UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





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




For
the fiscal year ended December 31, 2008




or




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




For
the transition period from ___________ to ___________




Commission
file number 000-27765





SYMYX
TECHNOLOGIES, INC.


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
              77-0397908(State
      or Other Jurisdiction of Incorporation or Organization)
              (IRS
      Employer Identification Number)1263
      East Arques AvenueSunnyvale,
      California 94085
              (408)
      764-2000(Address
      of Principal Executive Offices Including Zip Code)
              (Registrant's
      Telephone Number, Including Area
Code)





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


Class:
              Common
      Stock, $0.001 Par Value
              Name
      of Each Exchange on Which Registered:
              NASDAQ
      Global Select Market








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


None





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





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





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





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





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


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





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





The
aggregate market value of the registrant’s common stock held by non-affiliates
as of June 30, 2008 (the last business day of the registrant's most recently
completed second fiscal quarter) was $132.5 million, based on the closing price
for the common stock on the NASDAQ Global Select Market on such date. The
determination of affiliate status for the purposes of this calculation is not
necessarily a conclusive determination for other purposes. The calculation
excludes approximately 14,793,000 shares held by directors, officers and
stockholders whose ownership exceeded 5 percent of the registrant’s outstanding
common stock as of June 30, 2008. Exclusion of these shares should not be
construed to indicate that such person controls, is controlled by or is under
common control with the Registrant.





As of
February 27, 2009, 34,031,617 shares of the registrant’s common stock were
outstanding.


DOCUMENTS
INCORPORATED BY REFERENCE





Certain
sections of the definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K in connection with the registrant’s
2009 Annual Meeting of Stockholders are incorporated by reference into Items 10,
11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K where
indicated. Except with respect to the information specifically incorporated by
reference in this Form 10-K, the registrant’s proxy statement is not deemed to
be filed as part hereof.













TABLE
OF CONTENTS





ITEM
                  
                  PAGEPart
      I1.
                  Business
                  11A.
                  Risk
    Factors
                  111B.
                  Unresolved Staff
      Comments
                  222.
                  Properties
                  233.
                  Legal
      Proceedings
                  234.
                  Submission of Matters to a Vote of
      Security Holders
                  23Part
      II5.
                  Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities
                  246.
                  Selected Financial
      Data
                  267.
                  Management’s Discussion and Analysis
      of Financial Condition and Results of Operation
                  287A.
                  Quantitative and Qualitative
      Disclosures about Market Risk
                  458.
                  Financial Statements and
      Supplementary Data
                  469.
                  Changes in and Disagreements with
      Accountants on Accounting and Financial
    Disclosure
                  829A.
                  Controls and
      Procedures
                  829A(T).
                  Controls and
      Procedures
                  849B.
                  Other
      Information
                  84Part
      III10.
                  Directors, Executive Officers and
      Corporate Governance
                  8511.
                  Executive
      Compensation
                  8512.
                  Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters
                  8513.
                  Certain Relationships and Related
      Transactions and Director Independence
                  8614.
                  Principal Accounting Fees and
      Services
                  86Part
      IV15.
                  Exhibits and Financial Statement
      Schedules
                  87Signatures
                  90





i
 Table of Contents




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 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; the status of our collaborations with
industry leaders; our ability to continue to enter into new collaborative
arrangements; the impact of general economic trends on our business; our belief
that our cash and cash equivalents will be sufficient to satisfy our anticipated
cash requirements; our expectations regarding our customers; our market
penetration and expansion efforts; the potential impact and benefits of our
technology on our customers and on materials research and development; our
expectations regarding the development, effectiveness and acceptance of our
technology; the expansion of our capabilities and our portfolio of intellectual
property; the effect of our past acquisitions; our belief regarding the adequacy
of our supply arrangements; and our belief regarding employee
relations.





Among
the factors that could cause actual results to differ materially are the factors
detailed in Item 1A, "Risk Factors." Given these uncertainties, readers are
cautioned not to place undue reliance on the forward-looking
statements.





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





General





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. Information about
Symyx, including reports and other information we have filed with the SEC, is
available at www.symyx.com. The information posted on our website is not
incorporated into this Report.





Symyx was
incorporated in California on September 20, 1994 and reincorporated in Delaware
in February 1999. Symyx’s headquarters are located at 1263 East Arques Avenue,
Sunnyvale, California, 94085, and the telephone number at that location is (408)
764-2000. Our mailing address is 415 Oakmead Parkway, Sunnyvale, CA 94085. Our
common stock trades on the NASDAQ Global Select Market under the symbol
“SMMX.”





From
mid-2007 until the end of 2008, we were organized into three business
units:  Symyx Software, Symyx Tools and Symyx Research. In December
2008, we initiated a reorganization (the “Reorganization”) in which we combined
Symyx Tools and Symyx Research into a single business unit, Symyx High
Productivity Research (“ Symyx HPR”), moved from a single combined sales force
to dedicated sales forces within our two business units, and reduced our
workforce by approximately 15%.





1
 Table of Contents




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 59% of our 2008 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 from ExxonMobil and The Dow
Company in 2009 as mentioned in the “Customers” section below. Symyx HPR
accounted for 41% of our 2008 revenue.





Through
software and database licensing, software services, tool sales and research
services, we provide customers multiple ways to work with us. Our goal is to
leverage and integrate 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, while reducing time-to-market for products
reaching commercialization.





Industry
Background





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





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





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





We
primarily serve customers in two broad categories:




1)
            Life
      Sciences





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





2
 Table of Contents




2)
            Chemical,
      Energy and Consumer and Industrial
Products





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





The
market dynamics in these categories are changing product economics, especially
with respect to time-to-market and prices, and in turn, mandating better
information correlation across people, instruments and geographies, faster
experimentation and lower costs.  Our offerings help customers meet these
demands. Symyx Software enables the integration of research data and
enterprise-wide information sharing.  Symyx HPR automation tools enables
our customers to perform 10 to 25 times more experiments per year at 90% lower
costs per experiment and improved precision and accuracy over traditional
discovery method.  And for those customers who wish to leverage our
deep expertise in chemistry, materials science and high-throughput research,
Symyx HPR research personnel can work with or for customers to solve discovery
and development challenges directly.





