employee stock option plans
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              3,334
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              3,334Comprehensive
      income:Net
      income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              12,002
              
              
              
              12,002Unrealized
      (loss) on foreign currency translation
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (29
              )
              
              
              --
              
              
              
              (29
              )Unrealized
      gain on available-for-sale securities
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              220
              
              
              
              --
              
              
              
              220Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,193Balance
      at December 31, 2005
              
              
              --
              
              
              
              --
              
              
              
              33,194
              
              
              
              33
              
              
              
              196,815
              
              
              
              (261
              )
              
              
              (298
              )
              
              
              22,240
              
              
              
              218,529Issuance
      of common stock on exercise of options
              
              
              --
              
              
              
              --
              
              
              
              940
              
              
              
              1
              
              
              
              14,030
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              14,031Issuance
      of common stock under employee share purchase plan
              
              
              --
              
              
              
              --
              
              
              
              90
              
              
              
              --
              
              
              
              1,877
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,877Repurchase
      of common stock
              
              
              --
              
              
              
              --
              
              
              
              (1,249
              )
              
              
              (1
              )
              
              
              (29,999
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (30,000
              )Stock-based
      compensation
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              10,055
              
              
              
              261
              
              
              
              --
              
              
              
              --
              
              
              
              10,316Tax
      benefit from employee stock option plans
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              5,045
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              5,045Comprehensive
      income:Net
      income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              8,284
              
              
              
              8,284Unrealized
      gain on foreign currency translation
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              13
              
              
              
              --
              
              
              
              13Unrealized
      gain on available-for-sale securities, net of income taxes of
      $16
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              281
              
              
              
              --
              
              
              
              281Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,578Balance
      at December 31, 2006
              
              
              --
              
              
              
              --
              
              
              
              32,975
              
              
              
              33
              
              
              
              197,823
              
              
              
              --
              
              
              
              (4
              )
              
              
              30,524
              
              
              
              228,376Issuance
      of common stock on exercise of options
              
              
              --
              
              
              
              --
              
              
              
              96
              
              
              
              --
              
              
              
              629
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              629Issuance
      of common stock under employee share purchase plan
              
              
              --
              
              
              
              --
              
              
              
              219
              
              
              
              1
              
              
              
              1,908
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,909Issuance
      of common stock for vested restricted stock units, net
              
              
              --
              
              
              
              --
              
              
              
              208
              
              
              
              --
              
              
              
              (1,956
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (1,956
              )Issuance
      of restricted common stock
              
              
              --
              
              
              
              --
              
              
              
              91
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Stock-based
      compensation
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              5,702
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              5,702Tax
      benefit (deficiency) from employee stock option plans
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (812
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (812
              )Cumulative
      effect of adopting FIN 48
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (57
              )
              
              
              --
              
              
              
              --
              
              
              
              (939
              )
              
              
              (996
              )Comprehensive
      income:Net
      income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              18,784
              
              
              
              18,784Unrealized
      gain on foreign currency translation
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              628
              
              
              
              --
              
              
              
              628Unrealized
      loss on available-for-sale securities
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (23
              )
              
              
              --
              
              
              
              (23
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              19,389Balance
      at December 31, 2007
              
              
              --
              
              
              $
              --
              
              
              
              33,589
              
              
              $
              34
              
              
              $
              203,237
              
              
              $
              --
              
              
              $
              601
              
              
              $
              48,369
              
              
              $
              252,241




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


52
 Table of Contents


SYMYX
TECHNOLOGIES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)




2007
            
            
            2006
            
            
            2005Operating
      activitiesNet
      income
            
            $
            18,784
            
            
            $
            8,284
            
            
            $
            12,002Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
            
            
            7,603
            
            
            
            10,135
            
            
            
            10,508Amortization
      of intangible assets arising from business combinations
            
            
            6,126
            
            
            
            4,270
            
            
            
            3,515Acquired
      in-process research and development
            
            
            2,500
            
            
            
            1,392
            
            
            
            1,590Stock-based
      compensation
            
            
            5,702
            
            
            
            10,296
            
            
            
            343Equity
      in loss from investment in Visyx Technologies
      Inc.
            
            
            314
            
            
            
            186
            
            
            
            --Gain
      from sale of equity interest in Ilypsa, Inc.
            
            
            (40,826
            )
            
            
            --
            
            
            
            --Gain
      on sale of property, plant and equipment
            
            
            --
            
            
            
            (7
            )
            
            
            (11
            )Deferred
      income taxes
            
            
            (3,534
            )
            
            
            (5,694
            )
            
            
            55Excess
      tax benefits from stock-based compensation
            
            
            (163
            )
            
            
            (2,667
            )
            
            
            --Tax
      benefit (deficiency) from employee stock transactions
            
            
            (812
            )
            
            
            5,045
            
            
            
            3,334Changes
      in operating assets and liabilities, excluding effects of business
      acquisitions:Accounts
      receivable
            
            
            (2,028
            )
            
            
            (6,417
            )
            
            
            1,645Inventories
            
            
            (1,397
            )
            
            
            (831
            )
            
            
            1,738Interest
      receivable and other current assets
            
            
            (2,043
            )
            
            
            908
            
            
            
            1,390Other
      long-term assets
            
            
            607
            
            
            
            (1,176
            )
            
            
            257Accounts
      payable
            
            
            (1,791
            )
            
            
            979
            
            
            
            874Other
      accrued liabilities
            
            
            1,076
            
            
            
            965
            
            
            
            866Accrued
      compensation and employee benefits
            
            
            97
            
            
            
            13
            
            
            
            2,031Accrued
      royalties
            
            
            3,692
            
            
            
            --
            
            
            
            --Income
      taxes payable
            
            
            (5,658
            )
            
            
            3,430
            
            
            
            1,810Accrued
      restructuring charges
            
            
            (4,548
            )
            
            
            --
            
            
            
            --Deferred
      rent
            
            
            139
            
            
            
            (27
            )
            
            
            12Deferred
      revenue
            
            
            648
            
            
            
            570
            
            
            
            618Warranty
      expense accrual
            
            
            776
            
            
            
            266
            
            
            
            (8
            )Net
      cash provided by (used in) operating activities
            
            
            (14,736
            )
            
            
            29,920
            
            
            
            42,569Investing
      activitiesPurchase
      of property, plant and equipment, net
            
            
            (7,712
            )
            
            
            (19,649
            )
            
            
            (6,527
            )Purchase
      of available-for-sale securities
            
            
            (101,932
            )
            
            
            (144,018
            )
            
            
            (119,840
            )Proceeds
      from maturities of available-for-sale securities
            
            
            202,900
            
            
            
            128,832
            
            
            
            136,440Proceeds
      from sales of available-for-sale securities
            
            
            7,986
            
            
            
            --
            
            
            
            --Proceeds
      from sale of equity interest in Ilypsa, Inc.
            
            
            41,238
            
            
            
            --
            
            
            
            --Long-term
      investments
            
            
            (100
            )
            
            
            (13,900
            )
            
            
            --Acquisition
      of businesses, net of cash acquired
            
            
            (125,910
            )
            
            
            (4,216
            )
            
            
            (12,760
            )Release
      of payment to shareholders of an acquired business
            
            
            (1,024
            )
            
            
            --
            
            
            
            --Net
      cash provided by (used in) investing activities
            
            
            15,446
            
            
            
            (52,951
            )
            
            
            (2,687
            )Financing
      activitiesProceeds
      from issuance of common stock
            
            
            2,538
            
            
            
            15,908
            
            
            
            11,295Repurchase
      of common stock
            
            
            --
            
            
            
            (30,000
            )
            
            
            --Payment
      of employee withholding tax in lieu of issuing common stock upon vesting
      of restricted stock units
            
            
            (1,956
            )
            
            
            --
            
            
            
            --Excess
      tax benefits from stock-based compensation
            
            
            163
            
            
            
            2,667
            
            
            
            --Net
      cash provided by (used in) financing activities
            
            
            745
            
            
            
            (11,425
            )
            
            
            11,295Effect
      of foreign exchange rate changes on cash and cash
    equivalents
            
            
            (498
            )
            
            
            (31
            )
            
            
            (29
            )Net
      increase (decrease) in cash and cash
      equivalents
            
            
            957
            
            
            
            (34,487
            )
            
            
            51,148Cash
      and cash equivalents at beginning of yea
            
            
            36,120
            
            
            
            70,607
            
            
            
            19,459Cash
      and cash equivalents at end of
      yea
            
            $
            37,077
            
            
            $
            36,120
            
            
            $
            70,607


53
 Table of Contents





Supplemental
      disclosure of cash flow informationIncome
      taxes paid, net
            
            $
            20,940
            
            
            $
            3,562
            
            
            $
            2,087Supplemental
      disclosure of non-cash investing and financing activitiesNet
      working capital adjustments receivable from the seller of an acquired
      business
            
            $
            (4,954
            )
            
            $
            --
            
            
            $
            --Payable
      related to transaction costs for a business acquisition
            
            $
            562
            
            
            $
            --
            
            
            $
            --Employee
      stock options assumed in connection with acquisitions
            
            $
            --
            
            
            $
            --
            
            
            $
            571Payable
      to stockholders of an acquired business
            
            $
            --
            
            
            $
            1,024
            
            
            $
            --




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


54
 Table of Contents




SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Summary
of Significant Accounting Policies





Business
and Basis of Presentation





Symyx
Technologies, Inc. (the “Company” or “Symyx”) is a scientific research and
development (“R&D”) integration partner to leading companies in the life
science, chemicals, energy, consumer products and electronics industries. Symyx
performs research for customers using proprietary technologies to discover new
and innovative materials, sells automated high-throughput instrumentation,
licenses software for use in customers’ own laboratories, and licenses
discovered materials and intellectual property.





Principles
of consolidation





These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries (collectively, “Symyx”). Symyx accounts for equity
investments in companies over which the Company has the ability to exercise
significant influence, but does not hold a controlling interest, under the
equity method, and the Company records its proportionate share of income or
losses as other income (loss) in the consolidated income statements. The Company
has eliminated all significant intercompany accounts and
transactions.





On
October 1, 2007, the Company acquired MDL Information Systems, Inc., a
Delaware corporation, MDL Information Systems AG, a company organized under the
laws of Switzerland, MDL Information Systems Japan K.K., a company organized
under the laws of Japan, and MDL Information Systems (Sweden) AB, a company
organized under the laws of Sweden (collectively the “MDL Group Companies” or
“MDL”), along with certain assets of Elsevier Limited, a company organized under
the laws of England and Wales, and MDL Information Systems (UK) Limited, a
company organized under the laws of England and Wales. This acquisition was
accounted for as a business combination using the purchase method. The results
of operations of MDL have been included in the Company’s consolidated financial
statements since the acquisition date. All significant intercompany balances and
transactions have been eliminated on consolidation.





Reclassifications





Certain
reclassifications have been made to prior period amounts to conform to the
current period presentations. Expenses related to software consulting and
software and hardware maintenance have been reclassified as costs of revenue
from operating expenses. Amortization of acquired core/developed technologies
has also been reclassified as costs of revenue from operating
expenses.





Use
of Estimates





Preparing
financial statements in accordance with United States generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the Company’s consolidated financial statements
and accompanying notes. Estimates include the forfeiture rate for stock-based
awards, future warranty expenditures and product life cycles, and assumptions
such as the elements comprising a revenue arrangement, including management’s
judgment on determining whether certain circumstances would be indicators of
goodwill impairment; when technological feasibility is achieved for the
Company’s products; the potential outcome of future tax consequences of events
that have been recognized in the Company’s financial statements or tax returns;
and determining when investment impairments are other-than-temporary. Actual
results and outcomes may differ from management’s estimates and assumptions. For
example, the actual results with regard to warranty expenditures could have a
material unfavorable impact on the Company if system failures or the cost to
repair a system is greater than what the Company has used in estimating the
warranty expense accrual.


55
 Table of Contents


SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Cash
and Cash Equivalents





The
Company considers all highly liquid investments with maturities of three months
or less on the date of purchase to be cash equivalents. Cash equivalents are
carried at fair value.





Investments





Management
determines the appropriate classification of debt and equity securities at the
time of purchase and reevaluates such determination as of each balance sheet
date.





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





The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. The cost of securities sold is based on the specific identification
method. Interest and dividends are included in interest income.





The
Company invests its excess cash primarily in deposits with banks and short-term
and medium-term marketable securities. These investments primarily include
corporate notes, money market funds, U.S. municipal debt securities, and U.S.
treasury notes. By policy, the Company restricts its investments to long-term
bank obligations rated "A" or higher and short-term obligations rated "P1" or
higher by Moody's or "A1" or higher by Standard & Poor's ("S&P"), and
corporate obligations, including intermediate term notes rated "A" or higher,
and commercial paper rated "P1" or higher by Moody's, or "A1" or higher by
S&P. By policy, the Company restricts its investments to instruments with
maturities of less than twenty-four months.





Cash,
cash equivalents and available-for-sale securities as of December 31, 2007 were
as follows (in thousands):





Adjusted
              Cost
            
            
            Gross
      Unrealized
              Gain
            
            
            Gross
      Unrealized
              Loss
            
            
            Fair
              ValueCash
      and cash
      equivalents
            
            $
            37,077
            
            
            $
            --
            
            
            $
            --
            
            
            $
            37,077U.S.
      corporate debt securities
            
            
            8,394
            
            
            
            1
            
            
            
            --
            
            
            
            8,395Total
            
            $
            45,471
            
            
            $
            1
            
            
            $
            --
            
            
            $
            45,472








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





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





(1)
            The
      Company’s investments in U.S. municipal debt securities were all Variable
      Rate Demand Notes. These securities did not have a specific maturity date.
      However, they could be redeemed at any time, provided that the issuer was
      provided notice one week in advance of such redemption. The Company held
      these securities as available-for-sale and accordingly recorded these
      securities as current assets.


56
 Table of Contents
  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Above
amounts are included in the following line items on the Consolidated Balance
Sheets (in thousands):





December
      31,2007
            
            
            2006Cash
      and cash equivalents
            
            $
            37,077
            
            
            $
            36,120Available-for-sale
      securities
            
            
            8,395
            
            
            
            113,875Total
            
            $
            45,472
            
            
            $
            149,995





The
Company had no realized gains or losses for the years ended December 31,
2006 and 2005. Realized losses on the sale of available-for-sale securities for
the year ended December 31, 2007 were immaterial. Unrealized gains and losses
for the years ended December 31, 2007, 2006 and 2005 are included in this Note 1
of Notes to the Consolidated Financial Statements under “Comprehensive Income
(Loss).”





The fair
value of the Company’s investment in debt securities, by contractual maturity,
are all due within one year. There were no unrealized losses as of December 31,
2007 and 2006.





