This Quarterly Report on Form 10-Q ("Report"), including the "Management's Discussion and Analysis of Financial Condition and Results of Operation," contains 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. 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 trends in our business; our belief that our cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months; and our expectations regarding our customers.

Among the factors that could cause actual results to differ materially are the factors detailed in Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 13, 2009 (SEC File No. 000-27765), which readers should review. 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. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Report and the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2008.

All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for any subsequent quarter or for the full fiscal year.

Overview

Symyx Technologies, Inc. enables global leaders in life sciences, chemical, energy, and consumer and industrial products to optimize and accelerate their scientific research and development ("R&D"). Through our expertise in scientific informatics management, workflow optimization, and micro-scale, parallel experimentation, we help companies transform their R&D operations to minimize the time their scientists spend on routine, repetitive tasks and to maximize the return on their R&D investments. Symyx software, tools, and research services enable scientists to design, execute, analyze, and report experimental results faster, easier and less expensively.

Symyx Software provides a suite of scientific software, content and technology to support R&D information lifecycle management across the enterprise, improving scientists' ability to search, develop, manage, manipulate and store research data and to manage intellectual property. Symyx Software is the larger of our business units, accounting for 65% of our first quarter 2009 revenue.

Symyx HPR provides various ways for customers to access our proprietary high-throughput technologies for parallel (versus serial) experimentation, enabling greater speed and breadth of research. Symyx HPR 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. Our customers can bring some of the capabilities of our laboratories into their own organizations by purchasing our tools to integrate and automate laboratory experimentation to increase research productivity. Customers can also leverage our expertise and infrastructure through the purchase of research services, with programs that range from directed research to strategic collaborative relationships. The reorganization of services, along with the combination of tools and research into HPR are intended to leverage the expertise and experience of our technical staff and sales team, and provide new revenue opportunities to replace the expected continued decline in research-related revenue.

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.

Highlights for the quarter ended March 31, 2009 include:

· At $33.4 million, revenue for the quarter was down approximately 10% compared to the first quarter of 2008. Symyx Software increased 9%, but this gain was offset by the decline in Symyx HPR revenue resulting from the expiration of our primary agreement with ExxonMobil in May 2008 and lower revenue for Symyx tools.

· We exited the quarter with $81.8 million in cash and cash equivalents.

· Our net loss per share for the quarter was $0.09, compared with net loss per share of $0.20 in the first quarter of 2008. Despite lower revenue in the current quarter, we narrowed our loss by significantly reducing our operating expenses. These reductions were primarily driven by our December 2008 restructuring efforts, lower depreciation due to certain one-time charges we took in the fourth quarter of 2008 and generally lower capital expenditures, and expense management in the current quarter.

· We made significant progress against our technology roadmap. We released Symyx Notebook 6.1 in January 2009, enabling scientist to capture query and report on methods and data specifically encountered by analytical chemists and biologists; and we released Symyx Notebook 6.2 in March 2009, enabling scientists from different departments to collaborate effectively using a single, flexible enterprise ELN platform.

Due to the expiration of our primary contract with ExxonMobil in May 2008, we expect our research services revenues in the second quarter of 2009 to be significantly below our research revenues in the second quarter of 2008, and therefore for our total second quarter 2009 revenue to be below our results in the same quarter of last year. Further, the current macroeconomic environment has caused our customers to delay, and in some cases cancel, major expenditures with us, including purchases of tools, investments in software consulting services, and significant research services engagements. Though we continue to develop and progress our pipeline of new sales opportunities, we cannot predict with certainty if and when these opportunities will convert to bookings or revenue.