Symyx
Solutions





Symyx
Software





We have
developed our software offerings through acquisitions and
internally.  Most recently,in October 2007 we
acquired MDL Information Systems, Inc. (“MDL”), a leading provider of scientific
informatics software, databases and services.  We acquired
IntelliChem, Inc. (“IntelliChem”) in November 2004, and Synthematix, Inc.
(“Synthematix”) in April 2005; these two companies provided us our initial entry
into the market for electronic lab notebook (“ELN”) applications. Internally, we
have developed a number of solutions, including our recently released Symyx
Notebook 6.0 enterprise ELN platform, leveraging much of the knowledge gained
from our IntelliChem and Synthematix acquisitions, and our lab execution and
analysis software (“LEA”), which enables scientists to design experiments,
execute those experiments on our automated workflows, and capture and analyze
large quantities of multi-media data.





Today,
Symyx Software encompasses:





Symyx Isentris--Decision
Support.We offer Symyx Isentris®, a comprehensive solution
consisting of a number of industry-leading products including:




(i)
              Symyx
      Isentris Client for searching, browsing, collating and sharing scientific
      data in an efficient, time-saving manner that is integrated with
      workflows;
 (ii)
              Symyx
      Isentris for Excel® for accessing, browsing, collating, reporting,
      managing and sharing scientific data from a diverse range of public and
      proprietary data sources in the Microsoft Excel spreadsheet
      environment;
 (iii)
              Symyx
      Draw for quickly drawing precise chemical structures and reactions, and
      creating publication-quality
graphics;
 (iv)
              Symyx
      Isentris Controls for accessing and
      leveraging the underlying functionality of Isentris with a set of .NET
      controls that can be used in Microsoft Visual Studio to build custom
      scientific applications rapidly, extend applications and integrate
      existing applications;
 (v)
              SymyxCheshire®for defining cheminformatic
      business rules for different applications to perform particular
      operations, such as chemical convention checks, chemical structure
      validation, and physico-chemical property
  calculations;
 (vi)
              Symyx Core Interface for accessing
      essential services for managing and supporting critical application
      workflows, building consistent, high-quality applications quickly,
      creating useful data views and finding information easier;
    and
 (vii)
                Symyx
      Direct for searching and registering
      molecules and reactions in Oracle databases using a single, powerful
      chemistry data cartridge.


3
 Table of Contents




Symyx Notebook 6.0
Platform.  Symyx Notebook is an enterprise application that replaces
paper notebooks traditionally used by scientists, providing a digital
environment where scientists can plan, execute, record, store, back up and share
their daily research activities. We offer a universal ELN foundation, and
continue to develop domain-specific capabilities for scientists engaged in
discovery, process, analytical, formulations and biology functions that are
designed with their specific workflows in mind. We believe having front-ends
customized based on specific functions best meets the needs of scientists, while
having those front-ends built on a common platform facilitates enterprise-wide
adoption and use of Symyx Software, enabling optimal use of research data,
improving data and documentation quality, and insuring adherence to standard
operating procedures.





Vault
Platform.  Supporting our ELN offerings is our proprietary
database solution, Vault Platform, which supports workflow, information access,
security, signatures, document storage and access, and collaboration within
regulated and non-regulated environments.





Content Databases.To support
their research activities, scientists can access our comprehensive, integrated
and cross-referenced collection of factual databases and reference works
covering bioactivity, chemical sourcing, molecular properties, synthetic
methodology, metabolism and toxicology information.  These vital
research resources can be accessed easily through our Symyx Notebook and
Isentris applications, or via the Internet through our Discovery Gate
portal.





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





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





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





Software
Services.  Symyx Software also offers customers a range of
software integration and development services.





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





Symyx
HPR





Introduction--High-Throughput
Technologies





Since its
founding in 1994, Symyx has pioneered high-throughput R&D technologies with
the goal of modernizing, automating and digitizing chemical/materials R&D.
These advancements are the foundation of all Symyx HPR offerings, and certain of
our Symyx Software offerings.





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





4
 Table of Contents




In
conventional terms, creating and testing a single material is considered one
experiment. Using our miniaturized, automated technology to execute hundreds to
thousands of experiments at a time and our software applications to design,
schedule, run, manage and share the data from those experiments, scientists can
dramatically increase the probability of success and reduce the time and costs
per experiment to discover new materials. For example, using traditional
methods, a team consisting of a chemist plus a technician could perform 500 to
1,000 experiments per year. In our laboratories, that same team could perform 10
to 25 times more of these same experiments at a vastly reduced cost per
experiment. As a result, Symyx-enabled scientists can improve their
productivity, generate significantly more data, increase the possibility of
successful discoveries within a given timeframe and reduce associated program
costs dramatically.





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





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





We are
committed to retaining our position as a leading developer and supplier of
high-throughput technologies for the discovery of new materials with
commercially valuable properties. In support of that objective, Symyx HPR offers
complementary offerings in the form of automated tools and contract research
services.





Automated
Tools.





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





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





The
workflows we sell to life science companies include those for solubility,
polymorph and salt selection, liquid formulations, forced degradation, excipient
compatibility, organic synthesis, bio catalysis and process optimization. The
workflows we sell to chemical companies include those for formulations,
heterogeneous catalysis, homogeneous catalysis and polymerization catalysis.
Consumer and industrial products companies utilize our HPR tools to design,
formulate, and test the performance characteristics of materials. The workflows
we sell to consumer products companies include those for additives,
adhesives/coatings/sealants, consumer and personal care and
plastics.