The
Company determines the accounting method used to account for investments in
equity securities in which it does not have a controlling interest primarily
based on the Company’s ownership of the investee and whether the Company has the
ability to exercise significant influence over the strategic, operating,
investing, and financing activities of the investee. Accordingly, the Company
accounts for its August 2006 investment in Intermolecular, Inc. using the cost
method of accounting while it accounts for its November 2006 investment in Visyx
Technologies Inc. (“Visyx”) using the equity method of accounting. At December
31, 2007, the carrying value of Intermolecular was $13,500,000. The Company
determines that it is not practical to estimate the fair value of the
investments and believes that there are no identified events or changes in
circumstances that may have a significant adverse effect on the fair value of
the investment. At December 31, 2007, the carrying value of Visyx was
$0.





The
Company did not receive any dividends from Visyx in the years ended December 31,
2007 and 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 life of three to five years for financial
reporting purposes and by accelerated methods for income tax purposes.
Depreciation of buildings is computed on the straight-line method using a life
of thirty years for financial reporting purposes. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of the
assets for financial reporting purposes. Property, plant and equipment consist
of the following (in thousands):





December
      31,2007
            
            
            2006Machinery
      and equipment
            
            $
            37,882
            
            
            $
            31,226Computers
      and software
            
            
            7,528
            
            
            
            5,812Land
      and building
            
            
            3,551
            
            
            
            3,551Leasehold
      improvements
            
            
            36,859
            
            
            
            34,626Construction
      in progress
            
            
            696
            
            
            
            2,385Furniture
      and fixtures
            
            
            3,036
            
            
            
            2,002Property,
      plant and equipment, gross
            
            
            89,552
            
            
            
            79,602Less
      accumulated depreciation and amortization
            
            
            (56,583
            )
            
            
            (48,380
            )Property,
      plant and equipment, net
            
            $
            32,969
            
            
            $
            31,222





At
December 31, 2007, all property, plant and equipment were pledged as collateral
under its bank credit facility as detailed in Note 5 of the Notes to
Consolidated Financial Statements. However, the Company had no borrowings as of
December 31, 2007 under this bank credit facility. Amortization of leasehold
improvements is included in depreciation expense. Depreciation expense was
$10,818,000, $10,217,000 and $7,532,000 in 2007, 2006, and 2005,
respectively.


57
 Table of Contents
  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Goodwill





The
Company’s goodwill at December 31, 2007 and 2006 is reported under two reporting
units as follows (in thousands):




December
      31, 2007
            
            
            December
      31, 2006Symyx
      Software
            
            $
            113,699
            
            
            $
            17,672Symyx
      Tools
            
            
            411
            
            
            
            374Total
            
            $
            114,110
            
            
            $
            18,046





Goodwill
increased in 2007 due principally to the MDL acquisition as discussed in Note 7
of the Notes to Consolidated Financial Statements. Goodwill is tested for
impairment using a fair-value-based approach on at least an annual basis, or
more frequently if indicators of potential impairment exist. Based on the
results of its annual impairment tests conducted during 2007 and 2006, the
Company determined that no impairment of goodwill existed. However, future
goodwill impairment tests could result in a charge to earnings. The Company will
continue to evaluate goodwill at least on an annual basis and whenever events
and changes in circumstances indicate that there may be a potential
impairment.





Intangible
Assets





Intangible
assets, with the exception of goodwill which is not subject to amortization, are
amortized using the straight-line method over their estimated period of benefit,
ranging from one to eight years. The Company evaluates the recoverability of
intangible assets periodically and takes into account events or circumstances
that warrant revised estimates of useful lives or that indicate that impairment
exists. All of the Company’s intangible assets are subject to amortization. No
impairments of intangible assets have been identified during any of the periods
presented.





Long-Lived
Assets





The
Company routinely evaluates the carrying value of its long-lived
assets.  The Company accounts for the impairment and disposal of
long-lived assets utilizing Statement of Financial Accounting Standards
No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (“SFAS 144”).
SFAS 144 requires that long-lived assets, such as property, plant and
equipment, and purchased intangible assets subject to amortization, be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The recoverability of an
asset is measured by a comparison of the carrying amount of an asset to its
estimated undiscounted future cash flows expected to be generated. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and would no longer be
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet. To date, no impairment charges have been
recognized.





Revenue
Recognition





The
Company recognizes revenue in accordance with the Securities and Exchange
Commission’s Staff Accounting Bulletin No. 104 (“SAB 104”), Revenue Recognition, the
American Institute of Certified Public Accountants Statement of Position (“SOP”)
97-2, Software Revenue
Recognition, as amended by SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, Financial Accounting Standards Board
Technical Bulletin 90-1, Accounting for Separately Priced
Extended Warranty and Product Maintenance Contracts, the Emerging Issues
Task Force consensus on Issue 00-21, Multiple-Deliverable Revenue
Arrangements (“EITF 00-21”), and other authoritative accounting
literature. The Company generates revenue from services provided under research
collaborations, the sale of products, the license of software, the provision of
support and maintenance and other services, and the license of intellectual
property. It is possible for the Company’s customers to work with it in multiple
areas of its business and contracts may include multiple elements such as
service revenue, product revenue, license revenue, and royalty revenue. In
determining the basis for non-software product revenue recognition, the Company
first determines the fair value of any extended warranty services and defers
this revenue to be recognized ratably over the warranty service period. For
those non-software product sales contracts that involve multiple element
deliverables, the Company identifies all deliverables, determines the units of
accounting and allocates revenue among the units of accounting in accordance
with EITF 00-21. In a multiple-element arrangement that includes software that
is more than incidental to the products or services as a whole, the Company
recognizes revenue from the software and software-related elements, as well as
any non-software deliverable(s) for which a software deliverable is essential to
its functionality, in accordance with SOP 97-2.





58
 Table of Contents




SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Service
Revenue





The
Company recognizes service revenue from research service agreements, software
consulting, and support and maintenance agreements based upon the performance
requirements of the agreements. Payments received prior to performance are
deferred and recognized as revenue when earned over future performance periods.
Research agreements specify minimum levels of research effort required to be
performed by the Company. Payments received under research agreements are not
refundable if the research effort is not successful. Direct costs associated
with research services are included in research and development expense.
Software consulting agreements specify the number of days of consulting services
to be provided by the Company. Support and maintenance agreements specify the
term of the product maintenance and the nature of the services to be provided by
the Company during the term.





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





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





For those
arrangements that require significant production, modification, or customization
of the software, such services are considered essential to software
functionality, accordingly revenue from the entire arrangement (i.e., software
license, database subscriptions, post contract customer support (PCS) and
professional services) is deferred until final delivery and acceptance of the
product and the revenue is recognized ratably over the remaining initial PCS
period or upon final delivery and acceptance when the initial PCS period has
already ended.





For many
customers, the Company has developed custom registration and other tools that
are typically delivered on a time and materials basis. These custom development
projects are generally not sold in connection with a new software license deal,
but rather to customers that have been using the Company's software products for
an extended period of time. Revenue from these arrangements is non refundable
and is usually recognized on a monthly basis as the services are delivered and
invoiced.





Extended
product maintenance contracts, which typically provide both extended warranty
coverage and product maintenance services, are separately priced from the
product, and are recognized as revenue ratably over the term of the coverage.
The Company’s software licenses may provide for technical support, bug fixes,
and rights to unspecified upgrades on a when-and-if-available basis for periods
defined within the product maintenance contract. Revenue related to this
post-contract customer support is deferred and recognized over the term of the
contracted support.


59
 Table of Contents
  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Product
Sales





Product
sales revenue includes sales of Symyx Tools hardware and the license of
associated software. The Company's Symyx Tools are typically delivered under
multiple-element arrangements, which include hardware, software and intellectual
property licenses, and maintenance. A determination is made for each system
delivered as to whether software is incidental to the system as a whole. If
software is not incidental to the Symyx Tools system as a whole, revenue from
these arrangements is recognized in accordance with SOP 97-2, as amended. If
software is incidental to the Symyx Tools system, revenue from the sale of the
Symyx Tools system is earned and recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed or
determinable, and collectability is reasonably assured. This is generally upon
shipment, transfer of title to and acceptance by the customer of the hardware
and associated licenses to software and intellectual property, unless there are
extended payment terms. The Company considers all arrangements with payment
terms extending beyond twelve months not to be fixed or determinable. If the fee
is not fixed or determinable, revenue is recognized as payments become due from
the customer. In multiple element arrangements, the Company uses the residual
method to allocate revenue to delivered elements once it has established fair
value for all undelivered elements. Payments received in advance under these
arrangements are recorded as deferred revenue until earned.





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





Software
License and Database Content Fees





Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectability is probable. The
Company enters into certain arrangements where it is obligated to deliver
multiple products and/or services (multiple elements). In these transactions,
the Company allocates the total revenue among the elements based on the sales
price of each element when sold separately (vendor-specific objective
evidence).





If the
fair value of all elements has not been determined, the amount of revenue
allocated to undelivered elements is based on the vendor-specific objective
evidence of fair value for those elements using the residual method. Under the
residual method, the total fair value of the undelivered elements, as indicated
by vendor-specific objective evidence, is recorded as deferred revenue, and the
difference between the total arrangement fee and the amount for the undelivered
elements is recognized as revenue related to delivered elements. If evidence of
the fair value of one or more undelivered elements does not exist, the total
revenue is deferred and recognized when delivery of those elements occurs or
when fair value for any remaining undelivered elements can be
established.





For
software and database content licensed on an annual right to use basis, revenue
is recognized ratably over the term of the license. Revenue from multi-year
licensing arrangements are deferred at the time of billing and recognized as
revenue ratably over the coverage period. Certain multi-year software licensing
arrangements include rights to receive future versions of software products on a
when-and-if-available basis. For software licensed on a perpetual basis, where
the Company has not established vendor specific objective evidence of the fair
value of the software licenses and maintenance and support (primarily the
support for the Electronic Lab Notebook software products and certain support
for the products that we acquired from MDL), the perpetual license fee is
recognized ratably over the contractual period of the bundled support and
maintenance arrangements.





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


60
 Table of Contents
  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Intellectual
Property License Fees and Royalties





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





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





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





Concentration
of Revenue





During
the years ended December 31, 2007, 2006 and 2005, the following customers
contributed more than 10% of the Company’s total revenue for the year (in
thousands):





Years
      Ended December 31,2007
            
            
            2006
            
            
            2005ExxonMobil
            
            $
            36,489
            
            
            $
            51,318
            
            
            $
            42,254Dow
            
            
            35,301
            
            
            
            29,302
            
            
            
            26,765Total
            
            $
            71,790
            
            
            $
            80,620
            
            
            $
            69,019





The
revenue from the above customers has been included in the following reportable
segments for the years ended December 31, 2007, 2006 and 2005 (in
thousands):


Years
      Ended December 31,2007
            
            
            2006
            
            
            2005Symyx
      Research
            
            $
            40,216
            
            
            $
            40,852
            
            
            $
            38,696Symyx
      Tools
            
            
            17,855
            
            
            
            25,283
            
            
            
            16,982Symyx
      Software
            
            
            9,343
            
            
            
            9,948
            
            
            
            9,251Materials
      and IP Licensing
            
            
            4,376
            
            
            
            4,537
            
            
            
            4,090Total
            
            $
            71,790
            
            
            $
            80,620
            
            
            $
            69,019





The
revenue from the above customers has been included in the consolidated income
statements as follows (in thousands):





Years
      Ended December 31,2007
            
            
            2006
            
            
            2005Service
      revenue
            
            $
            35,939
            
            
            $
            36,854
            
            
            $
            33,835Product
      sales
            
            
            16,472
            
            
            
            24,232
            
            
            
            16,060License
      fees, content revenue and royalties
            
            
            19,379
            
            
            
            19,534
            
            
            
            19,124Total
            
            $
            71,790
            
            
            $
            80,620
            
            
            $
            69,019





Inventory





Work-in-process
inventory consists of purchased parts and fabricated sub-assemblies for Symyx
Tools in the process of being built. Finished goods inventory consists of
customized systems that have been finished but are pending shipment to
customers. Inventories are carried at the lower of cost or market, with cost
determined on a specific identification basis, except for inventory acquired
from Autodose that was recorded at a fair value in accordance with purchase
accounting rules. The Company’s inventory balances at December 31, 2007 and
December 31, 2006 were as follows (in thousands):


61
 Table of Contents




SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


December
      31, 2007
            
            
            December
      31, 2006Raw
      materials
            
            $
            269
            
            
            $
            --Work-in-process
            
            
            2,707
            
            
            
            2,580Finished
      goods
            
            
            1,101
            
            
            
            100Total
            
            $
            4,077
            
            
            $
            2,680





The above
inventory balance at December 31, 2006 included approximately $371,000 of
inventory valued at fair value in accordance with purchase accounting rules and
having a cost of approximately $198,000.





Accounts
Receivable and Allowance for Doubtful Accounts





Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The Company assumed an allowance for doubtful accounts in the amount
of $53,000 upon the acquisition of MDL Group Companies on October 1, 2007. There
was no such allowance as of December 31, 2006.





Warranty
Expense Accrual





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





Changes
in the Company’s warranty expense accrual during the years ended December 31,
2007 and 2006 are as follows (in thousands):




2007
            
            
            2006Balance
      as of January 1
            
            $
            952
            
            
            $
            645New
      warranties issued during the period
            
            
            1,485
            
            
            
            839Costs
      incurred during the period on specific systems
            
            
            (581
            )
            
            
            (332
            )Changes
      in liability for pre-existing warranties during the period, including
      expirations
            
            
            (128
            )
            
            
            (200
            )Balance
      as of December 31
            
            $
            1,728
            
            
            $
            952





Research
and Development





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





Income
Taxes





Income
taxes have been provided using the liability method. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. The Company
provides a valuation allowance against net deferred tax assets if, based upon
the available evidence, it is not more likely than not that the deferred tax
assets will be realized.


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  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Software
Development Costs





Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, requires the
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. The Company determined that the
technological feasibility of its software products is established only upon the
completion of a product design, a working model and the confirmation of the
completeness of the working model against the product design. Costs incurred by
the Company between the completion of the working model and the point at which
the product is ready for general release have been insignificant. Accordingly,
the Company has charged all such costs to research and development expense in
the period incurred.





Stock-Based
Compensation





Prior to
January 1, 2006, the Company elected to follow Accounting Principles Board
Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25"), and related interpretations in
accounting for stock awards to employees. Accordingly, no compensation expense
was recognized in the Company’s financial statements prior to January 1, 2006 in
connection with stock-based awards granted to employees with exercise prices not
less than fair value on the grant date. Deferred compensation for unvested
options assumed in connection with business combinations was determined as the
difference between the exercise price and the fair market value of the Company’s
common stock on the date options were assumed. Deferred compensation was
amortized on a graded vesting method through December 31, 2005.





