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 Part II of this Report, 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 Management's Discussion and Analysis of Financial Condition and Results of Operations 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 and nine months ended September 30, 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 the life sciences, chemical, energy, and consumer and industrial products industries 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 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 September 30, 2009 include:

· We announced the release of Symyx Notebook 6.3, a major version upgrade that significantly enhances Symyx's vision of an enterprise electronic lab notebook ("ELN") to support many scientific disciplines. Previous versions of Symyx Notebook had focused on biology, analytical and synthetic chemistry - version 6.3 rounds out the offering by adding parallel chemistry support for synthetic and medicinal chemistry.

· We released version 3.2 of the Symyx Isentris® decision support system, enabling scientists to explore, compare and report on information spanning multiple experiments captured in electronic lab notebooks, the Symyx Lab Execution and Analysis (LEA) software suite, laboratory information management systems ("LIMS") and other information management systems.

· We announced the opening of a new software research and development center in Bangalore, India, which will collaborate with our other sites on our core scientific information management software solutions.

· Following the end of the third quarter, we commenced a restructuring in October 2009 ("October 2009 Restructuring") focused on our HPR business unit. To address underperformance in our contract development and manufacturing operations ("CDMO") acquired as part of the IntegrityBio acquisition, and to address the anticipated decline in the demand for research services following 2009 year end, we are exiting our Camarillo CDMO facility and commencing a plan to reduce our HPR staffing by approximately 75 employees, representing a 15% reduction in our total current headcount. We estimate the associated restructuring costs, including losses on the sale of assets in connection with the CDMO exit, will be approximately $5 million, of which approximately $1.5 million to $2.5 million will be cash. We expect to complete the majority of these restructuring actions by December 31, 2009, and to substantially complete the remaining balance of these actions in the first quarter of 2010.

· Our net income was $1.5 million, or $0.04 per diluted share, for the quarter, improving from our net loss of $745,000, or $0.02 per share, in the same quarter of 2008, despite lower revenue in the current period. Net income for the current quarter included $2.7 million in discrete income tax benefits. Our net loss for the nine months ended September 2009 was $2.9 million, or $0.08 per share, a substantial improvement over our net loss of $9.1 million, or $0.27 per share, for the same period of 2008, reflecting the benefits from our 2008 restructuring and the success of our continuing focus on controlling operating expenses.

· We ended the quarter with cash and cash equivalents totaling $80.6 million, a significant increase over our total cash and cash equivalents of $66.4 million at December 31, 2008.

· During the three months ended September 30, 2009, we have recorded discrete income tax benefits totaling $2.7 million as a result of changing our valuation allowance against certain deferred tax assets and recognizing tax benefits with the expiration of certain federal statutes of limitation.

· We secured a multi-million dollar commitment from another top-fifteen pharmaceutical company to deploy our Notebook solution across the enterprise.

Included in our results of operations for the three and nine month periods ended September 30, 2009 was stock-based compensation expense as follows (in thousands):

                                               Three Months Ended September 30,               Nine Months Ended September 30,
                                                 2009                     2008                 2009                     2008
Costs of revenue                           $             69         $             50     $            286         $            184
Research and development                                413                      358                  812                    1,081
Sales, general and administrative                       782                      712                2,237                    2,016
Total                                      $          1,264         $          1,120     $          3,335         $          3,281

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"). In "Critical Accounting Policies" under Item 7, and in Note 1 of the Notes to the Consolidated Financial Statements included under Item 8, in each case of our Annual Report on Form 10-K for the year ended December 31, 2008, we describe 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

Occasionally we enter into certain software consulting service and tools product arrangements under which all the revenue is deferred until certain elements of the arrangements are delivered in the future. 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 and incremental variable expenses include direct labor costs and direct services contracts with third parties working on the software service arrangements. As of September 30, 2009 and December 31, 2008, we deferred approximately $1.3 million and $2.2 million, respectively, of direct and incremental variable expenses related to software consulting service and tools product arrangements where the revenue is deferred until future periods.

When we have deferred software costs, we consider the revenue recognition guidance under which the revenue falls to determine the cost recognition, as well as the realizability of the deferred cost (See "Deferred Costs" section in Note 1 above).