5
 Table of Contents




We
assemble and ship HPR tools primarily from our facilities in California. As we
assemble our systems, we generally manufacture only critical and proprietary
components ourselves. We contract with others for the manufacture and supply of
the majority of components. We believe our supply arrangements to be adequate.
From time to time, we rely on a single supplier for all of our requirements of a
particular component or raw material.





Research
Services





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





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





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





Our
overall R&D expenditures for 2008, 2007, and 2006, respectively, were $75.4
million, $66.2 million and $59.3 million. We do not track our fully burdened
R&D costs by project. However, based on hours spent on each project, we
estimate our R&D efforts were allocated as follows:





2008
                            
                            
                            2007
                            
                            
                            2006Customer-sponsored
      projects
                            
                            
                            37
                            %
                            
                            
                            55
                            %
                            
                            
                            61
                            %Internally-funded
      projects
                            
                            
                            63
                            %
                            
                            
                            45
                            %
                            
                            
                            39
                            %Total
                            
                            
                            100
                            %
                            
                            
                            100
                            %
                            
                            
                            100
                            %





IP
Licensing





We
discover and patent a range of materials in our collaborations and internal
research programs. These discovered materials provide us licensing
opportunities, offer a path to commercialization of new materials, and
demonstrate the capabilities of our high-throughput research technologies. In
addition, we periodically enter into patent and other intellectual property
licenses designed to provide selective access to our methodology patents,
offering a constructive way to sustain the value of our intellectual property
portfolio while expanding the ways in which we can work with potential
customers.





6
 Table of Contents




Customers





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





In
certain instances, we work with customers in alliances, where our customers work
with us across all of our business offerings under a substantial, multi-year
commitment.  For example, under our April 1, 2003 alliance agreement
with ExxonMobil, we provided research services in certain exclusive areas,
developed and sold Symyx HPR tools and licensed Symyx Software and intellectual
property.  The original five-year commitment under that agreement was
approximately $200 million and expired on May 31, 2008.  Effective January
1, 2008, we executed a supplemental agreement with ExxonMobil which included
additional commitments to us of approximately $13.1 million. We continue to
be entitled to receive royalties from the commercialization of materials,
processes and products based on discoveries made in other fields covered by the
original alliance agreement.





Under our
January 1, 2005 alliance agreement with Dow, we contracted to perform research
in a number of exclusive areas, develop and provide HPR tools, and license Symyx
software and intellectual property. Dow’s base commitment over the five-year
term was approximately $120 million, of which we have recognized approximately
$115.9 million through December 31, 2008.  The original alliance agreement
also entitles us to receive royalties from the commercialization of materials,
processes and products based on discoveries made in the fields covered by that
agreement.  Effective November 29, 2007, we executed a supplemental
agreement with Dow which includes additional commitments to us of approximately
$49.0 million for purchases of Symyx HPR tools and research services,
establishes minimum royalties over the period 2008-2015, and reduces applicable
royalty rates to encourage Dow’s full use and broad commercialization of
technology developed under the original agreement.





For the
fiscal years ended December 31, 2008, 2007 and 2006, Symyx HPR and Symyx
Software each contributed more than 10% of our total revenue. See detail in Note
6 of the Notes to the Consolidated Financial Statements.





The
following table lists our major customers and the revenue they each contributed
in the fiscal years ended December 31, 2008, 2007 and 2006 (in
thousands):





Years
      Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006ExxonMobil
                        
                        $
                        24,514
                        
                        
                        $
                        36,489
                        
                        
                        $
                        51,318Dow
                        
                        
                        28,681
                        
                        
                        
                        35,301
                        
                        
                        
                        29,302Total
                        
                        $
                        53,195
                        
                        
                        $
                        71,790
                        
                        
                        $
                        80,620




No other
customers contributed more than 10% of our revenue during these
years.





For the
fiscal years ended December 31, 2008, 2007 and 2006, approximately 36%, 12%, and
11%, respectively, of our total revenue was generated from sales to customers
located in foreign countries. See Note 6 of the Notes to the Consolidated
Financial Statements for further detail. We are exposed to risks associated with
international operations. See “We are exposed to risks associated with export
sales and international operations that may limit our ability to generate
revenue from our products and international property” under Item 1A, “Risk
Factors.”





7
 Table of Contents




Sales
and Sales Support





Substantially
all of our sales are direct, though we have non-exclusive distribution
relationships in Japan, Korea and India.  As of December 31, 2008, our
sales organization was comprised of approximately 50 employees in the United
States, Europe and Japan, and separately organized within our Symyx Software and
Symyx HPR business units.





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





Intellectual
Property and Other Proprietary Rights





Our
success, particularly in our HPR business unit, depends in large part upon our
proprietary technology. The risks associated with patents and other intellectual
property are more fully discussed in the “Risk Factors” section contained in
Item 1A of this Annual Report on Form 10-K.





Our
patent portfolio as of December 31, 2008 consisted of 338 issued patents,
including 281 United States patents, 28 European patents, and 29 patents in
other countries, with over 200 additional applications pending worldwide. These
patents and applications cover composition of matter, instruments and
methodology, and include issued patents with broad claims in high-throughput
combinatorial methodologies, and software patents. We co-own with Lawrence
Berkeley National Laboratory, on behalf of The Regents of the University of
California, 24 of the issued patents in the United States and other countries.
We have an exclusive license to these patents and patent applications from
Lawrence Berkeley National Laboratory, which was agreed to upon our formation.
In addition to patents, we rely on copyright, trademark and trade secret rights,
confidentiality procedures, and licensing arrangements to establish and protect
our proprietary rights. The earliest filed patents will begin to expire in
2014.





Markets





Our
primary markets are life sciences, chemical, energy, and consumer and industrial
products.  We provide hardware, software and services that enable the
R&D operations of companies in these industries to achieve breakthroughs in
scientific R&D productivity and return on investment.  Global
companies in life sciences, chemical, energy, and consumer and industrial
products spent more than $100 billion on R&D in 2007.  While the
economic downturn that commenced in the second half of 2008 materially and
negatively affected R&D spending, and is likely to continue to do so in
2009, we believe companies will continue to invest in technology products and
services to increase productivity.