The
Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based
Payment (“SFAS 123R”), effective January 1, 2006, using the modified
prospective transition method. Under that transition method, the Company
recognized stock-based compensation expenses for: (a) employee stock
purchase plan (“ESPP”) awards with offering periods commencing, and stock
options granted or assumed, prior to, but not yet vested as of December 31,
2005, based on the grant-date fair value estimated in accordance with the
original provisions of Statement of Financial Accounting Standard No. 123 (“SFAS
123”); (b) ESPP awards with offering periods commencing subsequent to December
31, 2005 in accordance with the provisions of SFAS 123R; (c) restricted stock
units and stock options awarded subsequent to December 31, 2005 based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
Under the modified prospective transition method, results for prior periods are
not restated. See Note 4 “Stockholders’ Equity” for further
details.





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





Pro forma
net loss information is required by SFAS 123, computed as if the Company had
accounted for its employee stock options granted under the fair value method of
that Statement. Options granted following the Company’s November 1999 initial
public offering have been valued in 2005 using the Black-Scholes method with
valuation assumptions as follows:





Expected
      dividend yield
            
            
            0
            %Expected
      stock price volatility
            
            
            0.52Risk-free
      interest rate
            
            
            3.8
            %Expected
      life
      (years)
            
            
            3.5





63
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SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


The fair
value of issuances under the Employee Stock Purchase Plan is estimated on the
issuance date using the Black-Scholes model assuming no expected dividends and
the following weighted average assumptions for issuance made in
2005.





Expected
      stock price volatility
              
              
              0.52Risk-free
      interest rate
              
              
              2.6
              %Expected
      life (years)
              
              
              0.67





Had the
Company valued its stock options and stock purchase rights according to the fair
value provisions of SFAS 123, pro forma net loss and pro forma net loss per
share would have been as follows (in thousands, except per share data) for the
year ended December 31, 2005:





Net
      income (loss):As
      reported
            
            $
            12,002Add:  Stock-based
      employee compensation expense included in reported net income, net of
      related tax effects
            
            
            243Deduct:  Total
      stock-based employee compensation expense determined under fair value
      method for all awards, net of related tax effects
            
            
            (20,541
            )Pro
      forma
            
            $
            (8,296
            )Basic
      net income (loss) per share:As
      reported
            
            $
            0.37Pro
      forma
            
            $
            (0.25
            )Diluted
      net income (loss) per share:As
      reported
            
            $
            0.35Pro
      forma
            
            $
            (0.25
            )





Net
Income per Share





Basic net
income per share has been computed using the weighted-average number of shares
of common stock outstanding during the period. Diluted net income per share has
been calculated based on the shares used in the calculation of basic net income
per share and the dilutive effect of stock options, restricted stock and
restricted stock units.





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





Years
      Ended December 31,2007
            
            
            2006
            
            
            2005Net
      income
            
            $
            18,784
            
            
            $
            8,284
            
            
            $
            12,002Weighted-average
      shares of common stock outstanding
            
            
            33,301
            
            
            
            33,199
            
            
            
            32,819Less:
      weighted-average restricted stock
            
            
            (102
            )
            
            
            --
            
            
            
            --Weighted-average
      shares used in computing basic net income per share
            
            
            33,199
            
            
            
            33,199
            
            
            
            32,819Dilutive
      effect of employee stock options and restricted stock units, using the
      treasury stock method
            
            
            358
            
            
            
            1,015
            
            
            
            1,745Weighted-average
      shares used in computing diluted net income per share
            
            
            33,557
            
            
            
            34,214
            
            
            
            34,564Basic
      net income per share
            
            $
            0.57
            
            
            $
            0.25
            
            
            $
            0.37Diluted
      net income per share
            
            $
            0.56
            
            
            $
            0.24
            
            
            $
            0.35


64
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  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


The
Company has excluded 91,100 shares of restricted stock from the calculation of
both basic and diluted net income per share because these shares are subject to
repurchase. The Company has excluded options for the purchase of 5,072,000,
3,938,000 and 3,375,000 shares of common stock from the calculation of diluted
net income per share in 2007, 2006, and 2005, respectively, because all such
securities are anti-dilutive for the respective periods.





Employee
Savings Plan





The
Company has a savings plan in the United States that qualifies under Section
401(k) of the Internal Revenue Code. Participating U.S. employees may contribute
up to 60% of their pretax salary, but not more than statutory limits. For each
dollar a participant contributes under this plan, the Company makes employer
contribution to the plan of 50 cents, with a maximum matching contribution of 2%
of a participant’s earnings. Matching contributions for the plan were $795,000,
$629,000 and $504,000 in 2007, 2006, and 2005, respectively. Matching
contributions are invested proportionate to each participant’s voluntary
contributions in the investment options provided under the plan. Symyx common
stock is not an investment option under the plan.





Foreign
Currency Translation





The
financial statements of the Company’s wholly-owned foreign subsidiaries are
measured using the local currency as the functional currency. Assets and
liabilities of the subsidiaries are translated at the rates of exchange at the
balance sheet date. The resultant translation adjustments are recorded as a
separate component of stockholders’ equity as accumulated other comprehensive
income (loss) and have not been significant to date. Income and expense items
are translated at average monthly rates of exchange.





Comprehensive
Income (Loss)





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





The
components of accumulated other comprehensive income (loss) at December 31,
2007, 2006 and 2005 are as follows (in thousands):





Foreign
      Currency Translation Adjustments
            
            
            Unrealized
      Gain (Loss) On Available-For-Sale Securities
            
            
            TotalBalance
      at January 1, 2005
            
            $
            (12
            )
            
            $
            (477
            )
            
            $
            (489
            )Foreign
      currency translation adjustment
            
            
            (29
            )
            
            
            --
            
            
            
            (29
            )Unrealized
      loss on available-for-sale securities
            
            
            --
            
            
            
            220
            
            
            
            220Balance
      at December 31, 2005
            
            $
            (41
            )
            
            $
            (257
            )
            
            $
            (298
            )Foreign
      currency translation adjustment
            
            
            13
            
            
            
            --
            
            
            
            13Unrealized
      gain on available-for-sale securities, net of $16 taxes
            
            
            --
            
            
            
            281
            
            
            
            281Balance
      at December 31, 2006
            
            $
            (28
            )
            
            $
            24
            
            
            $
            (4
            )Foreign
      currency translation adjustment
            
            
            628
            
            
            
            --
            
            
            
            628Unrealized
      gain on available-for-sale securities
            
            
            --
            
            
            
            (23
            )
            
            
            (23
            )Balance
      at December 31, 2007
            
            $
            600
            
            
            $
            1
            
            
            $
            601





Effect
of New Accounting Pronouncements





Fair
Value Measurements





In
September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), Fair Value
Measurements.  SFAS 157 provides guidance for using fair
value to measure assets and liabilities. It also responds to investors' requests
for expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings.  SFAS 157 applies
whenever other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair value in any new
circumstances.  SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and is required
to be adopted by the Company in the first quarter of fiscal 2008. The Company is
currently evaluating the effect that the adoption of SFAS 157 will have on
its consolidated results of operations and financial condition.


65
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  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115. SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. It is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Early adoption is
permitted as of the first interim period of earlier fiscal years, provided the
entity also elects to early adopt SFAS 157. The Company is currently evaluating
the effect that the adoption of SFAS 159 will have on its consolidated results
of operations and financial condition.





In June
2007, the FASB ratified EITF Issue No. 07-3, “Accounting for Nonrefundable
Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities” (EITF 07-3). EITF 07-3 requires non-refundable
advance payments for goods and services to be used in future research and
development (R&D) activities to be recorded as assets and the payments to be
expensed when the R&D activities are performed. EITF 07-3 applies
prospectively for new contractual arrangements entered into beginning in the
first quarter of fiscal year 2008. Prior to adoption, the Company recognized
these non-refundable advance payments as an expense upon payment. The adoption
of EITF 07-3 is not expected to have a significant impact on the Company’s
consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business Combinations(“SFAS
141(R)”). Under SFAS
No. 141(R), an entity is required to recognize the assets acquired,
liabilities assumed, contractual contingencies, and contingent consideration at
their fair value on the acquisition date. It further requires that:
acquisition-related costs be recognized separately from the acquisition and
expensed as incurred, restructuring costs generally be expensed in periods
subsequent to the acquisition date, and changes in accounting for deferred tax
asset valuation allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. In addition, acquired in-process
research and development (IPR&D) is capitalized as an intangible asset and
amortized over its estimated useful life. The adoption of SFAS No. 141(R)
will change our accounting treatment for business combinations on a prospective
basis beginning in the first quarter of fiscal year 2009. The Company is
currently assessing SFAS No. 141R and has not yet determined the impact
that the adoption will have on its financial position and results of
operations.





In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), Noncontrolling interests in
Consolidated Financial Statements, an amendment of ARB No. 51.SFAS 160
is based on the economic entity concept of consolidated financial statements,
under which all residual economic interest holders in an entity have an equity
interest in the consolidated entity, even if the residual interest is relative
to only a portion of the entity. SFAS 160 requires that a noncontrolling
interest in a consolidated subsidiary be displayed in the consolidated statement
of financial position as a separate component of equity because the FASB
concluded that noncontrolling interests meet the definition of equity of the
consolidated entity. SFAS 160 is effective for the first annual reporting period
on or after December 15, 2008, and earlier adoption is prohibited. The Company
is currently evaluating the effect that the adoption of SFAS 160 will have on
its consolidated results of operations and financial condition.





2.  Research
and Development Arrangements





The
Company has entered into a number of multi-year research and development
collaborations to perform research for partners in exclusive fields over
multiple years. The major collaborative arrangements have similar contractual
terms and are non-cancelable other than for material breach or certain other
conditions. Under the collaborative arrangements, the Company is responsible for
performing research at levels defined in the agreements, including synthesis,
screening, and informatics. The partner, in turn, is entitled to develop and
commercialize materials discovered in or under collaboration within the defined
field. The Company typically receives research and development funding at
specified amounts per full time equivalent employee working on the project and
is entitled to receive royalties on the sale of any products commercialized
under the agreement or payments on the achievement of specified research
milestones. The agreements also contain procedures by which the Company and the
partner will determine royalty rates for the sale or license of products under
the agreements.


66
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SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)




The table
below indicates the significant collaborative partners for whom the Company
conducted research and development in 2007, together with the primary focus of
the collaborations. In addition to these partners the Company has a number of
other undisclosed partners, none of which individually constituted more than 5%
of total revenue in 2007:





Partner
            
            Current Research Contract
    Ends
            
            Primary focus of current collaborative
      effortsDow
            
            12/31/2009
            
            Polyolefin
      catalysts for certain commodity chemicalsExxonMobil
            
            5/31/2008
            
            Catalysts
      for certain commodity chemicals including
  olefins





Revenue
from these significant collaborative partners who individually comprised more
than 10% of revenue is included within Note 1 “Concentration of
Revenue.”





In 2003,
the Company entered into an Alliance, Technology Transfer and License Agreement
(“ATTLA”) effective April 1, 2003 with ExxonMobil Research and Engineering
Company (“EMRE”) under which the Company is contracted to provide research
services, develop and sell Symyx Tools, and license its software and
intellectual property. The ExxonMobil alliance provides the Company with an
expected five-year revenue stream of over $200 million from currently planned
alliance activities, purchases of Symyx Tools, and licensing fees. In addition,
the Company is entitled to receive royalties from the commercialization of
materials, processes, and products based on discoveries made in the fields of
agreement.




In
December 2004, the Company entered into an Alliance, Technology Transfer,
Research and License Agreement effective January 1, 2005 with Dow under which
the Company is contracted to perform research in a number of exclusive areas,
develop and provide Symyx Tools, and license Symyx Software as well as certain
intellectual property.  Dow will make payments to the Company over the
five-year term of approximately $120 million.  In addition, the
Company is entitled to receive royalties on commercialized discoveries resulting
from the collaborative research. On November 29, 2007, the Company entered into
a supplemental agreement with Dow amending provisions of the (i) Collaborative
Research and License Agreement effective as of January 1, 1999 by and between
the Company and Dow, as amended to date; and (ii) the Alliance, Technology
Transfer, Research and License Agreement effective as of January 1, 2005 by and
among the Company, Symyx Discovery Tools, Inc. (currently Symyx Tools, Inc., a
wholly-owned Symyx subsidiary), and Dow, as amended to date.





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


67
 Table of Contents




SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)




2007
            
            
            2006
            
            
            2005Projects
      funded by collaboration partners
            
            
            55
            %
            
            
            61
            %
            
            
            70
            %Projects
      funded internally:Software
      development
            
            
            31
            %
            
            
            29
            %
            
            
            23
            %Research
            
            
            7
            %
            
            
            8
            %
            
            
            6
            %Tools
      development
            
            
            7
            %
            
            
            2
            %
            
            
            1
            %Total
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %





Due to
the nature of the Company’s research and dependence on its collaborative
partners to commercialize the results of the research, the Company cannot
predict with any certainty whether any particular collaboration or research
effort will ultimately result in a commercial product and therefore whether the
Company will achieve future milestones or royalty payments under its various
collaborations.





3.
Commitments and Contingencies





Leases





The
Company has entered into various operating lease agreements for facilities in
five states and two foreign countries with lease terms ranging from one to ten
years. Rent expense, which is being recognized on a straight-line basis over the
lease terms, was approximately $3,902,000, $2,724,000 and $2,317,000 for the
years ended December 31, 2007, 2006 and 2005, respectively. Future commitments
and obligations under the operating leases for the Company’s facilities, to be
satisfied as they become due over the next eight years, are as follows (in
thousands):





Years
      ending December 31,
            
            Amount2008
            
            $
            5,2022009
            
            
            4,0872010
            
            
            3,9442011
            
            
            4,0572012
            
            
            3,765Thereafter
            
            
            11,368Total
            
            $
            32,423





Other
Commitments





As of
December 31, 2007, the Company had firm purchase commitments for inventory,
fixed assets and services of approximately $2,074,000. The Company also had
committed to pay royalty to third-party on future database content revenue of
approximately $2,501,000 in 2008 upon cash receipts from customers.





As
discussed in Note 8 “Related
Party Transactions”below,the Company’s commitment
for future research and development investments pursuant to certain agreements
with Intermolecular, Inc. as of December 31, 2007 was $643,000. The Company
expects to meet this commitment next year with additional research
efforts.





Upon
adoption of FIN 48 on January 1, 2007, the Company recorded additional $996,000
of accrued liability associated with uncertainties in income taxes to bring its
total tax reserve to $3,219,000. During the twelve months ended December 31,
2007, the Company increased the total tax reserve under FIN 48 to $3,962,000.
The Company could not make reasonably reliable estimates of the periods of cash
settlement with the respective tax authorities and as such has determined to
record the liabilities as current on its Consolidated Balance
Sheet.