We recognized stock-based compensation expense of $880,000 and $1.1 million, respectively, during the three months ended March 31, 2009 and 2008, impacting our results of operations for the respective periods as follows (in thousands):

                                        Three Months Ended March 31,
                                       2009                   2008
Costs of revenue                    $       148         $             60
Research and development                     14                      370
Sales, general and administrative           718                      714
Total                               $       880         $          1,144

Critical Accounting Policies and Use of Estimates

We prepare our financial statements and accompanying notes in accordance with generally accepted accounting principles in the United States (GAAP). Note 1 of the Notes to the Consolidated Financial Statements included under Item 8 in our Annual Report on Form 10-K for the year ended December 31, 2008 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 assumptions used in determining the implied fair value of goodwill, the forfeiture rates for stock-based awards, the collectability of outstanding accounts receivables, reserve for excess or obsolete inventory, future warranty expenditures, assumptions such as the elements comprising a revenue arrangement, including the distinction between software upgrades/enhancements and new products, when our products achieve technological feasibility, the potential outcome of future tax consequences of events recognized in the our financial statements or tax returns and the fair value of acquired intangible assets. We evaluate our estimates, including those mentioned above, on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. We have not materially changed these policies from those reported in our Annual Report on Form 10-K for the year ended December 31, 2008, except for the following additional critical accounting policy regarding deferred costs.

Deferred Costs

We entered into some software service arrangements under which all the revenue is deferred until certain specified functionality is delivered In these cases, the direct variable expenses, not exceeding the expected revenue, are deferred and included in other current assets on the balance sheet until the revenue is recognized. Direct variable expenses include direct labor costs and direct services contracts with third parties working on the software service arrangements. As of March 31, 2009, we deferred approximately $311,000 of direct variable expenses related to software service arrangements where the revenue is deferred until future periods.

Results of Operations

Revenue

                                              Three Months Ended March 31,
                                                2009                 2008                  Change
                                                         (in thousands, except percentages)
Service                                    $       16,700       $       18,515     $  (1,815 )         (10 %)
Product                                             2,719                4,568        (1,849 )         (40 %)
License fees, content and royalties                13,975               13,824           151             1 %
Total revenue                              $       33,394       $       36,907     $  (3,513 )         (10 %)

The decrease in service revenue for the three months ended March 31, 2009 was primarily due to reduced research service revenue from ExxonMobil, partially offset by the additional software maintenance and license revenue generated by Symyx Software. Product sales for the quarter ended March 31, 2009 decreased compared with the same quarter last year due to lower shipments of Symyx tools systems. License fees, content and royalties increased slightly in the quarter ended March 31, 2009 compared to the same quarter last year due to additional software license fees and content subscription revenue.

ExxonMobil and The Dow Chemical Company (Dow) accounted for $3.4 million and $5.5 million of total revenue, respectively, for the three months ended March 31, 2009, and for $7.7 million and $5.8 million of total revenue, respectively, for the same period in 2008. With the MDL acquisition in October 2007, we have decreased the concentration of our revenue as it becomes distributed across a larger base of customers. We believe Dow will continue to be a major contributor to our 2009 revenue, but expect Symyx HPR revenue to be lower in 2009 as a result of the expiration of our main alliance agreement with ExxonMobil on May 31, 2008.

The revenue, and corresponding percent of revenue by each revenue component, from ExxonMobil and Dow, collectively, are as follows (in thousands, except percentages):

                                          Three Months Ended March 31,
                                            2009                  2008
Service                               $    4,000     24 %     $  7,153   39 %
Product sales                                858     32 %        1,102   24 %
License fees, content and royalties        4,037     29 %        5,288   38 %
Total                                 $    8,895     27 %     $ 13,543   37 %

Revenue by Segment

We segregate revenue into the following business units (in thousands):

                    Three Months Ended March 31,
                      2009                 2008                Change
                             (in thousands, except percentages)
Symyx Software   $       21,750       $       20,024     $  1,726         9 %
Symyx HPR                11,644               16,883       (5,239 )     (31 %)
Total            $       33,394       $       36,907     $ (3,513 )     (10 %)

Symyx Software generates revenue primarily from the licensing of software, including the Isentris platform and our lab execution and analysis software ("LEA") and Electronic Laboratory Notebook ("ELN") products, content subscriptions, and providing associated support, maintenance and consulting services. Symyx Software revenue increased slightly from 2008 to 2009 driven by higher maintenance revenue and slightly higher license revenue, which offset lower consulting services revenue in the current quarter.