Competition





Symyx
Software competes in the research software market. In our assessment, the
research software market is highly fragmented and a large number of software
providers offer spot solutions targeted to particular areas. Thus, within
certain markets, Symyx Software competes with CambridgeSoft, Accelrys, ChemAxon,
IDBS and others.  We also compete in certain areas with customers’ own
internally developed applications.  We believe Symyx Software’s
ability to enable enterprise-wide data integration and access to experiment
design, execution and analysis enables us to compete favorably.





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





8
 Table of Contents




In
research services, we compete primarily with our customers’ in-house R&D
efforts. In addition, Accelergy Corporation, Avantium Technologies, HTE AG and
others offer certain high-throughput approaches to materials
discovery.





Financial
Information about Geographic Areas





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





2008
                              
                              
                              2007
                              
                              
                              2006United
      States
                              
                              
                              64
                              %
                              
                              
                              88
                              %
                              
                              
                              89
                              %Europe
                              
                              
                              26
                              %
                              
                              
                              9
                              %
                              
                              
                              8
                              %Asia
                              
                              
                              9
                              %
                              
                              
                              3
                              %
                              
                              
                              3
                              %Rest
      of the World
                              
                              
                              1
                              %
                              
                              
                              *
                              
                              
                              
                              *Total
                              
                              
                              100
                              %
                              
                              
                              100
                              %
                              
                              
                              100
                              %*
      Less than 1%








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





Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Long-lived
      assets in U.S.
                      
                      $
                      114,373
                      
                      
                      $
                      195,246
                      
                      
                      $
                      82,487Long-lived
      assets in foreign countries
                      
                      
                      14,076
                      
                      
                      
                      33,207
                      
                      
                      
                      3,902Total
      long-lived assets
                      
                      $
                      128,449
                      
                      
                      $
                      228,453
                      
                      
                      $
                      86,389








We have a
significant amount of assets denominated in foreign currencies and are subject
to foreign currency exchange rate fluctuation.





Backlog
of Committed Revenue





As of
December 31, 2008, our backlog was approximately $100 million, compared with
backlog of approximately $100 million at December 31, 2007. Our backlog includes
contractual commitments from our customers for the next 12 months for products
to be shipped; research, consulting and maintenance services to be provided; and
license and content revenue to be recognized. Because of the occasional
customer-driven changes in delivery schedules or cancellation of orders without
significant penalty, we do not believe our backlog, as of any particular date,
is necessarily indicative of actual revenue for any future period.





Employees





As of
December 31, 2008, we had approximately 540 employees, including approximately
400 scientific and technical employees and 140 employees in business
development, legal, sales, and general and administrative services. Our total
headcount decreased in 2008, primarily due to the reduction in force as
discussed above in connection with the Reorganization.  We anticipate
our headcount will continue to decrease slightly in fiscal 2009 as we carry out
the Reorganization plan. None of our employees is represented by a labor union,
and we consider our employee relations to be good. We believe our future success
depends in part upon our continued ability to identify, hire and retain
qualified personnel.





9
 Table of Contents




Executive
Officers of the Registrant





Set forth
below is information regarding our executive officers as of February 28,
2009:





Name
      of Executive Officer
                        
                        Age
                        
                        Position with the CompanyIsy
      Goldwasser (1)
                        
                        39
                        
                        Chief
      Executive OfficerRex
      S. Jackson (2)
                        
                        48
                        
                        Executive
      Vice President and Chief Financial OfficerRichard
      Boehner (3)
                        
                        61
                        
                        President,
      Symyx HPRTrevor
      Heritage (4)
                        
                        42
                        
                        President,
      Symyx SoftwareCharles
      Haley (5)
                        
                        39
                        
                        Senior
      Vice President and General CounselRichard
      J. Rosenthal (6)
                        
                        53
                        
                        Senior
      Vice President of Finance and Principal Accounting
  Officer





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


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





(2) Mr.
Jackson joined Symyx in February 2007 as Executive Vice President, General
Counsel and Secretary.  In June 2007, Mr. Jackson assumed the role of
interim Chief Financial Officer, and in October 2007 was appointed Chief
Financial Officer. Prior to joining Symyx, he served as Senior Vice President
and General Counsel at Avago Technologies Ltd. from 2006 to 2007 and held
multiple positions at Synopsys, Inc. from 2003 to 2006, most recently as Senior
Vice President, General Counsel and acting Chief Financial Officer. Mr. Jackson
obtained a B.A. degree in political science from Duke University and a J.D.
degree from Stanford University.





(3) Mr.
Boehner joined Symyx in April 2007 to lead Symyx’s business development efforts
as Executive Vice President, Chemicals and Energy, was appointed President of
Symyx Research in November 2007, and was appointed President of Symyx HPR in
December 2008. Previously, Mr. Boehner served in corporate development and
strategic planning roles at Sun Chemical Corporation from 2003 to 2007 and at
MacDermid Incorporated, Great Lakes Chemical and Allied Signal in earlier years.
Mr. Boehner has a B.S. and an M.B.A. from Colorado State
University.





(4) Dr.
Heritage was Senior Vice President and Chief Science Officer of MDL Information
Systems, Inc. for three years prior to the Company’s acquisition of MDL in
October 2007 and was appointed President of Symyx Software effective June 1,
2008. Prior to joining MDL, Dr. Heritage was with Tripos, Inc., a discovery
informatics company focused on the life sciences industry, from 1994 to 2005,
most recently serving as senior vice president and general manager, Discovery
Informatics. Dr. Heritage has a B.S. degree in chemistry and computer and a
Ph.D. degree in organic chemistry from University of Reading, United
Kindom.