As of
December 31, 2007, the Company had no amounts due under loan agreements and had
an unused line of credit with Bank of America as detailed in Note 5 of the Notes
to Consolidated Financial Statements.


68
 Table of Contents
  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Customer
Indemnification





From time
to time, the Company agrees to indemnify its customers against certain third
party liability, including liability if the Company’s products infringe a third
party’s intellectual property rights. Such indemnification provisions are
accounted for in accordance with FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The indemnification is typically limited to no
more than the amount paid by the customer. As of December 31, 2007, the
Company was not subject to any pending intellectual property-related
litigation.





Contingencies





As
discussed in Note 7 “Business Combinations”, additional purchase price
consideration of up to $6,267,000 may be payable upon the achievement of certain
2008 and 2009 revenue targets by the Company’s Autodose product line. The
Company will evaluate the possibility of achieving these targets from time to
time and record the fair value of any additional consideration as an additional
cost of the acquisition. No additional consideration was recorded as of December
31, 2007.





4.  Stockholders’
Equity





Stock
Purchase Plan





The
Company has an Employee Stock Purchase Plan (the "Purchase Plan") that permits
eligible employees to purchase common stock at a discount, but only through
payroll deductions, during concurrent 12-month offering periods. Each offering
period will be divided into two consecutive six-month purchase periods. The
price at which stock is purchased under the Purchase Plan is equal to 85% of the
fair market value of the common stock on the first or last day of the offering
period, whichever is lower. In addition, the Purchase Plan provides for annual
increases in the number of shares available for issuance under the Purchase Plan
on the first day of each fiscal year, equal to the lesser of 1% of the
outstanding shares of common stock on the first day of the fiscal year, 350,000
shares, or a lesser amount as determined by the Board of Directors. At December
31, 2007, the number of shares of common stock available for future issue under
the Purchase Plan was 1,570,370.





Stock
Option Plans





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





During
1997, the Company's Board of Directors approved the adoption of the 1997 Stock
Option Plan with terms and conditions the same as those of the 1996 Stock Option
Plan (collectively, the "Qualified Plans"). The 1997 Stock Option Plan provides
for the issuance of options for up to 14,090,572 shares of common stock to
employees and consultants. In February 2007, the Qualified Plans expired and all
unissued shares under the Qualified Plans were forfeited.





In
October 2001, the Company's Board of Directors approved 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 of common stock to non-executive
employees and consultants. As of December 31, 2007, all authorized shares of
options under the NSO Plan had been granted.





At the
2007 Annual Stockholders Meeting held on June 12, 2007, the Company’s
stockholders approved the adoption of the 2007 Symyx Technologies, Inc. Stock
Incentive Plan (the “2007 Plan”). The 2007 Plan provides for the grant of stock
options, restricted stock, restricted stock units and stock appreciation rights
(collectively, “awards”). Stock options granted under the 2007 Plan may be
either incentive stock options under the provisions of Section 422 of the
Internal Revenue Code of 1986, as amended (the “Code”), or nonqualified stock
options. The Compensation Committee of the Company’s Board of Directors
administers the 2007 Plan. The aggregate number of shares of common stock that
may be issued pursuant to awards granted under the 2007 Plan is 750,000 shares,
plus any shares that would otherwise return to each of the Company’s 1997 Stock
Plan (the “1997 Plan”) and the Company’s 2001 Nonstatutory Stock Option Plan
(the “2001 Nonstatutory Plan”) as a result of forfeiture, termination or
expiration of awards previously granted under each of the 1997 Plan and the 2001
Nonstatutory Plan.  The maximum number of shares with respect to which
options and stock appreciation rights may be granted to a participant during a
calendar year is 750,000 shares. For awards of restricted stock and restricted
stock units that are intended to be performance-based compensation under Section
162(m) of the Code, the maximum number of shares subject to such awards that may
be granted to a participant during a calendar year is 750,000 shares. As of
December 31, 2007, 1,083,717 shares were available for issuance under the 2007
Plan.


69
 Table of Contents
  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


In
connection with the acquisition of IntelliChem, the Company assumed all the
unvested outstanding stock options issued pursuant to IntelliChem’s 2003 Stock
Option Plan (“IntelliChem Plan”) and converted them into options to purchase
44,126 shares of the Company’s common stock. In connection with the acquisition
of Synthematix, the Company assumed all the unvested outstanding stock options
issued pursuant to Synthematix’s 2000 Equity Compensation Plan (“Synthematix
Plan”), as amended, and converted them into options to purchase 23,876 shares of
the Company’s common stock. These options generally retained all of the rights,
terms, and conditions of the plan under which they were originally granted. As
of December 31, 2007, options to purchase 13,146 and 2,971 shares of common
stock were available for future grant under the IntelliChem Plan and Synthematix
Plan, respectively.





Stock
options granted under the Qualified Plans and 2007 Plan may be either incentive
stock options or nonstatutory stock options, whereas stock options granted under
the NSO Plan are nonstatutory stock options. Options are generally granted with
exercise prices equal to the fair value of the common stock on the grant date,
as determined by the Board of Directors. The options issued under the Qualified
Plans and the NSO plan expire no more than 10 years after the date of grant or
earlier if employment or relationship as a director or consultant is terminated.
The options issued under the 2007 plan expire no more than 7 years after the
date of grant or earlier if employment or relationship as a director or
consultant is terminated. The Board of Directors shall determine the times
during the term when the options may be exercised and the number of shares for
which an option may be granted. Options may be granted with different vesting
terms from time to time but will provide for annual vesting of at least 20% of
the total number of shares subject to the option.





A summary
of activity under the Qualified Plans, 2007 Stock Option Plans, the NSO Plan,
the IntelliChem Plan and the Synthematix Plan, is as follows:




Outstanding
      Stock OptionsNumber
      of
              Shares
            
            
            Exercise
              Price
            
            
            Weighted-
              Average
              Exercise
      PriceBalance
      at January 1, 2005
            
            
            7,434,485
            
            
            $
            0.19
      - $58.25
            
            
            $
            24.98Options
      granted and assumed
            
            
            1,599,226
            
            
            $
            0.51
      - $31.00
            
            
            $
            26.68Options
      exercised
            
            
            (632,058
            )
            
            $
            0.39
      - $30.25
            
            
            $
            15.39Options
      cancelled
            
            
            (307,841
            )
            
            $
            0.51
      - $57.00
            
            
            $
            28.90Balance
      at December 31, 2005
            
            
            8,093,812
            
            
            $
            0.19
      - $58.25
            
            
            $
            25.91Options
      exercised
            
            
            (940,496
            )
            
            $
            0.39
      - $27.99
            
            
            $
            14.92Options
      cancelled
            
            
            (390,724
            )
            
            $
            0.39
      - $51.50
            
            
            $
            27.58Balance
      at December 31, 2006
            
            
            6,762,592
            
            
            $
            0.19
      - $58.25
            
            
            $
            27.35Options
      granted
            
            
            1,423,500
            
            
            $
            4.29
      - $ 8.58
            
            
            $
            6.68Options
      exercised
            
            
            (96,122
            )
            
            $
            0.39
      - $18.95
            
            
            $
            6.55Options
      cancelled
            
            
            (1,222,527
            )
            
            $
            0.19
      - $57.00
            
            
            $
            28.31Balance
      at December 31, 2007
            
            
            6,867,443
            
            
            $
            0.39
      - $58.25
            
            
            $
            23.18





At
December 31, 2007, 2006 and 2005, vested and outstanding options for the
purchase of 5,411,627, 6,514,413 and 7,313,292 shares of common stock were
exercisable at weighted-average exercise prices of $27.53, $27.62 and $26.75,
respectively. The weighted-average grant date fair value of options granted
during the years ended December 31, 2007 and 2005 was $4.08 and $12.20,
respectively. No options were granted in 2006.





The
Company granted stock options to purchase 1,423,500 shares of common stock in
2007, including options to purchase 620,000 shares of common stock were granted
to non-executive employees at an exercise price equal to 50% of the grant date
fair market value. The Company valued options granted in 2007 using the
Black-Scholes method with the following valuation assumptions:


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  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Range
            
            
            Weighted-AverageExpected
      dividend
            
            
            0%
      - 0
            %
            
            
            0
            %Risk-free
      interest rate
            
            
            4.1%
      - 4.4
            %
            
            
            4.3
            %Expected
      volatility
            
            
            43%
      - 48
            %
            
            
            44
            %Expected
      life (in years)
            
            
            1.75
      – 5.17
            
            
            
            3.5





An
analysis of options outstanding at December 31, 2007 is as follows:





Options
      ExercisableExercise
      Price
            
            
            Options
      Outstanding at December 31, 2007
            
            
            Weighted-Average
      Remaining Contractual Life
              (in
      years)
            
            
            Weighted-Average
      Exercise Price
            
            
            Exercisable
      at December 31, 2007
            
            
            Weighted-Average
      Exercise Price
            
            
            Weighted-
      Average Remaining Contractual Life
              (in
      years)$
            0.39
      - $ 8.58
            
            
            
            1,548,465
            
            
            
            4.1
            
            
            $
            6.37
            
            
            
            124,826
            
            
            $
            2.86
            
            
            
            2.3$
            10.39
      - $14.75
            
            
            
            1,046,898
            
            
            
            4.3
            
            
            $
            12.97
            
            
            
            1,046,898
            
            
            $
            12.97
            
            
            
            4.3$
            15.22
      - $22.68
            
            
            
            657,167
            
            
            
            5.2
            
            
            $
            18.09
            
            
            
            638,913
            
            
            $
            17.99
            
            
            
            5.1$
            23.11
      - $24.67
            
            
            
            387,760
            
            
            
            6.2
            
            
            $
            24.20
            
            
            
            373,837
            
            
            $
            24.20
            
            
            
            6.2$
            25.00
      - $26.51
            
            
            
            765,667
            
            
            
            3.7
            
            
            $
            25.39
            
            
            
            765,667
            
            
            $
            25.39
            
            
            
            3.7$
            26.70
      - $27.99
            
            
            
            993,254
            
            
            
            6.9
            
            
            $
            27.64
            
            
            
            993,254
            
            
            $
            27.64
            
            
            
            6.9$
            28.05
      - $34.63
            
            
            
            565,828
            
            
            
            6.3
            
            
            $
            31.41
            
            
            
            565,828
            
            
            $
            31.41
            
            
            
            6.3$
            36.50
      - $58.25
            
            
            
            902,404
            
            
            
            2.2
            
            
            $
            55.21
            
            
            
            902,404
            
            
            $
            55.21
            
            
            
            2.26,867,443
            
            
            
            4.7
            
            
            $
            23.18
            
            
            
            5,411,627
            
            
            $
            27.53
            
            
            
            4.7





The
aggregate intrinsic values for the above outstanding and exercisable stock
options were $2,718,000 and $615,000, respectively. The aggregate intrinsic
value is calculated as the difference between the exercise price of the
underlying awards and the close price of the Company’s common stock for
in-the-money options at December 31, 2007. During the years ended December 31,
2007, 2006 and 2005, the aggregate intrinsic value of options exercised under
the Company’s stock option plans was $859,000, $11,716,000 and $7,895,000,
respectively. The aggregated fair value of stock options vested during 2007 and
2006 was $1,330,000 and $4,239,000, respectively. As of December 31, 2007,
$5,266,000 of total unrecognized compensation cost related to unvested stock
options granted and outstanding is expected to be amortized on a straight-line
basis through 2011.





On two
separate occasions during the quarter ended September 30, 2005, the
Compensation Committee of the Company’s Board of Directors approved amendments
to the terms of outstanding options to purchase shares of the Company’s common
stock. On each occasion, the terms of options with exercise prices above a
designated threshold were amended to become fully vested and exercisable on
December 30, 2005, provided that the holder of such option remained an
employee or consultant of the Company on such date. The first occasion was on
September 13, 2005, when the Company amended the terms of outstanding options to
purchase approximately 251,000 shares of the Company’s common stock with
exercise prices above $30 per share. The second occasion was on
September 22, 2005, when the Company amended the terms of outstanding
options to purchase approximately 159,000 shares of the Company’s common stock
with exercise prices equal or greater than $24.67 per share. All such options
were issued pursuant to the terms of the Company’s 1997 Stock Plan, the
Company’s 2001 Nonstatutory Stock Option Plan or Symyx IntelliChem’s 2003 Stock
Option Plan. No options held by executive officers or directors of the Company
were accelerated pursuant to this authorization. The Company accelerated the
vesting schedule for the above options to avoid future compensation expenses to
be recorded in accordance with SFAS 123(R). No compensation expense was recorded
in connection with the acceleration of the vesting schedule of the above options
because the fair market value of the common stock was less than the exercise
price of the accelerated options on each of the respective measurement
dates.





Starting
in March 2006, the Company granted restricted stock units to its employees and
members of the Board of Directors under the Qualified Plans. The fair value of
the Company’s restricted stock units was calculated based upon the fair market
value of the Company’s stock at the date of grant. As of December 31, 2007,
$4,383,000 of total unrecognized compensation cost related to unvested
restricted stock units granted is expected to be amortized on a straight-line
basis through February 2010. The Company plans to issue new common stock to
settle the restricted stock units.


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TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


In
February 2007, the Company granted to its executive officers 176,400 shares of
performance-based restricted stock, of which 85,300 shares were canceled
during the year in connection with employment terminations. The remaining
91,100 shares of restricted stock outstanding as of December 31, 2007 will not
vest and are being canceled subsequent to year end because certain pre-defined
2007 performance targets were not achieved. The Company did not record
compensation expenses associated with the above restricted stock during 2007 as
the vesting was not probable.





The
following table illustrates the changes in status of the Company’s restricted
stock units and restricted stock during the year ended December 31,
2007:


Restricted
      Stock Units
            
            
            Restricted
      StockShares
            
            
            Weighted-Average
      Grant-Date Fair Value
            
            
            Shares
            
            
            Weighted-Average
      Grant-Date Fair ValueUnvested
      at January 1, 2007
            
            
            328,050
            
            
            $
            29.05
            
            
            
            --
            
            
            $
            --Granted
            
            
            595,011
            
            
            $
            17.26
            
            
            
            176,400
            
            
            $
            18.06Vested
            
            
            (325,406
            )
            
            $
            29.05
            
            
            
            --
            
            
            $
            --Cancelled
            
            
            (152,169
            )
            
            $
            17.79
            
            
            
            (85,300
            )
            
            $
            17.96Unvested
      at December 31, 2007
            
            
            445,486
            
            
            $
            17.16
            
            
            
            91,100
            
            
            $
            18.15





During
the year ended December 31, 2007, the Company valued awards under the Purchase
Plan using the Black-Scholes method with the following valuation
assumptions:





Expected
      dividend
            
            
            0.0
            %Risk-free
      interest rate
            
            
            4.7
            %Expected
      volatility
            
            
            55
            %Weighted-average
      expected life (in years)
            
            
            0.83





As of
December 31, 2007, $296,000 of total unrecognized compensation cost related to
the Purchase Plan is expected to be amortized on a straight-line basis through
October 2008.