Results of Operations

Revenue

                                        Three Months Ended September 30,
                                           2009                  2008                 Change
(in thousands, except percentages)
Service                               $        16,776       $        18,382     $ (1,606 )      (9 %)
Product                                         4,140                 4,819         (679 )     (14 %)
License fees, content and royalties            14,051                15,708       (1,657 )     (11 %)
Total revenue                         $        34,967       $        38,909     $ (3,942 )     (10 %)



                                          Nine Months Ended September 30,
                                            2009                   2008                 Change
(in thousands, except percentages)
Service                               $         50,722       $         57,137     $  (6,415 )     (11 %)
Product                                         12,454                 14,403        (1,949 )     (14 %)
License fees, content and royalties             41,812                 44,927        (3,115 )      (7 %)
Total revenue                         $        104,988       $        116,467     $ (11,479 )     (10 %)

Revenue for the three months ended September 30, 2009 decreased relative to the same period of 2008 due to a $1.8 million decrease in software license revenue, a $1.2 million net reduction in service revenue from ExxonMobil and Dow, lower software consulting revenue, content revenue and product sales, partially offset by higher maintenance revenue and materials royalties.

Revenue for the nine months ended September 30, 2009 decreased relative to the same period of 2008 due to a $5.4 million reduction in research service revenue following the May 2008 expiration of our primary alliance agreement with ExxonMobil, decreases in software licensing and consulting service revenue, and lower content revenue and Symyx HPR tools sales, partially offset by higher material royalties and maintenance revenue.

Revenue by Segment

We segregate revenue into the following business units:

                                              Three Months Ended September 30,
                                                 2009                  2008                 Change
(in thousands, except percentages)
Symyx Software                              $        22,027       $        25,581     $ (3,554 )     (14 %)
Symyx HPR                                            12,940                13,328         (388 )      (3 %)
Total                                       $        34,967       $        38,909     $ (3,942 )     (10 %)



                                                Nine Months Ended September 30,
                                                  2009                   2008                 Change
(in thousands, except percentages)
Symyx Software                              $         64,552       $         69,682     $  (5,130 )      (7 %)
Symyx HPR                                             40,436                 46,785        (6,349 )     (14 %)
Total                                       $        104,988       $        116,467     $ (11,479 )     (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. The Software revenue decreases in the three and nine months ended September 30, 2009 compared with the corresponding periods in 2008 reflect primarily difficult market conditions, our customers' efforts to reduce costs, seat count reductions in connection with acquisition-related consolidations, and revenue deferrals associated with certain significant, multiple-element arrangements. These decreases were partially offset by higher maintenance revenue from our increased installed base.

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 other intellectual property. The decrease in Symyx HPR revenue in the three months ended September 30, 2009 from the corresponding period of 2008 resulted largely from the decrease in product sales revenue. The decline in Symyx HPR revenue for the nine months ended September 30, 2009 compared with the same period of 2008 was primarily due to a $5.4 million reduction in service revenue from ExxonMobil due to the expiration of our primary agreement with ExxonMobil in May 2008 and lower product sales while our customers continued to constrain their capital expenditures.

Concentration of Revenue

ExxonMobil and The Dow Chemical Company ("Dow") are the only two major customers
that contributed more than 10% of our revenue for the periods addressed below.
The aggregate revenue and corresponding percent of revenue by each revenue
component from ExxonMobil and Dow are as follows (in thousands, except
percentages):

                                            Three Months Ended September 30,
                                               2009                     2008
Service                               $    4,046           24 %   $  5,234       28 %
Product sales                              1,571           38 %      2,194       46 %
License fees, content and royalties        3,667           26 %      3,031       19 %
Total                                 $    9,284           27 %   $ 10,459       27 %



                                            Nine Months Ended September 30,
                                               2009                    2008
Service                               $    12,380         24 %   $ 19,744       35 %
Product sales                               3,940         32 %      5,143       36 %
License fees, content and royalties        11,364         27 %     11,981       27 %
Total                                 $    27,684         26 %   $ 36,868       32 %

With the MDL acquisition in October 2007, we have substantially broadened our customer base, but continue to expect that Dow and ExxonMobil will remain our two largest customers in 2009 based on existing commitments.

Cost of Revenue

                                              Three Months Ended September 30,
                                                 2009                  2008                Change
(in thousands, except percentages)
Costs of revenue:
Cost of service                             $         6,447       $         5,044     $ 1,403        28 %
Cost of products                                      1,899                 2,079        (180 )      -9 %
Cost of license fees, content and
royalties                                             1,353                 1,410         (57 )      -4 %
Amortization of intangible assets arising
from business combinations                            1,328                 1,864        (536 )     -29 %
Total costs of revenue                      $        11,027       $        10,397     $   630         6 %