(5) Mr.
Haley joined Symyx as Senior Vice President and General Counsel in September
2008.  Prior to Symyx, from October 2006 to September 2008, Mr. Haley
served as Deputy General Counsel of BigBand Networks, Inc. (“BigBand”), a
technology company serving the telecommunications and cable industries based in
Redwood City, CA.  Prior to BigBand, Mr. Haley was an associate and then
partner in the law firm of Tomlinson Zisko LLP, from June 2002 to September
2006.  Mr. Haley holds a J. D. from the University of Virginia School of
Law, and a B.A., summa cum laude, from Princeton University in Near Eastern
Studies.





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





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





10
 Table of Contents




Environmental
Matters





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





Company
Website and Available Information





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





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





ITEM 1A. RISK FACTORS





In
evaluating our business, you should carefully consider the following risks, as
well as other information contained in this Report.  If any of the
following risks actually occurs, our business, financial condition and operating
results could be harmed. The risks and uncertainties listed are not the only
risks and uncertainties facing us.  Additional risks and uncertainties
we have not anticipated or are currently seen as immaterial also may materially
and adversely impair our business operations.





We
depend on a small number of key customers for a large portion of our revenues,
particularly in our HPR Business Unit.  If we are unable to replace
the expected decline in certain key customer contracts with new collaboration
partners, or if any of our other key customers eliminates or significantly
reduces its business with us, our business, financial condition and results of
operations would be adversely affected.





We have
depended on a relatively small number of key customers for a large portion of
our revenues, in particular with respect to our HPR business unit, and expect
ExxonMobil, Dow and a select list of other companies will, in the aggregate,
continue to account for a substantial portion of our revenues for the
foreseeable future.  Given this customer concentration, the loss of any of
our key customers or a material reduction in business from one or more of these
customers would materially harm our business, financial condition and operating
results. For example, our revenue from ExxonMobil and Dow declined from $71.8
million in 2007 to $53.2 million in 2008, , primarily due to the expiration
of our alliance agreement with ExxonMobil in May 2008.  We expect
revenue from these historically two largest customers to be substantially lower
in 2009 compared to 2008, and to decline further in 2010 as our primary research
agreement with Dow expires in December 2009. We have launched research services
for the chemical, energy and life science industries, and are seeking to form
partnerships or new ventures in these areas intended to address this decline,
but can provide no assurances these initiatives will be successful. If we are
not able to replace these anticipated decreases in fiscal 2009-2010 with new
revenue, our business, operating results and financial condition will be
materially and adversely affected.





We
are exposed to general global economic and market conditions.





Our
business is subject to the effects of general economic conditions in the United
States, Europe, Asia, and globally, and, in particular, market conditions in the
life science and chemical industries. A global economic slowdown, such as that
resulting from the current disruption in domestic and international credit and
financial markets which have contributed to a 42% decline in the Nasdaq
Composite Index between January 2, 2008 and December 31, 2008, or a particular
slowdown in the life science and/or chemical industries resulting in decreased
sales of our products and services, may materially adversely impact our
business, operating results and financial condition.





11
 Table of Contents




Recent
worldwide market turmoil may adversely affect our customers which directly
impacts our business and results of operations.





Our
operations and performance depend on our customers having adequate resources to
purchase our products and services. The unprecedented turmoil in the global
markets and the global economic downturn generally continues to adversely impact
our customers and potential customers. These market and economic conditions have
continued to deteriorate despite government intervention globally, and may
remain volatile and uncertain for the foreseeable future. Customers have altered
and may continue to alter their purchasing and payment activities in response to
deterioration in their businesses, lack of credit, economic uncertainty and
concern about the stability of markets in general, and these customers may
reduce, delay or terminate purchases of, and payment for, our products and
services. Recently, a number of our current and prospective customers have
merged with others, been forced to raise significant amounts of capital, or
received loans or equity investments from the government, which actions may
result in less demand for our products and services. If we are unable to
adequately respond to changes in demand resulting from deteriorating market and
economic conditions, our financial condition and operating results may be
materially and adversely affected.





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





Our
quarterly operating results have fluctuated in the past and are likely to do so
in the future.  In particular, third and fourth quarter revenue is
often heavily dependent on closing sales for a few high-value tools to
specific customers. The timing or occurrence of these sales is difficult to
predict. Quarterly fluctuations also result from our customers’ budgetary
cycles, as our customers typically expend their remaining capital budgets for
the year in the fourth quarter.As a
result, the fourth quarter historically has been our strongest quarter. These
fluctuations could cause our stock price to fluctuate significantly or decline,
as was the case when we reported revised projections for the balance of fiscal
2008 in October 2008. Revenue in future fiscal periods may be greater or less
than revenue in the immediately preceding period or in the comparable period of
the prior year. Some of the factors that could cause our operating results to
fluctuate include:




·
            general
      and industry-specific economic and financial uncertainties, which may
      affect our customers' capital investment levels and research and
      development investment decisions
            ;


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


·
            the
      size and timing of customer orders for, shipments of, and payments related
      to Symyx tools;


·
            the
      concentration of Symyx tools sales in the second half of the year, with
      the majority of those sales occurring  in the fourth
      quarter;


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


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


·
            the
      technical risks associated with the delivery of Symyx tools and the timing
      of customer acceptance of Symyx
tools;


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


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


·
            the
      amount and timing of royalties we receive from third parties, including
      those who license Symyx tools and Symyx Software for
    resale;


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


·
            special
      charges related to completed or potential
  acquisitions;


·
            the
      size and timing of research and development programs we undertake on an
      internally funded basis;


·
            developments
      or disputes concerning patent or other proprietary
  rights;


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


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


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


·
            general
      and industry-specific economic and financial uncertainties, which may
      affect our customers' capital investment levels and research and
      development investment decisions.