As of
December 31, 2007, the Company has reserved 9,983,133 shares of common stock for
future issuance in relation to the Company’s stock option plans.





The
Company recognized stock-based compensation expenses of $5,717,000 and
$10,296,000 during the years ended December 31, 2007 and 2006, respectively.
Stock-based compensation expense recognized in the Company’s results of
operations for the year ended December 31, 2007 and 2006 was as follows (in
thousands):





2007
            
            
            2006Costs
      of revenue
            
            $
            294
            
            
            $
            673Research
      and development
            
            
            2,627
            
            
            
            4,006Sales,
      general and administrative
            
            
            2,796
            
            
            
            5,617Total
            
            $
            5,717
            
            
            $
            10,296





The
income tax benefit recognized in the consolidated income statements related to
stock-based compensation expense was $1,873,000 and $2,995,000 in 2007 and 2006,
respectively.





5.  Bank
Credit Facility





On
September 28, 2007, the Company entered into a Credit Agreement (the “Credit
Agreement”) with Bank of America, N.A., as Administrative Agent and L/C Issuer
(the “Agent”), and each lender from time to time a party thereto. Under the
Credit Agreement, the Agent has agreed to provide a $25 million aggregate
commitment for a two-year revolving credit facility and issuances of letters of
credit for the Company’s account (the “Facility”), secured by substantially all
of the Company’s assets excluding intellectual property.


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  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Loans
under the Credit Agreement bear interest at either (i) for Eurodollar rate
loans, the rate per annum equal to the British Bankers Association LIBOR plus a
margin ranging from 0.25 percent to 0.50 percent or (ii) a formula based on the
Agent’s prime rate and the federal funds effective rate.  Subject to
certain conditions stated in the Credit Agreement, the Company may borrow,
pre-pay and re-borrow amounts under the Facility at any time during the term of
the Credit Agreement.  The Credit Agreement will terminate and all
amounts owing thereunder will be due and payable on September 28, 2009, unless
the commitments are earlier terminated, either at the Company’s request or, if
an event of default occurs, by the lenders. The Company may also, upon the
agreement of either the Agent or additional banks not currently a party to the
Credit Agreement, increase the commitments under the Facility up to an
additional $50 million. The Credit Agreement contains customary representations,
warranties, affirmative and negative covenants, including financial covenants
and events of default.  The negative covenants set forth in the Credit
Agreement include restrictions on additional indebtedness and liens, fundamental
changes and entering into burdensome agreements. The financial covenants require
the Company to meet quarterly financial tests with respect to consolidated net
worth and consolidated interest coverage ratio, and financial tests with respect
to a consolidated leverage ratio. As of December 31, 2007, the Company had no
borrowing under the credit facility and was in compliance with all financial
covenants related to the Facility.





6.
Segment Disclosure





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





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





Revenue
is disaggregated into:




·
              Symyx
      Research – research services on behalf of collaborative or
      non-collaborative partners




·
              Symyx
      Tools – sale of select proprietary instruments and associated software and
      intellectual property




·
              Symyx
      Software – license of automation and data mining applications as well as
      ELN software and provision of associated support, maintenance, and
      consulting services




·
              Materials
      and IP Licensing – license of discovered materials and methodology
      patents, and royalties due to the Company upon successful
      commercialization of products incorporating materials discovered in the
      Company’s industry
collaborations





Prior to
November 2006, the Company’s Symyx Sensors segment provided development services
and licenses for specific applications to intellectual property associated with
the Company’s sensor technology. In November 2006, the Company spun out the
Sensors segment.





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SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


The
disaggregated financial information reviewed by the CODM is as follows (in
thousands):





Years
      Ended December 31,2007
            
            
            2006
            
            
            2005Symyx
      Research
            
            $
            47,867
            
            
            $
            52,218
            
            
            $
            53,818Symyx
      Tools
            
            
            39,474
            
            
            
            37,847
            
            
            
            30,829Symyx
      Software
            
            
            31,893
            
            
            
            25,495
            
            
            
            15,315Materials
      and IP Licensing
            
            
            5,838
            
            
            
            5,650
            
            
            
            5,268Symyx
      Sensors
            
            
            --
            
            
            
            3,690
            
            
            
            2,907Total
            
            $
            125,072
            
            
            $
            124,900
            
            
            $
            108,137





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





Year
      Ended December 31, 2007Service
      Revenue
            
            
            Product
              Sales
            
            
            License
      Fees, content revenue and Royalties
            
            
            Total
      RevenueSymyx
      Research
            
            $
            37,865
            
            
            $
            --
            
            
            $
            10,002
            
            
            $
            47,867Symyx
      Tools
            
            
            4,547
            
            
            
            34,898
            
            
            
            29
            
            
            
            39,474Symyx
      Software
            
            
            16,622
            
            
            
            --
            
            
            
            15,271
            
            
            
            31,893Materials
      and IP Licensing
            
            
            --
            
            
            
            --
            
            
            
            5,838
            
            
            
            5,838Total
            
            $
            59,034
            
            
            $
            34,898
            
            
            $
            31,140
            
            
            $
            125,072




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




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




74
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SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Geographic
Area Data





The table
below shows revenue by physical location of the Company’s customers (in
thousands).





Years
      Ended December 31,2007
            
            
            2006
            
            
            2005United
      States
            
            $
            109,741
            
            
            $
            111,158
            
            
            $
            89,571Rest
      of North America
            
            
            554
            
            
            
            508
            
            
            
            257Asia
            
            
            3,712
            
            
            
            3,953
            
            
            
            1,841Europe
            
            
            11,065
            
            
            
            9,281
            
            
            
            16,468Total
            
            $
            125,072
            
            
            $
            124,900
            
            
            $
            108,137





The
tables below show revenue and long-lived assets by location (in
thousands):





Years
      Ended December 31,2007
            
            
            2006
            
            
            2005Revenue
      generated by U.S. operations
            
            $
            114,242
            
            
            $
            122,997
            
            
            $
            108,137Revenue
      generated by foreign operations
            
            
            10,830
            
            
            
            1,903
            
            
            
            --Total
      revenue from unaffiliated customers
            
            $
            125,072
            
            
            $
            124,900
            
            
            $
            108,137Long-lived
      assets in U.S.
            
            $
            195,246
            
            
            $
            82,487
            
            
            $
            60,951Long-lived
      assets in foreign countries
            
            
            33,207
            
            
            
            3,902
            
            
            
            28Total
      long-lived assets
            
            $
            228,453
            
            
            $
            86,389
            
            
            $
            60,979





7.
Business Combinations





Acquisition
of MDL Group Companies





On
October 1, 2007, the Company completed the MDL acquisition pursuant to the terms
of the Sale Agreement (the “MDL Sale Agreement”), dated August 9, 2007, by and
among the Company, Elsevier Inc., a New York corporation, Elsevier Swiss
Holdings S.A., a company organized under the laws of Switzerland, Elsevier Japan
KK, a company organized under the laws of Japan, Elsevier UK and MDL (UK)
Limited (collectively, the “Seller”). The Company paid $123,000,000 in cash and
expects to receive a working capital adjustment in the amount of $4,954,000 as
set forth in the MDL Sale Agreement. Of the $123,000,000 cash paid, the parties
placed $10,000,000 in escrow pending their determination of any detriments
suffered or benefits enjoyed by MDL as a result of pre-closing intercompany
transactions by certain MDL Group Companies. The results of MDL’s operations
have been included in the consolidated financial statements since that
date.





In
accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, the
Company allocated the purchase price to the tangible assets, liabilities, and
intangible assets acquired, as well as in-process research and development,
based on their estimated fair values. The excess purchase price over the fair
values was recorded as goodwill. The fair value assigned to intangible assets
acquired was based on estimates and assumptions determined by management. The
acquired goodwill was assigned entirely to the Company’s software segment.
Purchased intangibles with finite lives are amortized on a straight-line basis
over their respective useful lives.





Total
preliminary purchase price for this acquisition was $121,794,000, consisting of
approximately $118,046,000 in cash (net of estimated working capital
adjustments), and $3,748,000 in transaction costs, consisting of legal and other
professional service fees. The purchase price was preliminary primarily because
the Company had not determined the amount to be released to Seller from the
escrow.




75
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SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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




AmountFair
      value of net liabilities assumed
            
            $
            (5,605
            )Accrued
      restructuring costs
            
            
            (6,823
            )In-process
      research and development
            
            
            2,500Intangible
      assets
            
            
            59,000Deferred
      tax liabilities
            
            
            (22,428
            )Goodwill
            
            
            95,150Total
            
            $
            121,794




The fair
values of MDL’s net liabilities as of the acquisition date were (in
thousands):





AmountAccounts
      receivable, net
            
            $
            4,417Prepaids
      and other assets
            
            
            2,538Plant,
      property and equipment
            
            
            4,851Accounts
      payable and other accrued liabilities
            
            
            (2,046
            )Accrued
      compensation
            
            
            (4,961
            )Deferred
      revenue
            
            
            (10,404
            )Fair
      value of MDL’s net liabilities
            
            $
            (5,605
            )





The
allocation of the consideration for the MDL acquisition to its individual assets
and liabilities was based on management’s analysis and estimates of the fair
values of the acquired assets and liabilities. In addition to the value assigned
to in-process research and development (“IPR&D”) projects, and MDL’s
tangible assets, specific intangible assets were identified and valued. The
identifiable intangible assets included customer relationships, core technology
and proprietary content.





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





The value
of IPR&D was determined using a cost to recreate approach. This approach
combines the costs incurred to date by the MDL development department, the
product design department and development consultants.





In
performing this preliminary purchase price allocation, the Company considered,
among other factors, its intention for future use of the acquired assets,
analyses of historical financial performance and estimates of future performance
of MDL’s products. The fair value of intangible assets was primarily based on
the income approach. The relief from royalty method and the “with” and “without”
method under the income approach were utilized when appropriate. The rates
utilized to discount the after-tax cash flows to their present values ranged
from 8% to 13%. These discount rates were determined after consideration of the
Company’s rate of return and the weighted average return on assets. Risks the
Company identified and considered in this analysis included achieving
anticipated levels of market acceptance and penetration, successful completion
of development efforts, market growth rates, and risks related to the impact of
potential changes in future target markets.




76
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SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Identifiable
intangible assets purchased in the MDL acquisition consisted of the following
(in thousands, except for useful life) with a weighted average useful life of
7.1 years and no significant residual value estimated:





Amount
            
            
            Useful
      Life (in years)Customer
      relationships
            
            $
            33,600
            
            
            
            8Core
      technology
            
            
            10,500
            
            
            
            7Proprietary
      content
            
            
            7,800
            
            
            
            6Elsevier
      license agreement
            
            
            3,100
            
            
            
            3Third
      party license agreements
            
            
            1,300
            
            
            
            3Trade
      name
            
            
            1,400
            
            
            
            3Bargain
      lease
            
            
            1,300
            
            
            
            8Balance
      at December 31, 2007, at cost
            
            $
            59,000





No
goodwill will be deductible for tax purposes.





Pro
Forma Financial Information (unaudited)





The
unaudited financial information in the table below summarizes the combined
results of operations of the Company and MDL, on a pro forma basis, as though
the companies had been combined as of the beginning of each period presented.
The impact of the IPR&D charge associated with the acquisition has been
excluded. This pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the results of operations
that would have been achieved had the acquisition taken place at the beginning
of each period presented. The unaudited pro forma combined income statement data
for the year ended December 31, 2007 combines the historical results for
the Company for the year ended December 31, 2007 and the historical results
for MDL for the period of January 1, 2007 through October 1, 2007. The
unaudited pro forma combined income statement data for the year ended
December 31, 2006 combines the historical results for the Company for the
year ended December 31, 2006 and the historical results for MDL for the
year ended December 31, 2006. The following amounts are in thousands,
except per share amounts.




Years
      Ended December 31,2007
            
            
            2006Revenue
            
            $
            182,733
            
            
            $
            205,987Net
      income
            
            $
            16,121
            
            
            $
            3,153Basic
      income per share
            
            $
            0.49
            
            
            $
            0.09Diluted
      income per share
            
            $
            0.48
            
            
            $
            0.09





Acquisition
of Autodose SA.





On July
13, 2006, the Company completed the acquisition of 100% of the outstanding
shares of privately-held Autodose SA (“Autodose”), a Geneva, Switzerland-based
maker of precision powder-dispensing equipment. By acquiring Autodose, the
Company now offers customers Symyx Tools that combine Autodose’s powder-handling
technology with its existing liquid-handling robotics technology. The
acquisition was accounted for as a business combination using the purchase
method. Autodose has since been renamed Symyx Technologies Europe SA and its
results of operations have been included in the Company’s consolidated financial
statements since that date.





The
purchase price for this acquisition was $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 date of acquisition) and $247,000 in transaction costs,
consisting of legal and other professional service fees, net of foreign currency
exchange variance.





Additional
purchase price consideration of up to $6,267,000 may be payable upon the
achievement of certain 2008 and 2009 revenue targets by our Autodose product
line. The Company will evaluate the possibility of achieving these targets from
time to time and record the fair value of any additional consideration as an
additional cost of the acquisition. No additional consideration was recorded as
of December 31, 2007.





77


SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


In
accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, the
Company allocated the preliminary purchase price to the tangible assets,
liabilities, and intangible assets acquired, as well as in-process research and
development (“IPR&D”), based on their estimated fair values. The excess
purchase price over the fair values was recorded as goodwill. The allocation of
the purchase price is as follows (in thousands):




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





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





AmountCash
            
            $
            1,863Accounts
      receivable
            
            
            333Inventory
            
            
            988Current
      deferred tax assets
            
            
            1Prepaid
      expenses and other assets
            
            
            22Plant,
      property and equipment
            
            
            31Other
      non-current assets
            
            
            27Accounts
      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
financial information is not provided because the results of operations of the
acquired entity were not material to the historical results of operations of the
Company.




Acquisition
of Synthematix, Inc.




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





The
purchase price for this acquisition was $14,015,000, consisting of approximately
$13,079,000 in cash, $571,000 in fair value of assumed stock options to purchase
23,876 shares of the Company’s common stock, and $365,000 in transaction costs,
consisting of legal and other professional service fees.