                                               Nine Months Ended September 30,
                                                 2009                  2008                Change
(in thousands, except percentages)
Costs of revenue:
Cost of service                             $        19,225       $        14,884     $ 4,341        29 %
Cost of products                                      6,186                 6,378        (192 )      -3 %
Cost of license fees, content and
royalties                                             4,103                 4,328        (225 )      -5 %
Amortization of intangible assets arising
from business combinations                            4,749                 5,431        (682 )     -13 %
Total costs of revenue                      $        34,263       $        31,021     $ 3,242        10 %

Total costs of revenue represented 32% and 27%, respectively, of total revenue for the three months ended September 30, 2009 and 2008. Total costs of revenue represented 33% and 27%, respectively, of total revenue for the nine months ended September 30, 2009 and 2008. The increase in costs of revenue as a percentage of total revenue was due to incremental expenses from the HPR formulations business resulting from our IntegrityBio acquisition which, as an service business not at scale, has substantially lower margins than our other business lines. To address underperformance in CDMO, and to address the anticipated decline in research services following the December 2009 expiration of research commitments from Dow and ExxonMobil, we announced a restructuring plan in October 2009 as detailed in Note 11 of the Notes to the Condensed Consolidated Financial Statements..

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 28% and 29%, respectively, for the three and nine month periods ended September 30, 2009 over the same periods in 2008 due to the incremental costs from the acquisition of IntegrityBio in August 2008, increase in research service costs for new research contracts, partially offset by decrease in software service costs due to the deferral of costs as described under "Critical Accounting Policies and Use of Estimates."

Gross product margin for the three months ended September 30, 2009 was 54%, compared with 57% in the corresponding period of 2008. Gross product margin for the nine month ended September 30, 2009 was 50%, compared with 55% in the corresponding period of 2008. The cost of products varies from period to period due to changes in product mix. In the three months ended September 30, 2009, we recognized revenue on a tool sale with low tool costs, resulting in an unusually high gross product margin on this sale. We do not anticipate that sales of tools with relatively low product costs will continue to contribute significantly to our gross product margin in the future. Additionally, write-downs to inventory for excess and obsolete items affect our margins; in the three months ended September 30, 2009 we recorded incremental write-downs of $414,000.

Cost of license fees, content and royalties consists of primarily royalties we pay for third-party content we include in our content subscription offerings, and remained consistently at approximately 20% of content revenue recognized.

Other Operating Expenses

                                                     Three Months Ended September 30,
                                       2009                                                   2008
                                                As a                                                   As a
                                             Percentage                                             Percentage
                              Amount          of Total         Change over           Amount          of Total
                            (in 000's)        Revenue         Previous Year        (in 000's)        Revenue
Research and development   $     12,764               37 %               (32 %)   $     18,814               48 %
Sales, general and
administrative                   10,397               30 %               (16 %)         12,375               32 %
Restructuring charges               710                2 %                na                 -                0 %
Impairment of goodwill              284                1 %                na                 -                0 %
Amortization of
intangible assets
arising from business
combinations                      1,448                4 %                (2 %)          1,476                4 %
Total operating expenses   $     25,603               73 %               (22 %)   $     32,665               84 %




                                                     Nine Months Ended September 30,
                                       2009                                                   2008
                                                As a                                                   As a
                                             Percentage                                             Percentage
                              Amount          of Total         Change over           Amount          of Total
                            (in 000's)        Revenue         Previous Year        (in 000's)        Revenue
Research and development   $     39,673               38 %               (33 %)   $     59,230               51 %
Sales, general and
administrative                   32,867               31 %               (22 %)         41,896               36 %
Restructuring charges               918                1 %                na                 -                0 %
Impairment of goodwill              284                *                  na                 -                0 %
Amortization of
intangible assets
arising from business
combinations                      4,340                4 %                (2 %)          4,432                4 %
Total operating expenses   $     78,082               74 %               (26 %)   $    105,558               91 %

* Less than 1%

Research and Development ("R&D") Expenses

Our R&D expenses consist primarily of:

• salaries and other personnel-related expenses;

• facilities costs;

• supplies; and

• depreciation of owned facilities and laboratory equipment.

Total R&D expenses for the three and nine months ended September 30, 2009 decreased significantly in both dollar and percentage terms versus the same periods in 2008 due (i) to the significant workforce reduction we implemented in December 2008, (ii) to lower depreciation expenses following the write-down of certain fixed asset values in the fourth quarter of 2008, and (iii) to the fact that 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 in the current periods rather than R&D expense.

Research and development includes those activities performed on behalf of some of our alliance partners including Dow and ExxonMobil, as discussed in "Research and Development ("R&D") section of Note 1 of Notes to the Condensed Consolidated Financial Statements. As we do not track fully burdened R&D costs or capital . . .