Symyx HPR generates revenue primarily from providing directed and collaborative research services and selling tools and associated services, and to a lesser extent, licensing materials and intellectual property. The decrease in Symyx HPR revenue in 2009 from 2008 resulted largely from the decrease of service revenue from ExxonMobil by $3.7 million. The balance of the decline was due to lower tools sales in the first quarter of 2009.

Costs of Revenue

                                              Three Months Ended March 31,
                                                2009                 2008                  Change
                                                         (in thousands, except percentages)
Costs of revenue:
Cost of service                            $        6,513       $        4,666     $   1,847            40 %
Cost of products                                    1,163                2,187        (1,024 )         -47 %
Cost of license fees, content and
royalties                                           1,281                1,603          (322 )         -20 %
Amortization of intangible assets
arising from business combinations                  1,787                1,781             6             *
Total costs of revenue                     $       10,744       $       10,237     $     507             5 %

Total costs of revenue represented 32% and 28%, respectively, of total revenue for the three months ended March 31, 2009 and 2008. The increase in costs of revenue as a percentage of total revenue was the result of incremental expenses from our new HPR formulations business from our IntegrityBio acquisition which, as a service business, has lower margins than our other business lines. Also, as we expand our research services activities, personnel expenses currently in our R&D line will be increasingly included in cost of revenue. Accordingly, over time, our gross margin percentage may decline, but we would expect a corresponding decrease in our research and development expenses.

Cost of service includes certain operating expenses related to software consulting and software and hardware maintenance and costs associated with research services for life science and chemical and energy industries. Cost of service increased 40% in the first quarter of 2009 over the same period in 2008 primarily due to the incremental costs from the acquisition of IntegrityBio in August 2008.

The decrease of cost of product sold in the first quarter of 2009 compared to the same period of 2008 was proportional to the decrease in product sales in the comparative periods.

Operating Expenses


                                                Three Months Ended March 31,
                               2009                                                    2008
                                       As a
                                    Percentage
                   Amount (in        of Total         Change over        Amount (in       As a Percentage
                     000's)          Revenue         Previous Year         000's)        of Total Revenue
Research and
development        $    13,566               41 %               (34 %)   $    20,687                    56 %
Sales, general
and
administrative          11,097               33 %               (27 %)        15,233                    41 %
Restructuring
charges                    208                1 %                na                -                     0 %
Amortization of
intangible
assets arising
from business
combinations             1,445                4 %                (2 %)         1,477                     4 %
Total operating
expenses           $    26,316               79 %               (30 %)   $    37,397                   101 %

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.

Total R&D expenses for the three months ended March 31, 2009 decreased 34% from the same period in 2008 due primarily to the significant workforce reduction we implemented in December 2008, and to lower depreciation expenses following the write-down of fixed asset values in the fourth quarter of 2008.

R&D expenses represented 41% and 56% of total revenue in the three months ended March 31, 2009 and 2008, respectively. As discussed under the "Costs of Revenue" caption above, an increasing amount of personnel and other associated expenses related to research services provided to life science and chemical and energy industries have been recorded as cost of service, contributing partially to the decrease in R&D expenses in dollars and as a percentage of revenue.

The innovations and advances generated by our research laboratories support our Symyx HPR and Symyx Software operations, and generate intellectual property and discovered materials. We believe our market opportunity is significant and that continued investment across our business segments is necessary for long-term success. Accordingly, we expect to continue to devote significant resources to R&D.

Research and development includes those activities performed on behalf of some of our alliance partners including Dow and ExxonMobil. As we do not track fully burdened R&D costs or capital expenditures by project, these amounts are not included in costs of service. However, based on hours spent on each project, we estimate the R&D efforts undertaken for various projects were as follows:

                                 Three Months Ended March 31,
                                  2009                  2008
Customer-sponsored projects              32 %                  41 %
Internally-funded projects               68 %                  59 %
Total                                   100 %                 100 %

The significant shift in percentage terms from 2008 to 2009 reflects the fact that our workforce reduction in the fourth quarter of 2008 was focused primarily on our HPR business and on our general and administrative functions. With respect to the former, the reduction disproportionately impacted personnel focused on customer projects as opposed to those engaged in internal development (e.g., development activities for Symyx Software), thus shifting percentages as shown above.