78
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SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Stock
options were valued using the Black-Scholes option pricing model. The
assumptions used in calculating fair value were as follows:




Group
      A Options
            
            
            Group
      B Options
            
            
            Group
      C OptionsExpected
      life (years)
            
            
            2
            
            
            
            0.5
            
            
            
            2Risk-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, totaling approximately $216,000, has been
recorded as deferred stock compensation.





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





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





The fair
values of Synthematix’s net tangible assets as of the acquisition date were (in
thousands):





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





Pro forma
financial information is not provided because the results of operations of the
acquired entity were not material to the historical results of operations of the
Company.





8.
Related Party Transactions





On July
18, 2007, Amgen Inc. ("Amgen") completed its acquisition of Ilypsa, Inc.
(“Ilypsa”). The Company received approximately $41,238,000 in cash before taxes
in August 2007 in exchange for its approximately 10% equity interest in
Ilypsa. The Company may also receive up to $4,124,000 before taxes in July
2008, subject to claims against the holdback provided for in this
transaction. Prior to this sale, the Company accounted for its Ilypsa
interest using the cost method, as the Company did not have the ability to
exercise significant influence over Ilypsa’s strategic, operating, investing,
and financing activities. Ilypsa licensed software and purchased products from
the Company. Revenue from Ilypsa for the years ended December 31, 2007, 2006 and
2005 was $0, $181,000 and $179,000, respectively.





79


SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


The
Company entered into a Collaborative Development and License Agreement with
Intermolecular in March 2005, and an Alliance Agreement in December 2005. Under
these agreements, the two companies work together to conduct R&D and other
activities with respect to materials and high-throughput technology for use in
semiconductor applications. Generally, each party bears its own expenses.
These agreements were amended in November 2007. Under the amended agreements,
the Company committed to fund an aggregate of $2,057,000 in research and capital
equipment expenditures. The Company expects to satisfy the remaining $643,000 of
this commitment in 2008. Further, in August 2006, the Company invested
$13,500,000 in exchange for approximately 13% of Intermolecular’s outstanding
shares. The Company accounts for its ownership interest in Intermolecular using
the cost method, because the Company does not have the ability to exercise
significant influence over Intermolecular’s strategic, operating, investing and
financing activities. Thomas Baruch, a Symyx director, is a director of
Intermolecular and a general partner of CMEA Ventures, which holds a minority
interest in Intermolecular. Steven D. Goldby, executive chairman of Symyx’
Board, is also a director of Intermolecular. For the years ended
December 31, 2007, 2006 and 2005, the Company recognized revenue from
Intermolecular of $912,000, $52,000 and $88,000, respectively. In 2005, the
Company also recognized a $20,000 gain from the sale of a fixed asset with
$130,000 net book value, which was sold to Intermolecular for its original cost
of $150,000. As of December 31, 2007 and 2006, the Company had deferred revenue
of $84,000 and $27,000 from Intermolecular.





In
November 2005, the Company entered into a Collaborative Research and License
Agreement with Solyndra, Inc. (“Solyndra”). Thomas Baruch, a Symyx director, is
a director of Solyndra, Inc. and a general partner of CMEA Ventures, which holds
a minority interest in Solyndra. For the years ended December 31, 2007, 2006 and
2005, the Company recognized revenue of $409,000, $1,228,000 and $43,000,
respectively, from providing research services to Solyndra. As of December 31,
2007 and 2006, the Company had recorded $0 and $24,000, respectively of deferred
revenue related to Solyndra.





In
November 2006, the Company invested $400,000 in cash plus certain intellectual
property with no cost basis related to sensor technology in exchange for
approximately 38% of the outstanding shares of Visyx Technologies Inc. The
Company has a 45% voting right in relation to its shareholding. Isy Goldwasser,
the Company’s chief executive officer and a Symyx director, is a director of
Visyx. Thomas Baruch, a Symyx Board member, is a general partner of CMEA
Ventures, which holds approximately 42% of Visyx’ outstanding shares and has a
49% voting right in relation to its shareholding. In July 2007, the Company
provided a $100,000 loan on the same terms and conditions as certain other
investors in exchange for a convertible promissory note, and incurred $14,000 of
additional costs on behalf of Visyx. During the twelve months ended December 31,
2007 and 2006, the Company reported equity losses of $314,000 and $186,000,
respectively, based on its share of the loss reported by Visyx, including the
write-down of the $100,000 loan (which was subsequently converted into shares of
preferred stock in the fourth quarter of 2007), in accordance with the equity
method of accounting. In November, Visyx has sold all its assets to
MeasurementSpecialties, Inc. The Company will only share in future
distributions, if any, subject to certain preferred stock liquidation
preferences. As of December 31, 2007, the Company had a $0 carrying value of
this investment.





9.
Income Taxes





The
Company’s income before taxes consisted of the following (in
thousands):





Years
      Ended December 31,2007
            
            
            2006
            
            
            2005U.
      S.
            
            $
            31,510
            
            
            $
            15,584
            
            
            $
            20,052Foreign
            
            
            (2,028
            )
            
            
            (918
            )
            
            
            91Total
            
            $
            29,482
            
            
            $
            14,666
            
            
            $
            20,143




80
 Table of Contents




SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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





Years
      Ended December 31,2007
            
            
            2006
            
            
            2005Current:Federal
            
            $
            12,759
            
            
            $
            10,685
            
            
            $
            6,856State
            
            
            645
            
            
            
            1,140
            
            
            
            553Foreign
            
            
            542
            
            
            
            259
            
            
            
            25Total
            
            
            13,946
            
            
            
            12,084
            
            
            
            7,434Deferred:Federal
            
            
            (2,276
            )
            
            
            (4,862
            )
            
            
            366State
            
            
            472
            
            
            
            (621
            )
            
            
            341Foreign
            
            
            (1,444
            )
            
            
            (219
            )
            
            
            --Total
            
            
            (3,248
            )
            
            
            (5,702
            )
            
            
            707Provision
      for income
      taxes
            
            $
            10,698
            
            
            $
            6,382
            
            
            $
            8,141





Tax
benefits or (deficiencies) resulting from the vesting of restricted stock units,
the exercise of nonqualified stock options and the disqualifying dispositions of
shares issued under the Company's stock-based compensation plans were
approximately $(868,000) in 2007, $5,045,000 in 2006 and $3,334,000 in 2005.
Such benefits (deficiencies) were recorded in additional paid-in
capital.





The
reconciliation of federal statutory income tax (on pre-tax income after
consideration of equity losses) to the Company’s provision for income taxes is
as follows (in thousands):





Years
      Ended December 31,2007
            
            
            2006
            
            
            2005Expected
      provision at federal statutory rate
            
            $
            10,318
            
            
            $
            5,133
            
            
            $
            7,050State
      taxes, net of federal impact
            
            
            571
            
            
            
            519
            
            
            
            894Research
      and development credits
            
            
            (321
            )
            
            
            (197
            )
            
            
            (351
            )Permanent
      difference related to stock-basedcompensation
            
            
            366
            
            
            
            998
            
            
            
            --Permanent
      difference related to acquisitions
            
            
            875
            
            
            
            487
            
            
            
            557Permanent
      difference related to tax-exempt interest
            
            
            (631
            )
            
            
            (307
            )
            
            
            --Other
      individually immaterial items
            
            
            (480
            )
            
            
            (251
            )
            
            
            (9
            )Provision
      for income taxes
            
            $
            10,698
            
            
            $
            6,382
            
            
            $
            8,141





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


81
 Table of Contents




SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)




December
      31,2007
            
            
            2006Deferred
      tax assets:Net
      operating loss carry-forwards
            
            $
            113
            
            
            $
            327Deferred
      revenue
            
            
            --
            
            
            
            30Capitalized
      research and development
            
            
            88
            
            
            
            195Depreciation
            
            
            7,655
            
            
            
            6,386Stock-based
      compensation
            
            
            2,043
            
            
            
            2,995Warranty
      expense accrual
            
            
            676
            
            
            
            364Research
      and development and other credits
            
            
            675
            
            
            
            1,411Other
      accruals and reserves
            
            
            4,337
            
            
            
            2,480Total
      deferred tax assets
            
            
            15,587
            
            
            
            14,188Deferred
      tax liabilities:Investment
      holdings
            
            
            --
            
            
            
            (16
            )Prepaid
      insurance and property tax
            
            
            (536
            )
            
            
            (479
            )Deferred
      revenue
            
            
            (2,791
            )
            
            
            --Intangible
      assets
            
            
            (21,567
            )
            
            
            (4,130
            )Total
      deferred tax liabilities
            
            
            (24,894
            )
            
            
            (4,625
            )Net
      deferred tax assets (liabilities)
            
            $
            (9,307
            )
            
            $
            9,563





U.S.
income taxes were not provided on undistributed earnings from investments in
certain non-U.S. subsidiaries. Determination of the amount of unrecognized
deferred tax liability for temporary differences related to investments in these
non-U.S. subsidiaries that are essentially permanent in duration is not
practicable. The Company currently intends to reinvest these earnings in
operations outside the U.S.





As of
December 31, 2007, the Company had federal net operating loss carryforwards of
approximately $107,000. The net operating losses from the acquisition of
Synthematix may be subject to an annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization. The net operating loss
carryforwards will start to expire in 2010, if not utilized. As of December 31,
2007, the Company also had Swiss net operating loss carryforwards of
approximately $407,000, which will expire in 2014, if not utilized.





As of
December 31, 2007, the Company had California research and development tax
credit carryforwards of approximately $1,039,000. The state research and
development credits have no expiration date. The research and development tax
credits from the acquisitions of IntelliChem and Synthematix may be subject to
an annual limitation of Section 383 due to ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state
provisions.





The
Internal Revenue Service may examine the Company’s federal income tax returns
and, in the course of which, may propose adjustments to the Company’s federal
income tax liability reported on such returns.





10.
Accounting for Uncertainty in Income Taxes





In June
2006, the FASB issued Financial Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109.FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition threshold a
tax position must meet before being recognized in the financial statements.
Under FIN 48, the impact of an uncertain income tax position on the income tax
return must be recognized at the largest amount that is more-likely-than-not to
be sustained upon audit by the relevant taxing authority. An uncertain income
tax position will not be recognized if it has less than a 50% likelihood of
being sustained. Additionally, FIN 48 provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition.


82
 Table of Contents
  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


The
Company adopted the provisions of FIN 48 on January 1, 2007. The total amount of
unrecognized tax benefits as of the date of adoption was $4,273,000. As a result
of the implementation of FIN 48, the Company recognized a $996,000 increase in
liability for unrecognized tax benefits which was accounted for as follows (in
thousands):





Reduction
      in retained earnings (cumulative effect)
            
            $
            939Reduction
      in additional paid-in capital
            
            
            57Increase
      in liability
            
            $
            996





The
following is a tabular reconciliation of the total amounts of unrecognized tax
benefits for the year ended December 31, 2007 (in thousands):





Unrecognized
      tax benefit at January 1, 2007
            
            $
            4,273Increase
      in tax positions for prior
      period
            
            
            287Decrease
      in tax positions for prior
      period
            
            
            --Increase
      in tax positions for current
      period
            
            
            526Settlements
            
            
            --Lapse
      of statute of
      limitations
            
            
            (121
            )Total
      unrecognized tax benefit at December 31, 2007
            
            $
            4,965





Included
in the balance of unrecognized tax benefits at December 31, 2007 was $3,472,000
of tax benefits that, if recognized, would affect the effective tax rate. Also
included in the balance of unrecognized tax benefits at December 31, 2007, was
$1,493,000 of tax benefits that, if recognized, would result in adjustments to
other tax accounts, primarily additional paid-in capital and deferred income
taxes.





The
Company recognizes interest accrued related to unrecognized income tax benefits
in interest expense and penalties as a component of the income tax provision, in
the accompanying Consolidated Statement of Operations. Related to the uncertain
tax benefits noted above, the Company accrued additional interest and penalties
of $108,000 during 2007 and in total, as of December 31, 2007, has recognized a
liability for interest and penalties of $201,000.





The
Company is subject to taxation in the U.S. and various state and foreign
jurisdictions. The Company is not currently under audit by any tax authorities.
Because the Company used some of the tax attributes carried forward from
previous years to tax years that are still open, statutes of limitation remain
open for all tax years to the extent of the attributes carried forward into tax
year 2003.





The
Company does not anticipate the total amounts of unrecognized income tax
benefits will significantly increase or decrease within the next 12 months of
the reporting date.





The
Company assessed the impact of uncertainties in tax positions taken by the MDL
Group Companies in periods prior to the acquisition. Based upon this assessment,
no FIN 48 liabilities were recorded on the opening balance sheet. By
operation of tax law, the seller of the MDL Group of Companies retains the
primary obligation for most pre-acquisition U.S. tax liabilities.  In
addition, by the terms of the acquisition agreement, the seller of the MDL Group
of Companies has agreed to indemnify the Company for any tax
liabilities related to pre-acquisition periods.





11.
Intangible Assets





The
Company acquired certain patent rights and know-how from third parties. It also
obtained certain intangible assets in the acquisitions of IntelliChem,
Synthematix, Autodose and MDL. These intangible assets are being amortized on a
straight-line basis over the estimated useful lives of the assets. Because some
of the intangible assets related to Autodose acquisition were recorded in
foreign currencies, the balance of these intangible assets may be affected by
foreign currency exchange rate fluctuations when converted to U.S. dollars at
each reporting period. The current estimated weighted-average useful lives and
carrying amounts of these intangible assets are as follows (in thousands, except
for useful lives):


83
 Table of Contents
  SYMYX
TECHNOLOGIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


December
      31, 2007Weighted-Average
      Useful Lives
              (Years)
            
            
            Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            
            Net
      Carrying AmountAcquired
      technology
            
            
            5.0
            
            
            $
            3,130
            
            
            $
            (2,591
            )
            
            $
            539Trade
      name
            
            
            3.4
            
            
            
            1,774
            
            
            
            (226
            )
            
            
            1,548Core/Developed
      technology
            
            
            5.7
            
            
            
            23,463
            
            
            
            (8,200
            )
            
            
            15,263Customer
      relationships
            
            
            7.8
            
            
            
            40,042
            
            
            
            (3,755
            )
            
            
            36,287Proprietary
      content
            
            
            6.0
            
            
            
            7,800
            
            
            
            (325
            )
            
            
            7,475Elsevier
      license
      agreement
            
            
            3.0
            
            
            
            3,100
            
            
            
            (258
            )
            
            
            2,842Third
      party license agreements
            
            
            3.0
            
            
            
            1,300
            
            
            
            (108
            )
            
            
            1,192Bargain
      lease
            
            
            8.0
            
            
            
            1,300
            
            
            
            (41
            )
            
            
            1,259Total
      intangibles
            
            
            6.6
            
            
            $
            81,909
            
            
            $
            (15,504
            )
            
            $
            66,405




December
      31, 2006Weighted-Average
      Useful Lives
                (Years)
              
              
              Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              
              Net
      Carrying AmountAcquired
      technology
              
              
              5.0
              
              
              $
              3,130
              
              
              $
              (2,299
              )
              
              $
              831Trade
      name
              
              
              1.9
              
              
              
              1,487
              
              
              
              (1,172
              )
              
              
              315Core/Developed
      technology
              
              
              4.6
              
              
              
              12,804
              
              
              
              (4,980
              )
              
              
              7,824Customer
      backlog
              
              
              0.5
              
              
              
              146
              
              
              
              (146
              )
              
              
              --Customer
      relationships
              
              
              6.5
              
              
              
              6,354
              
              
              
              (1,713
              )
              
              
              4,641Total
      intangibles
              
              
              5.0
              
              
              $
              23,921
              
              
              $
              (10,310
              )
              
              $
              13,611




In the
years ended December 31, 2007, 2006 and 2005, the Company recorded amortization
expense for intangible assets of $6,418,000, $4,562,000 and $3,807,000,
respectively. Assuming no subsequent impairment of the underlying assets, the
annual amortization expense of total intangible assets is expected to be
approximately $13,270,000 in 2008, $12,027,000 in 2009, $10,122,000 in 2010,
$8,010,000 in 2011, $7,371,000 in 2012, and $15,605,000 thereafter.




