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

Form 10-K

Commission file number 000-27765

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

TABLE OF CONTENTS

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PART I

Item 1.    Business

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

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

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

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

General

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

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

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

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

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

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



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



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



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

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

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

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

Industry Background

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

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

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

Symyx Solution

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

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

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

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

Symyx Offerings

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

    Industry Collaborations

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

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

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

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

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

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

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

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

    Discovery Tools

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

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

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

    Software Licensing

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

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

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

    Intellectual Property Licensing

    Discovered Materials

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

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

    Sensors

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

    Patents

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

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

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Technology

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

    Synthesis

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

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

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

    Screening

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

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

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

    Informatics

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

Intellectual Property and Other Proprietary Rights

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

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library synthesis methods;



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the libraries themselves;



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screening or characterization methods;



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equipment and software; and



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new materials and their uses.

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

Markets

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

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

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

    Material Markets

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

Competition

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

Backlog of Committed Revenue

        As of December 31, 2004, our customers have contractually committed approximately $83 million for the purchase of Discovery Tools systems, licenses to our intellectual property, and funding for research and development under collaborative agreements in 2005. We also have an additional $226 million in revenue backlog expected to be realized in fiscal 2006 and beyond. We intend to augment the already committed revenue base with new and extended collaborations, new tools sales, and new intellectual property and software licenses.

Employees

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

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Executive Officers of the Registrant

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

(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

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

Environmental Matters

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

Risk Factors

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

11

contemplated by the forward-looking statements contained in this Annual Report on Form 10-K. These are not the only risks and uncertainties facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

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

        Over time we have expanded our base of customers and collaborative partners, however, substantial portions of our revenues are generated from a small number of companies. In particular, ExxonMobil accounted for 54% of our total revenue for the year ended December 31, 2004. Our largest three customers accounted for 64% of our total revenue in 2004. We expect that ExxonMobil, Dow, and a select list of other companies will in aggregate continue to account for a substantial portion of our revenues for the foreseeable future and the loss of one or more of these customers or collaborative partners would harm our business and operating results. The cancellation of the ExxonMobil or Dow strategic alliance or loss of another significant customer or collaborative partner could also be perceived as a loss of momentum in our business and an adverse impact on our financial results and this may cause the market price of our common stock to fall.

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

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

•

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



•

extend current collaboration research and development arrangements and add new ones;



•

secure new Discovery Tools customers; and



•

add additional licensees of both our software and intellectual property.

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

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

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

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

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

We are dependent on the research and development activities of companies in the chemical and petrochemical, pharmaceutical, electronics, consumer goods, and automotive industries, and declines or reductions in research and development activities in these industries could harm our business

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

        In particular, many companies in the chemical and pharmaceutical industries have, in the past several years, experienced declining profitability or even losses. As a result, some chemical and pharmaceutical companies have reduced their research and development activities. In addition, many chemical products have become commodity products that compete primarily on the basis of price. If commoditization of chemical products and other pressures affecting the industry continue in the future, more companies could adopt strategies that involve significant reductions in their research and development programs. Although we believe that our approach can help chemical and petrochemical, pharmaceutical, electronics, consumer goods, and automotive companies increase the efficiency of their research and development activities, our efforts to convince them of this value may be unsuccessful. To the extent that these companies reduce their research and development activities, they would be less likely to do business with us. As a result of current negative economic conditions, a number of these companies have recently both reduced the size of their research and development budgets as well as the size of their workforces. Decisions by these companies to reduce their research and development activities could result in fewer or smaller scale collaborations with us, fewer or smaller scale intellectual property and software licenses, fewer sales of our Discovery Tools systems and related licenses and products, or choosing not to work with Symyx, any of which could reduce our revenues and harm our business and operating results.

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

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

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

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

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

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

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

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

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

        To date, we have a limited number of contracts for our Discovery Tools systems. Because of the high cost and complexity of these systems, the sales cycle for them has been and is likely to continue to be long.

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Sales of these systems will require us to educate our potential customers about the full benefits of these systems, which may require significant time.

        Sales of Discovery Tools systems and licensing of intellectual property, software, technologies, and materials will be subject to a number of significant risks over which we have little or no control, including:

•

customers' budgetary constraints and internal acceptance review procedures;



•

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



•

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



•

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



•

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



•

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



•

potential downturns in general or in industry specific economic conditions.

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

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

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

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

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

15

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•

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



•

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



•

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



•

developments or disputes concerning patent or other proprietary rights;



•

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



•

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



•

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



•

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



•

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



•

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



•

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



•

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



•

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



•

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

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

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

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Our stock price has been and may continue to be volatile

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

•

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



•

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



•

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



•

failure to achieve operating results projected by securities analysts;



•

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



•

changes in earnings estimates or recommendations by securities analysts;



•

changes in management;



•

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



•

speculation in the press or analyst community;



•

developments in our industry;



•

changes in our growth rates; and



•

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

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

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

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

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

19

rates decrease. Due in part to these factors, our investment income may fall short of expectations or we may suffer losses in principal if securities are sold that have declined in market value due to changes in interest rates.

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

        The Financial Accounting Standards Board issued SFAS No. 123(R) which we are required to adopt no later than July 1, 2005. This statement will require us to treat the value of stock options granted to employees as an expense. When we are required to expense stock option grants, it will reduce the attractiveness of granting stock options because the additional expense associated with these grants will reduce our profitability. However, stock options are an important employee recruitment and retention tool, and we may not be able to attract and retain key personnel if we reduce the scope of our employee stock option program. Accordingly, once we are required to expense stock option grants, our profitability will be reduced. We may need to reevaluate the use of stock options as an employee recruitment and retention tool.

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

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

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

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

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

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

We are exposed to general global economic and market conditions

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

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

        We have recently established operations in certain parts of Europe and Asia. We intend to continue to expand our international presence in order to increase our export sales. Export sales to international customers and operating in foreign countries entail a number of risks, including:

•

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



•

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



•

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



•

longer payment cycles and greater difficulty in accounts receivable collection;



•

potentially adverse taxes;



•

currency exchange fluctuations;



•

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



•

greater difficulties in staffing and managing foreign operations;



•

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



•

other factors beyond our control.

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

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

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

21

timely manner in response to changing market conditions, industry standards or other customer requirements would harm our future revenues and our business and operating results.

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

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