12
 Table of Contents




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





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





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





In
particular, many companies in the life science and chemical industries have, in
the past several years, experienced declining profitability, and in many cases,
losses, and this negative trend appeared to be accelerating in the fourth
quarter of 2008. There also has been considerable consolidation and
restructuring among many companies in the life sciences industry. In addition,
many chemical products have become commodity products that compete primarily on
the basis of price. As a result, some chemical and life science companies have
reduced their research and development activities and/or delayed investments in
new technologies. If commoditization of chemical products and other pressures
affecting the profitability of the industry, including governmental regulations
and governmental spending, continue in the future, more companies could adopt
strategies that involve significant reductions in their research and development
programs. Although we believe our technologies can help life
science, chemical, energy, and consumer and industrial products companies
increase the efficiency of their research and development activities, our
efforts to convince them of this value may be unsuccessful. To the extent these
companies reduce their research and development activities or external
investments, they will be less likely to do business with us. As a result of
current industry consolidation, a number of our pharmaceutical companies have
recently reduced or postponed decisions relative to research and development
spending. Decisions by these companies to reduce or postpone their research and
development activities could result in fewer or smaller scale collaborations
with us, fewer or smaller scale intellectual property and software licenses,
fewer sales of our tools, or choosing not to work with us, any of which could
reduce our revenue and harm our business and operating results.





Difficulties
we may encounter developing a new line of business, integrating acquisitions or
growing through other means may divert resources, disrupt our business, and
limit our ability to successfully expand our operations.





If we
develop a new line of business or pursue a partnership or venture, our
management’s attention may be diverted from normal daily operations of the
business. Furthermore, acquisitions, such as our recent acquisition of Integrity
Biosolution, or other growth initiatives, such as our introduction of contract
services in the life science market, places strain on our research,
administrative and operational infrastructure. As our operations expand
domestically and internationally, and as we continue to acquire new businesses,
we will need to continue to manage multiple locations and additional
relationships with various collaborative partners, suppliers and other third
parties. Our ability to manage our operations and further growth effectively
requires us to continue improving our reporting systems and procedures and our
operational, financial and management controls. In addition, recent SEC rules
and regulations have increased the internal control and regulatory requirements
under which we operate. We may not be able to successfully improve our
management information and control systems to a level necessary to manage our
acquisition activity or growth and we may discover deficiencies in existing
systems and controls that we may not be able to remediate in an efficient or
timely manner.





13
 Table of Contents




We have
acquired a number of businesses in the past. In the future, we may engage
in additional acquisitions and expand our business focus in order to exploit
technology or market opportunities.  In the event of any future
acquisitions or business expansions, we may issue stock that would dilute our
current stockholders’ percentage ownership, pay cash, incur debts or assume
liabilities. Our success depends upon our ability to successfully integrate the
products, people, and systems we acquired in these transactions. We may not be
able to successfully integrate our acquired businesses into our existing
business in a timely and non-disruptive manner or at all. In addition,
acquisitions could result in, among other things, large one-time charges
associated with acquired in-process research and development, amortization of
acquisition-related intangible assets, future write-offs of goodwill and other
acquisition-related intangible assets that are deemed to be impaired,
restructuring charges related to consolidation of operations, charges associated
with unknown or unforeseen liabilities of acquired businesses, increased general
and administrative expenses, and the loss of key employees. Specifically in
December 2008, with the recent decrease in our market capitalization, we
recorded a $76.5 million impairment charge to our goodwill associated with
our acquisitions.





Fluctuation
in foreign currency exchange rates may materially affect our financial condition
and results of operations.





A
significant portion of our business is now denominated in currencies other than
our functional currencies or our reporting currency for consolidated financial
statements. In 2008, we recorded a foreign currency loss of approximately $2.0
million. We are in the process of reducing monetary assets denominated in
foreign currencies but expect to continue to have a significant balance to
support our foreign operations. Material changes in foreign currency exchange
rates may materially and adversely affect our financial condition and results of
operations.





The
sales cycle for our tools and a number of our software products is long and
complex, and requires us to invest substantial resources in a potential sale
before we know whether the sale will occur.





We have a
limited number of contracts for our tools and our software product offerings
that are not database subscriptions.  Our sales efforts require us to
educate our potential customers about the full benefits of our solutions, which
often requires significant time and expense. Our sales cycle is typically from
12 to 18 months, and we incur significant expenses, and in many cases begin to
build customer-specific tools prior to obtaining contractual commitments, as
part of this process, without any assurance of resulting revenue. Investment of
time and expense in the sales cycle that does not ultimately result in sales
hurts our business. Factors impacting sales and the length of our sales cycle
include, but are not limited to, the following:





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





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





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





•
            customers'
      budgetary constraints and internal acceptance review
      procedures.





Wehavelaunched new service offeringsand a new unified
HPRbusinessunit.  We can provide no
assurances these new offeringsor business structurewill be
successful.




We have
established a range of new service offerings for our HPR business, including
both large molecule and small molecule formulation services offerings in the
life sciences area.  We also have created a joint sales force covering
both tools and research services, divided between life sciences and chemical
industries.  These services, and the combination of tools and
research, 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 revenues from ExxonMobil and Dow
in 2009. We have not yet proven the scalability of these service offerings,
and certain of these areas (e.g. large molecule formulation) are areas where the
company is still expanding its expertise and reputation.  If we are unable
to achieve significant sales from these new offerings, we will have expended a
significant amount of time and resources without obtaining the benefits we
anticipated, which may result in us incurring restructuring and other related
charges, and our financial condition and results of operations would be
materially and adversely affected.





14
 Table of Contents




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





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





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





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





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





The
market price of our common stock has been highly volatile since our initial
public offering. For example, in 2008, the highest closing price for our common
stock was $12.24 and the lowest closing for our common stock was
$3.03.  Volatility in the market price for our common stock can be
affected by a number of factors, including, but not limited to, the
following:




•
            failure
      to achieve operating results within the guidance our senior management
      provides, as occurred in the quarter ended September 30, 2008, or downward
      revisions in guidance relative to previous forecasts as occurred in
      October 2008;





•
            changes
      in our growth rates;





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





•
            failure
      to achieve operating results projected by securities
    analysts;





•
            changes
      in earnings estimates or recommendations by securities
      analysts;





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





•
            changes
      in investors’ acceptable levels of
risk;





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





15
 Table of Contents




•
            changes
      in management;





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





•
            speculation
      in the press or analyst community;





•
            developments
      in our industry; and





•
            general
      market conditions, political influences, and other factors, including
      factors unrelated to our operating performance or the operating
      performance of our competitors, such as global economic slowdown resulting
      from the current disruptions in the credit and financial markets.
      Particularly given the current economic downturn, we are concerned that
      market conditions may temper customer activity on major capital purchases
      such as Symyx tools, and significant enterprise investment in
      software.