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




12.           Financial
Instruments





The
Company has not entered into any derivative contracts at December 31, 2007. The
following is a summary of the Company’s risk management strategies and the
effect of these strategies on the Company’s consolidated financial
statements.





84
 Table of Contents




SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Concentrations
of credit risk





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash, cash equivalents, investments in
debt securities and trade accounts receivable. The Company carried an
$11,902,000 trade accounts receivable balance from Dow at December 31, 2007 but
did not consider any portion of this accounts receivable to be at risk. The
Company maintains cash and cash equivalents and available-for-sale investments
in various debt securities and money market mutual funds. The Company’s policy
is designed to limit exposure to any one institution or company. The relative
credit standing of the security issuers is monitored to ensure compliance with
the Company’s investment strategy. The Company does not require collateral on
these financial instruments.





Financial
Instruments





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





Cash and cash equivalents:
The carrying amounts reported in the balance sheets for cash and cash
equivalents are their fair values. The fair value for cash equivalents are based
on quoted market prices.





Accounts receivable and accounts
payable: The carrying amounts reported in the balance sheets for accounts
receivable and accounts payable approximate their fair values.





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





13.           Restructuring
Charges





On
October 2, 2007, in connection with the MDL Acquisition, the Company announced a
restructuring plan to terminate approximately 120 employees of the Company,
comprised of approximately 100 positions in the United States and approximately
20 positions internationally. Total estimated restructuring termination benefits
were $7,040,000, consisting primarily of involuntary employee termination
benefits. Of the total restructuring charges, $6,823,000 was associated with the
former MDL employees and therefore was accrued as part of the liabilities
assumed at the time of MDL acquisition according to FASB Statement No. 141,
Accounting for Business
Combinations, as well as EITF Consensus No. 95-3. The remaining balance
associated with the termination of employees of the acquiring company was
recorded as part of the operating expenses according to FASB Statement No. 146,
Accounting for Costs
Associated with Exit or Disposal Activities. As of December 31, 2007, the
Company completed the majority of the restructuring plan. The estimated costs to
complete the restructuring plan in the amount of $2,275,000 are expected to be
paid out in the first quarter of 2008.


85


SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


14.           Quarterly
Results of Operations (Unaudited)





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




Three
      Months Ended2007
              
              March
      31,
              
              
              June
      30,
              
              
              September
      30,
              
              
              December
      31 (b),Total
      revenue
              
              $
              24,967
              
              
              $
              25,557
              
              
              $
              26,053
              
              
              $
              48,495Total
      Costs
              
              
              4,045
              
              
              
              5,790
              
              
              
              5,227
              
              
              
              13,860Gross
      Profit
              
              
              20,922
              
              
              
              19,767
              
              
              
              20,826
              
              
              
              34,635Operating
      expenses:Research
      and development
              
              
              15,413
              
              
              
              14,529
              
              
              
              14,163
              
              
              
              22,081Sales,
      general and administrative
              
              
              9,617
              
              
              
              9,488
              
              
              
              9,537
              
              
              
              13,293Acquired
      in-process research and development
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              2,500Amortization
      of intangible assets arising from business
    combinations
              
              
              261
              
              
              
              258
              
              
              
              262
              
              
              
              1,472Total
      operating expenses
              
              
              25,291
              
              
              
              24,275
              
              
              
              23,962
              
              
              
              39,346Income
      (loss) from operations
              
              
              (4,369
              )
              
              
              (4,508
              )
              
              
              (3,136
              )
              
              
              (4,711
              )Gain
      from sale of equity interest in Ilypsa, Inc.
              
              
              --
              
              
              
              --
              
              
              
              40,826
              
              
              
              --Interest
      and other income
              
              
              1,708
              
              
              
              1,786
              
              
              
              1,812
              
              
              
              388Income
      (loss) before income tax (expense) benefit and equity loss
              
              
              (2,661
              )
              
              
              (2,722
              )
              
              
              39,502
              
              
              
              (4,323
              )Income
      tax (expense)
      benefit
              
              
              1,903
              
              
              
              1,252
              
              
              
              (14,833
              )
              
              
              980Equity
      in loss from investment in Visyx
              
              
              (214
              )
              
              
              --
              
              
              
              (114
              )
              
              
              14Net
      income (loss)
              
              $
              (972
              )
              
              $
              (1,470
              )
              
              $
              24,555
              
              
              $
              (3,329
              )Basic
      net income (loss) per share (a)
              
              $
              (0.03
              )
              
              $
              (0.04
              )
              
              $
              0.74
              
              
              $
              (0.10
              )Diluted
      net income (loss) per share (a)
              
              $
              (0.03
              )
              
              $
              (0.04
              )
              
              $
              0.73
              
              
              $
              (0.10
              )




Three
      Months Ended2006
              
              March
      31,
              
              
              June
      30,
              
              
              September
      30,
              
              
              December
      31 (b),Total
      revenue
              
              $
              27,066
              
              
              $
              28,424
              
              
              $
              29,533
              
              
              $
              39,877Total
      Costs
              
              
              4,167
              
              
              
              4,784
              
              
              
              4,385
              
              
              
              7,565Gross
      Profit
              
              
              22,899
              
              
              
              23,640
              
              
              
              25,148
              
              
              
              32,312Operating
      expenses:Research
      and development
              
              
              13,465
              
              
              
              15,181
              
              
              
              14,306
              
              
              
              16,316Sales,
      general and administrative
              
              
              7,600
              
              
              
              8,700
              
              
              
              8,329
              
              
              
              9,868Acquired
      in-process research and development
              
              
              --
              
              
              
              --
              
              
              
              1,392
              
              
              
              --Amortization
      of intangible assets arising from business
    combinations
              
              
              442
              
              
              
              442
              
              
              
              470
              
              
              
              345Total
      operating expenses
              
              
              21,507
              
              
              
              24,323
              
              
              
              24,497
              
              
              
              26,529Income
      (loss) from operations
              
              
              1,392
              
              
              
              (683
              )
              
              
              651
              
              
              
              5,783Interest
      and other income
              
              
              1,707
              
              
              
              2,053
              
              
              
              1,875
              
              
              
              2,074Income
      before income tax expense and equity loss
              
              
              3,099
              
              
              
              1,370
              
              
              
              2,526
              
              
              
              7,857Income
      tax expense
              
              
              (1,435
              )
              
              
              (605
              )
              
              
              (1,481
              )
              
              
              (2,861
              )Equity
      in loss from investment in Visyx
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (186
              )Net
      income
              
              $
              1,664
              
              
              $
              765
              
              
              $
              1,045
              
              
              $
              4,810Basic
      net income per share
      (a)
              
              $
              0.05
              
              
              $
              0.02
              
              
              $
              0.03
              
              
              $
              0.15Diluted
      net income per share
      (a)
              
              $
              0.05
              
              
              $
              0.02
              
              
              $
              0.03
              
              
              $
              0.14




(a)
Earnings per share, or EPS, for each quarter is computed using the
weighted-average number of shares outstanding during that quarter, while EPS for
the fiscal year is computed using the weighted-average number of shares
outstanding during the year. Thus, the sum of the EPS for each of the four
quarters may not equal the EPS for the fiscal year.
  (b) In
the final quarter of 2007 and 2006, delivery of multiple Symyx Tools to the
Company’s customers resulted in higher product sales revenue, which contributed
to the higher earnings per share in that quarter when compared with the other
quarters in 2007 and 2006, respectively.
  (c )
Total costs in the above schedule included certain expenses related to software
consulting services and software and hardware support and maintenance services
and amortization of  acquired software technology that were not
reported previously in the Company’s Quarterly Reports on Form
10-Q.


86
 Table of Contents


ITEM9.  CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None








ITEM9A. CONTROLS AND PROCEDURES




EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
  Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation,
our Chief Executive Officer and our Chief Financial Officer have concluded that,
as of December 31, 2007, such disclosure controls and procedures were
effective.
  Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
  LIMITATIONS
ON THE EFFECTIVENESS OF CONTROLS
  Our
disclosure controls and procedures are designed to provide reasonable, not
absolute, assurance that the objectives of our disclosure control system are
met. Because of inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Our Chief Executive Officer and Chief Financial
Officer have concluded, based on their evaluation as of the end of the period
covered by this report, that our disclosure controls and procedures were
sufficiently effective to provide reasonable assurance that the objectives of
our disclosure control system were met.
  CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
  There
were no changes in our internal control over financial reporting that occurred
during the fourth fiscal quarter ended December 31, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.


MANAGEMENT
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




As
required by the SEC rules and regulations for the implementation of Section 404
of Sarbanes-Oxley Act, our management is responsible for establishing and
maintaining adequate internal control over financial reporting. Our internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that: (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;  (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting  principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and Directors of the Company; and  (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that could
have a material effect on the financial statements.




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




The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007. In making this
assessment, the Company’s management used criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.




As
allowed by guidance provided by the Securities and Exchange Commission relating
to current year acquisitions, the Company’s management excluded the internal
controls of MDL Group Companies (as defined in Note 1 of Notes to the
Consolidated Financial Statements), from its assessment of and conclusion on the
effectiveness of internal control over financial reporting as of December 31,
2007. The 2007 consolidated financial statements of Symyx Technologies, Inc.
total  included $15.9 million and $37.5 million, of total assets and net
liabilities, respectively, as of December 31, 2007 and $9.2 million of total
revenue and $7.1 million of net loss for the year then ended in relation to MDL
Group Companies. The Company acquired MDL Group Companies in a business
combination on October 1, 2007.


87
 Table of Contents




Based on
its assessment, the Company’s management believes that, as of December 31, 2007,
the Company’s internal control over financial reporting was effective based on
the criteria set forth by COSO.




The
Company’s independent registered public accounting firm, Ernst & Young LLP,
has issued an attestation report on management’s assessment of the Company’s
internal control over financial reporting. This report is included
below.







Report
of Independent Registered Public Accounting Firm








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





We have
audited Symyx Technologies, Inc.’s internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Symyx Technologies, Inc.’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management Report
on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the company’s internal control over financial reporting based on
our audit.





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





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





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





As
indicated in the accompanying Management Report on Internal Control over
Financial Reporting, management’s assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of the MDL Group Companies  which is included in the
2007 consolidated financial statements of Symyx Technologies, Inc. and
constituted $15.9 million and $37.5 million of total assets and net liabilities,
respectively, as of December 31, 2007 and $9.2 million and $7.1 million of total
revenue and net loss, respectively, for the year then ended.  Our
audit of internal control over financial reporting of Symyx Technologies, Inc.
also did not include an evaluation of the internal control over financial
reporting of the MDL Group Companies.


88
 Table of Contents




In our
opinion, Symyx Technologies, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on the COSO criteria.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2007 consolidated financial statements of
Symyx Technologies, Inc. and our report dated March 17, 2008, expressed an
unqualified opinion thereon.






/s/ Ernst &
      Young LLP






San Jose,
California




March 17,
2008




ITEM9B. OTHER INFORMATION





None


89
 Table of Contents


PART
III




Certain
information required by Part III is omitted from this Annual Report on Form 10-K
because the registrant will file with the U.S. Securities and Exchange
Commission a definitive proxy statement pursuant to Regulation 14A in connection
with the solicitation of proxies for the Company’s Annual Meeting of
Stockholders expected to be held in June 2008 (the “Proxy Statement”) not later
than 120 days after the end of the fiscal year covered by this Annual Report on
Form 10-K, and certain information included therein is incorporated herein by
reference.





ITEM10.  DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE





The
information required by this item with respect to directors and executive
officers may be found under the caption “Executive Officers of the Registrant”
in Part I, Item 1 of this Annual Report on Form 10-K, and in the section
entitled “Proposal 1 - Election of Directors” appearing in the Proxy Statement.
Such information is incorporated herein by reference.





The
information required by this Item with respect to our audit committee and audit
committee financial expert may be found in the section entitled “Proposal 1 -
Election of Directors - Audit Committee” appearing in the Proxy Statement. Such
information is incorporated herein by reference.





The
information required by this Item with respect to compliance with Section 16(a)
of the Securities Exchange Act of 1934 may be found in the section entitled
“Section 16(a) Beneficial Ownership Reporting Compliance” appearing in the Proxy
Statement. Such information is incorporated herein by reference.





The
Company has adopted a Code of Conduct and Ethics that applies to its employees,
including principal executive officer, principal financial officer and
controller, within the meaning of Section 404 of the Sarbanes-Oxley Act of 2002
and the rules promulgated thereunder. A copy of the Code of Conduct and Ethics
is available at the Company’s website: www.symyx.com and
without charge upon written request to: Corporate Secretary, 415 Oakmead
Parkway, Sunnyvale, CA 94085. To the extent required by the law, amendments to,
and waivers from, any provision of the Company’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 make such public disclosure by posting such
information on the Company’s website in accordance with SEC rules.





ITEM 11.  EXECUTIVE COMPENSATION





The
information required by this Item with respect to director and executive officer
compensation is incorporated herein by reference from the information under the
caption “Executive Officer and Director Compensation.”





The
information required by this Item with respect to Compensation Committee
interlocks and insider participation is incorporated herein by reference to the
information from the Proxy Statement under the section entitled “Proposal 1 -
Compensation Committee Interlocks and Insider Participations.”