Sales, General and Administrative ("SG&A") Expenses

Our SG&A expenses consist primarily of personnel costs for business development, sales, legal, general management, finance and human resources, as well as payment of commissions to our foreign sales agents and professional expenses, such as outside legal and accounting fees. SG&A expenses for the three months ended March 31, 2009 decreased 27% from $15.2 million for the same period in 2008, and represented 33% and 41% of total revenue for the three months ended March 31, 2009 and 2008, respectively. The decrease was primarily due to the restructuring and cost control efforts we commenced in December 2008, expense management in the current quarter, lower depreciation due to fixed asset write downs in the fourth quarter of 2008, and the fact that SG&A expenses for the first quarter of 2008 were incrementally higher due to certain one-time transition costs following the MDL acquisition. We expect our SG&A expenses for the remainder of 2009 will continue to be lower than that of the same period of 2008.

Interest and Other Income (Expense), Net

Interest and other income (expense), net, for the three months ended March 31, 2009 consisted primarily of $993,000 net loss from foreign currency exchange. Interest and other income (expense), net, for the three months ended March 31, 2008 consisted of $226,000 net interest income and $622,000 net loss from foreign currency exchange.

Income Tax Benefits

We recorded income tax benefits of $1.6 million and $4.3 million, respectively, for the three months ended March 31, 2009 and 2008. The effective income tax benefit rate was 34% and 39% for the three-month periods ended March 31, 2009 and 2008, respectively. The effective income tax benefit rate in the three-month period ended March 31, 2009 was lower due to the additional valuation allowance we recorded against certain state deferred tax assets generated in 2009. The valuation allowance reflects that portion of deferred tax assets which management believes will not be realized on a more likely than not basis. If the actual results differ from these estimates or these estimates are adjusted in future periods, the valuation allowance may be adjusted, which could materially impact our financial position and results of operations.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. We are not currently under audit by any tax authorities. Because we 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 years starting from 2005 for federal and California tax purposes.

Fair Value Measurements

In September 2006, the FASB issued Statement No. 157 ("SFAS 157"), Fair Value Measurements. SFAS No. 157 establishes a three-level hierarchy which prioritizes the inputs used in measuring fair value. In general, fair value determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability. The fair value of our cash equivalents were $62,055,000 and $51,999,000 at March 31, 2009 and December 31, 2008, respectively, based on Level 1 inputs. Effective January 1, 2009, we adopted the provisions under SFAS No. 157 for valuation of nonfinancial assets and nonfinancial liabilities. The adoption of such provisions did not impact our financial position, results of operations, or cash flows.

Recent Accounting Pronouncements

In April 2009, the FASB issued the following new accounting standards:

? FASB Staff Position FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," ("FSP FAS 107-1" and "APB 28-1"). FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, "Interim Financial Reporting", to require those disclosures in all interim financial statements.

? FASB Staff Position FAS 157-4, "Determining Whether a Market Is Not Active and a Transaction Is Not Distressed," ("FSP FAS 157-4"). FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures.

? FASB Staff Position FAS 115-2, FAS 124-2, and EITF 99-20-2, "Recognition and Presentation of Other-Than-Temporary Impairments," ("FSP FAS 115-2," "FAS 124-2," and "EITF 99-20-2"). FSP FAS 115-2, FAS 124-2, and EITF 99-20-2 provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. This FSP applies to debt securities.

These standards are effective for periods ending after June 15, 2009. We are evaluating the impact that these standards will have on our financial statements.

Liquidity and Capital Resources

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

Balance Sheet and Cash Flows

At March 31, 2009, we had cash and cash equivalents of approximately $81.8 million, an increase of $15.4 million from December 31, 2008. The significant . . .