These
factors and fluctuations may materially and adversely affect the market price of
our common stock.  Securities class action litigation is often brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation, whether with or without merit, could result in substantial costs and
divert management’s attention and resources, which could harm our business and
financial condition, as well as the market price of our common stock.
Additionally, volatility or a lack of positive performance in our stock price
may adversely affect our ability to retain key employees, most of whom have been
granted stock options or restricted stock units, or to use our stock to acquire
other companies or technologies at a time when cash or financing for such
acquisitions may not be available.





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





Due to
the possibility of fluctuations in our revenue and expenses, it is difficult for
our management to predict or estimate our quarterly or annual operating
results and to give accurate projections. Our operating results in some
quarters may not meet the expectations of stock market analysts and
investors.  In addition, as in the case of the revised projections for
the balance of fiscal 2008 communicated in October 2008, we may update the
financial projections we communicate to our stockholders from time to time to
address recent developments, though we undertake no obligation to do so. In
cases in which we lower our projections, our stock price will likely decline,
and investors will experience a decrease in the value of their
investment.





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





Our
ability to grow our business and achieve profitability is dependent on our
ability to:




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





•
            secure
      customers for the company’s new life sciences
  offerings;





•
            secure
      new Symyx tools customers;





•
            enter
      new partnerships or ventures with third parties that would use our
      technology and expertise to further develop and commercialize
      products;





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


Maintain
renewal rates for our database content business;





•
            convince
      existing customers to upgrade to products with greater functionality and
      increase the number of users within our existing customer base;
      and





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





16
 Table of Contents




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





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





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





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





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





Our
ability to retain our skilled labor force and our success in attracting and
hiring new skilled employees will be a critical factor in determining whether we
will be successful in the future.  The recent decline in our market
value of our common stock, as well as the Reorganization, may complicate this
effort by reducing the perceived value of equity compensation awards to our
employees and candidates for employment. We may not be able to meet our future
hiring needs or retain existing personnel.  We will face particularly
significant challenges and risks in hiring, training, managing and retaining
engineering and sales and marketing employees, as well as independent
distributors, most of whom are geographically dispersed and must be trained in
the use and benefits of our products. Failure to attract and retain personnel,
particularly scientific and technical personnel, would impair our ability to
grow our business.





17
 Table of Contents




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





The field
of high-throughput materials science is increasingly competitive. We are aware
of companies that may apply their expertise in high-throughput chemistry to
their internal materials research and development programs. There are also
companies focusing on aspects of high-throughput chemistry for the discovery of
materials on behalf of third parties. 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 and pricing pressure
may increase. Both business units are facing increasing competition from a
number of instrument manufacturing and software companies. To the extent these
companies develop competing technologies, our own technologies, methodologies,
systems and workflows, and software could be rendered obsolete or
noncompetitive. We would then experience a decline in our revenue and operating
results.





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





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





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





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





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





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





18
 Table of Contents




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





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





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





Our
intellectual property must protect our overall business structure by allowing us
to obtain commercially significant results from litigation, including
compensation and/or relevant injunctions, without resulting in undue cost and
expense. Enforcement of our intellectual property through litigation can result
in significant expenses, distractions, and risks that might cause us to lose
focus or may otherwise harm our profitability and weaken our intellectual
property position. Enforcement proceedings can adversely affect our intellectual
property while causing us to spend resources on the enforcement proceedings. As
our licensing activities have matured, we have become involved in arbitration,
litigation and similar administrative proceedings 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.





19
 Table of Contents




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





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





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





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





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





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





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





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





20
 Table of Contents




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





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




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





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





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





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





•
            potentially
      adverse taxes;





•
            currency
      exchange fluctuations;





•
            greater
      difficulties in maintaining and enforcing United States accounting and
      public reporting standards;





•
            greater
      difficulties in staffing and managing foreign operations;
    and





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





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





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





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





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




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





21
 Table of Contents




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





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





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





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




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





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





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





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





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





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




ITEM 1B. UNRESOLVED STAFF COMMENTS





None.





22
 Table of Contents




ITEM 2. PROPERTIES





Our
facilities currently consist of approximately 267,000 square feet of office,
research and manufacturing space in California, New Jersey and Oregon, as well
as Japan, Switzerland, France, Germany and the United Kingdom. We own an
approximately 39,000 square-foot building at 3100 Central Expressway, Santa
Clara, California which consists of office and laboratory space. The remaining
properties consist of office, manufacturing and laboratory spaces leased to us
under lease agreements that expire from 2009 to 2016. While our facilities are
shared between our business units, much of our Software business unit is housed
in our San Ramon, California; Bend, Oregon; and Camberly, United Kingdom
facilities. Much of our HPR business unit is housed in our Santa Clara,
California offices.  We believe our existing properties, including
both owned and leased sites, are in good condition and are adequate to meet our
current and foreseeable future requirements.





ITEM 3. LEGAL PROCEEDINGS





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





ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.