The
information required by this Item with respect to our Compensation Committee’s
review and discussion of the Compensation Discussion and Analysis included in
the Proxy Statement is incorporated herein by reference to the information from
the Proxy Statement under the section entitled “Proposal 1 - Election of
Directors - Compensation Committee report.”


90
 Table of Contents




ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND   RELATED STOCKHOLDER
MATTERS





The
information required by this Item with respect to security ownership of certain
beneficial owners and management is incorporated herein by reference to the
information appearing in our 2008 Proxy Statement under the heading “Security
Ownership of Certain Beneficial Owners and Management.”






Securities
Authorized for Issuance under the Equity Compensation Plans





The
following table provides information as of December 31, 2007 with respect to
shares of our common stock issuable under our existing equity compensation
plans.




A
              
              
              B
              
              
              C
              
              
              D
              
              EPlan
      Category
              
              Number
      of Securities to Be Issued Upon Exercise of Outstanding
      Options
              
              
              Weighted
      Average Exercise Price of Outstanding Options
              
              
              Number
      of Securities to Be Issued Upon Vesting of Outstanding Restricted Stock
      Units
              
              
              Weighted
      Average Grant Price of Outstanding Restricted Stock Units
              
              
              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)
              
              
              6,031,510
              (3)
              
              $
              24.94
              
              
              
              445,486
              
              
              $
              17.16
              
              
              
              2,654,087
              (4)Equity
      Compensation Plans Not Approved by Stockholders (2)
              
              
              835,933
              
              
              $
              10.47
              
              
              
              --
              
              
              
              --
              
              
              
              16,117Total
              
              
              6,867,443
              
              
              $
              23.18
              
              
              
              445,486
              
              
              $
              17.16
              
              
              
              2,670,204





(1)
            
            Consists
      of the 1996 Stock Option Plan, 1997 Stock Option Plan, 2007 Stock
      Incentive Plan and the 1999 Employee Stock Purchase
  Plan.(2)
            
            Consists
      of 2001 Nonstatutory Plan, IntelliChem, Inc. 2003 Stock Option Plan
      assumed in connection with the IntelliChem acquisition and the
      Synthematix, Inc. 2000 Equity Compensation Plan, as amended, assumed in
      connection with the Synthematix acquisition. A description of these plans
      is available in Note 4 of the Notes to Consolidated Financial
      Statements.(3)
            
            Excludes
      purchase rights accruing under our 1999 Employee Stock Purchase Plan which
      has a stockholder approved reserve of 1,570,370 shares as of December 31,
      2007. Under the 1999 Employee Stock Purchase Plan, each eligible employee
      may purchase up to a maximum of 10,000 shares per annum of common stock at
      semi-annual intervals on the last United States business day of April and
      October each year at a purchase price per share equal to 85% of the lower
      of (i) the closing selling price per share of common stock on the
      employee’s entry date into the 12-month offering period in which that
      semi-annual purchase date occurs or (ii) the closing selling price
      per share on the semi-annual purchase date.  Eligible employees
      may defer up to 10% of their salary, but not to exceed $25,000, in any
      calendar year, to purchase shares under this Plan.(4)
            
            Consists
      of shares available for future issuance under our 2007 Stock Incentive
      Plan and the 1999 Employee Stock Purchase Plan. As of December 31, 2007,
      an aggregate of 1,570,370 shares of common stock were available for
      issuance under the 1999 Employee Stock Purchase Plan and 1,083,717 shares
      of common stock were available for issuance under the 2007 Stock Incentive
      Plan. The 1999 Employee Stock Purchase Plan provides for annual increases
      in the number of shares available for issuance under the Plan on the first
      day of each fiscal year, equal to the lesser of 1% of the outstanding
      shares of common stock on the first day of the fiscal year, 350,000
      shares, or a lesser amount as determined by our Board of
      Directors.


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 Table of Contents


ITEM13.  CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS AND DIRECTOR INDEPENDENCE





The
information required by this item with respect to related party transaction is
incorporated herein by reference to the information under the caption “Certain
Relationships and Related Transactions” in the Proxy Statement.





The
information required by this Item with respect to director independence is
incorporated herein by reference to the information in the Proxy Statement in
the section entitled “Proposal 1 - Election of Directors - Independence of the
Board of Directors.”





ITEM14.  PRINCIPAL ACCOUNTING FEES AND
SERVICES





The
information required by this item is incorporated by reference to the
information under the caption “Proposal 2—Ratification of Selection of
Independent Registered Public Accounting Firm—Principal Accounting Fees and
Services” in the Proxy Statement.


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 Table of Contents


PART
IV





ITEM15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES





(a)(
1).  FINANCIAL STATEMENTS





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





Report
      of Independent Registered Public Accounting
Firm


Consolidated
      Balance Sheets at December 31, 2007 and
2006


Consolidated
      Income Statements for the Years Ended December 31, 2007, 2006 and
      2005


Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2007,
      2006 and 2005


Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
      2005


Notes
      to Consolidated Financial
Statements





(a)
(2).  FINANCIAL STATEMENT SCHEDULES





All
schedules are omitted as the required information is inapplicable or the
information is presented in the Consolidated Financial Statements and notes
thereto 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 Incorporation3.2
            (18)
            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**10.6
            (2)
            Form
      of Change of Control Agreement between Symyx and W. Henry
      Weinberg**10.8
            (16)
            Form
      of Restricted Stock Agreement under the Symyx Technologies, Inc. 1997
      Stock Plan10.9
            (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 Company10.11
            (2)
            License
      Agreement dated June 22, 1995 between Symyx and Lawrence Berkeley
      Laboratory, on behalf of The Regents of the University of
      California10.13
            (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




93
 Table of Contents




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
      thereunder10.19
            (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**10.23
            (17)
            Symyx
      Technologies, Inc. Executive Change in Control and Severance Benefit
      Plan**10,24
            (19)
            Severance
      Agreement between Symyx Technologies, Inc. and Ms. Jeryl L.
      Hilleman10.25
            (20)
            Sale
      Agreement by and Among Elsevier, Inc., Elsevier Swiss Holdings S.A.,
      Elsevier Japan KK, Elsevier Limited and MDL Information Systems (UK)
      Limited as sellers and Symyx Technologies, Inc. as
  buyers10.26
            (21)
            Form
      of Restricted Stock Unit Award under the Symyx Technologies, Inc. 2007
      Stock Incentive Plan**10.27
            (21)
            Form
      of Director and Executive Officer Indemnification
  Agreement10.28
            (22)
            Credit
      Agreement, dated as of September 28, 2007, by and among Symyx
      Technologies, Inc. as borrower, Bank of America, N.A. as administrative
      agent and L/C issuer, and the other lenders from time to time party
      thereto10.29
            (23)
            Form
      of Stock Option Agreement under the Symyx Technologies, Inc. 2007 Stock
      Incentive Plan10.30
            (24)
            Form
      of Stock Option Agreement under the Symyx Technologies, Inc. 2001
      Nonstatutory Stock Option Plan10.31
            (25)
            2007
      Stock Incentive Plan*10.32
            (26)
            Supplemental
      Agreement, by and between Symyx Technologies, Inc. and The Dow Chemical
      Company**10.33
            (26)
            Fiscal
      Year 2007 and 2008 Base Salaries for Named Executive
    Officers14
            (6)
            Symyx
      Technologies, Inc. Code of Conduct and Ethics21
            (26)
            List
      of Subsidiaries23.1
            (26)
            Consent
      of Independent Registered Public Accounting Firm24.1
            
            Power
      of Attorney (reference is made to the signature page of this
      report)31.1
            (26)
            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
            (26)
            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
            (26)
            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
            (26)
            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.


*     Confidential
treatment has been requested for portions of these exhibits.
 **   Management
contracts or compensatory plans or arrangements.
 ___________________
  94
 Table of Contents




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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


(16)
Incorporated by reference to the same number exhibit filed with the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2006.


(17)
Incorporated by reference to the same number exhibit filed with Registrant’s
Quarterly Report on Form 10-Q for the period ended March 31, 2007.


(18)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K on December 12, 2007.


(19)
Incorporated by reference to the same number exhibit filed with Registrant’s
Quarterly Report on Form 10-Q for the period ended June 30, 2007.


(20)
Incorporated by reference to Exhibit 10.25 filed with Registrant’s Current
Report on Form 8-K on August 15, 2007.


(21)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K on September 4, 2007.


(22)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K on October 4, 2007.


(23)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K on November 8, 2007


95
 Table of Contents


(24)
Incorporated by reference to Exhibit 10.7 filed with Registrant’s Quarterly
Report on Form 10-Q for the period ended September 30, 2007.


(25)
Incorporated by reference to Exhibit 10.1 filed with Registrant’s Quarterly
Report on Form 10-Q for the period ended June 30, 2007.


(26)
Filed here within.




96
 Table of Contents


SIGNATURES








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







SYMYX
      TECHNOLOGIES, INC.(Registrant)
  
 
 Date:  March
      17, 2008
              /s/
      Isy GoldwasserIsy
      GoldwasserChief
      Executive Officer(Principal
      Executive Officer)Date:  March
      17, 2008
              /s/
      Rex S. JacksonRex
      S. JacksonExecutive
      Vice President,Chief
      Financial Officer(Principal
      Financial Officer)


97
 Table of Contents




POWER
OF ATTORNEY





KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Isy Goldwasser, Rex S. Jackson and Richard J.
Rosenthal, or any of them, each with the power of substitution, his
attorney-in-fact, to sign any amendments to this Annual Report on Form 10-K
(including post-effective amendments), and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
                
                Title
                
                DateBy
                /s/
      ISY GOLDWASSER
                
                Chief
      Executive Officer
                
                March
      17, 2008Isy
      Goldwasser
                
                (Chief
      Executive Officer and Director)By
                /s/
      REX S. JACKSON
                
                Executive
      Vice President
                
                March
      17, 2008Rex
      S. Jackson
                
                and
      Chief Financial Officer
                  (Principal
      Financial Officer)By
                /s/
      RICHARD J. ROSENTHAL
                
                Senior
      Vice President of Finance
                
                March
      17, 2008Richard
      J. Rosenthal
                
                (Principal
      Accounting Officer)By
                /s/
      STEVEN D. GOLDBY
                
                Executive
      Chairman
                
                March
      17, 2008Steven
      D. Goldby
                
                of
      the BoardBy
                /s/
      THOMAS R. BARUCH
                
                Director
                
                March
      17, 2008Thomas
      R. BaruchBy
                /s/
      DAVID C. HILL
                
                Director
                
                March
      17, 2008David
      C. HillBy
                /s/
      ANTHONY R. MULLER
                
                Director
                
                March
      17, 2008Anthony
      R. MullerBy
                /s/
      KENNETH J. NUSSBACHER
                
                Director
                
                March
      17, 2008Kenneth
      J. NussbacherBy
                /s/
      MARIO M. ROSATI
                
                Director
                
                March
      17, 2008Mario
      M. RosatiBy
                /s/
      BRUCE A. PASTERNACK
                
                Director
                
                March
      17, 2008Bruce
      A. Pasternack
  98
 Table of Contents




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 Incorporation3.2
            (18)
            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**10.6
            (2)
            Form
      of Change of Control Agreement between Symyx and W. Henry
      Weinberg**10.8
            (16)
            Form
      of Restricted Stock Agreement under the Symyx Technologies, Inc. 1997
      Stock Plan10.9
            (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 Company10.11
            (2)
            License
      Agreement dated June 22, 1995 between Symyx and Lawrence Berkeley
      Laboratory, on behalf of The Regents of the University of
      California10.13
            (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 thereto10.14
            (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
      thereunder10.19
            (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**10.23
            (17)
            Symyx
      Technologies, Inc. Executive Change in Control and Severance Benefit
      Plan**10,24
            (19)
            Severance
      Agreement between Symyx Technologies, Inc. and Ms. Jeryl L.
      Hilleman10.25
            (20)
            Sale
      Agreement by and Among Elsevier, Inc., Elsevier Swiss Holdings S.A.,
      Elsevier Japan KK, Elsevier Limited and MDL Information Systems (UK)
      Limited as sellers and Symyx Technologies, Inc. as
  buyers10.26
            (21)
            Form
      of Restricted Stock Unit Award under the Symyx Technologies, Inc. 2007
      Stock Incentive Plan


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 Table of Contents


**10.27
            (21)
            Form
      of Director and Executive Officer Indemnification
  Agreement10.28
            (22)
            Credit
      Agreement, dated as of September 28, 2007, by and among Symyx
      Technologies, Inc. as borrower, Bank of America, N.A. as administrative
      agent and L/C issuer, and the other lenders from time to time party
      thereto10.29
            (23)
            Form
      of Stock Option Agreement under the Symyx Technologies, Inc. 2007 Stock
      Incentive Plan10.30
            (24)
            Form
      of Stock Option Agreement under the Symyx Technologies, Inc. 2001
      Nonstatutory Stock Option Plan10.31
            (25)
            2007
      Stock Incentive Plan*10.32
            (26)
            Supplemental
      Agreement, by and between Symyx Technologies, Inc. and The Dow Chemical
      Company**10.33
            (26)
            Fiscal
      Year 2007 and 2008 Base Salaries for Named Executive
    Officers14
            (6)
            Symyx
      Technologies, Inc. Code of Conduct and Ethics21
            (26)
            List
      of Subsidiaries23.1
            (26)
            Consent
      of Independent Registered Public Accounting Firm24.1
            
            Power
      of Attorney (reference is made to the signature page of this
      report)31.1
            (26)
            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
            (26)
            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
            (26)
            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
            (26)
            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.





*     Confidential
treatment has been requested for portions of these exhibits.


**   Management
contracts or compensatory plans or arrangements.


___________________





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


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


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


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


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


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


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


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


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


100
 Table of Contents




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


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


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


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


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


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


(16)
Incorporated by reference to the same number exhibit filed with the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2006.


(17)
Incorporated by reference to the same number exhibit filed with Registrant’s
Quarterly Report on Form 10-Q for the period ended March 31, 2007.


(18)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K on December 12, 2007.


(19)
Incorporated by reference to the same number exhibit filed with Registrant’s
Quarterly Report on Form 10-Q for the period ended June 30, 2007.


(20)
Incorporated by reference to Exhibit 10.25 filed with Registrant’s Current
Report on Form 8-K on August 15, 2007.


(21)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K on September 4, 2007.


(22)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K on October 4, 2007.


(23)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K on November 8, 2007


(24)
Incorporated by reference to Exhibit 10.7 filed with Registrant’s Quarterly
Report on Form 10-Q for the period ended September 30, 2007.


(25)
Incorporated by reference to Exhibit 10.1 filed with Registrant’s Quarterly
Report on Form 10-Q for the period ended June 30, 2007.


(26)
Filed here within.








101