23
 Table of Contents





PART
II





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





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





HIGH
                      
                      
                      LOW2007First
      Quarter
                      
                      $
                      21.87
                      
                      
                      $
                      16.01Second
      Quarter
                      
                      $
                      18.21
                      
                      
                      $
                      9.86Third
      Quarter
                      
                      $
                      11.55
                      
                      
                      $
                      8.09Fourth
      Quarter
                      
                      $
                      10.42
                      
                      
                      $
                      6.902008First
      Quarter
                      
                      $
                      8.18
                      
                      
                      $
                      6.19Second
      Quarter
                      
                      $
                      8.40
                      
                      
                      $
                      6.93Third
      Quarter
                      
                      $
                      12.24
                      
                      
                      $
                      6.59Fourth
      Quarter
                      
                      $
                      9.51
                      
                      
                      $
                      3.03




As of
February 27, 2009, there were approximately 95 holders of record of our common
stock.





We have
paid no dividends on our common stock since our inception and we currently
intend to retain all future earnings, if any, to use in our business. Further,
under the terms of our credit agreement with Bank of America, N.A., we are
restricted from making any cash dividend payments. Accordingly, we do not
anticipate paying any cash dividends in the foreseeable future.





Stock
Performance Graph





The
following graph compares the cumulative total stockholder return on our common
stock with the cumulative total return for each of the NASDAQ composite and the
S & P Biotechnology index for the 5-year period ended December 31, 2008. The
stock price performance shown on the graph below is not necessarily indicative
of future price performance.





24
 Table of Contents










12/03
                  
                  
                  
                  12/04
                  
                  
                  
                  12/05
                  
                  
                  
                  12/06
                  
                  
                  
                  12/07
                  
                  
                  
                  12/08Symyx
      Technologies, Inc.
                  
                  
                  100.00
                  
                  
                  
                  146.23
                  
                  
                  
                  132.80
                  
                  
                  
                  105.06
                  
                  
                  
                  37.37
                  
                  
                  
                  28.91NASDAQ
      Composite
                  
                  
                  100.00
                  
                  
                  
                  110.08
                  
                  
                  
                  112.88
                  
                  
                  
                  126.51
                  
                  
                  
                  138.13
                  
                  
                  
                  80.47S&P
      Biotechnology
                  
                  
                  100.00
                  
                  
                  
                  107.60
                  
                  
                  
                  127.27
                  
                  
                  
                  123.78
                  
                  
                  
                  119.54
                  
                  
                  
                  131.88




25
 Table of Contents





ITEM 6.  SELECTED FINANCIAL DATA





The
following selected historical information has been derived from our audited
financial statements. Liabilities
accrued for uncertain income tax positions have been reclassified as long-term
payable and income taxes receivable previously netted against income taxes
payable have been reclassified as current assets. Consolidated balance sheet
data for prior periods have been reclassified to conform to current
presentation.




The
financial information as of December 31, 2008 and 2007 and for each of the three
years in the period ended December 31, 2008 is derived from audited financial
statements included elsewhere in this Annual Report on Form 10-K. The table
should be read in conjunction with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operation," and Item 8, "Financial
Statements and Supplementary Data."





For
      the Years Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004(In
      thousands, except per share data)Consolidated
      Statements of Operations Data:Revenue:Service
                        
                        $
                        74,892
                        
                        
                        $
                        59,034
                        
                        
                        $
                        57,933
                        
                        
                        $
                        56,980
                        
                        
                        $
                        42,251Product
                        
                        
                        25,033
                        
                        
                        
                        34,898
                        
                        
                        
                        33,526
                        
                        
                        
                        26,663
                        
                        
                        
                        27,060License
      fees, content and royalties
                        
                        
                        59,120
                        
                        
                        
                        31,140
                        
                        
                        
                        33,441
                        
                        
                        
                        24,494
                        
                        
                        
                        13,874Total
      revenue
                        
                        
                        159,045
                        
                        
                        
                        125,072
                        
                        
                        
                        124,900
                        
                        
                        
                        108,137
                        
                        
                        
                        83,185Costs
      of revenue:Cost
      of service
                        
                        
                        21,094
                        
                        
                        
                        8,995
                        
                        
                        
                        6,519
                        
                        
                        
                        3,826
                        
                        
                        
                        -Cost
      of products
                        
                        
                        10,444
                        
                        
                        
                        14,281
                        
                        
                        
                        11,811
                        
                        
                        
                        11,090
                        
                        
                        
                        7,857Cost
      of license fees, content and royalties
                        
                        
                        5,876
                        
                        
                        
                        1,773
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Amortization
      of intangible assets
                        
                        
                        7,355
                        
                        
                        
                        3,873
                        
                        
                        
                        2,571
                        
                        
                        
                        2,252
                        
                        
                        
                        155Total
      costs of revenue
                        
                        
                        44,769
                        
                        
                        
                        28,922
                        
                        
                        
                        20,901
                        
                        
                        
                        17,168
                        
                        
                        
                        8,012Gross
      profit
                        
                        
                        114,276
                        
                        
                        
                        96,150
                        
                        
                        
                        103,999
                        
                        
                        
                        90,969
                        
                        
                        
                        75,173Operating
      expenses:Research
      and development
                        
                        
                        75,365
                        
                        
                        
                        66,186
                        
                        
                        
                        59,268
                        
                        
                        
                        47,151
                        
                        
                        
                        41,142Sales,
      general and administrative
                        
                        
                        54,589
                        
                        
                        
                        41,935
                        
                        
                        
                        34,497
                        
                        
                        
                        25,249
                        
                        
                        
                        18,007Restructuring
      charges
                        
                        
                        4,952
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Impairment
      to goodwill, intangibles and other long-lived assets
                        
                        
                        90,330
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Acquired
      in-process research and development
                        
                        
                        -
                        
                        
                        
                        2,500
                        
                        
                        
                        1,392
                        
                        
                        
                        1,590
                        
                        
                        
                        2,260Amortization
      of intangible assets arising from business combinations
                        
                        
                        5,903
                        
                        
                        
                        2,253
                        
                        
                        
                        1,699
                        
                        
                        
                        1,263
                        
                        
                        
                        76Total
      operating expenses
                        
                        
                        231,139
                        
                        
                        
                        112,874
                        
                        
                        
                        96,856
                        
                        
                        
                        75,253
                        
                        
                        
                        61,485Income
      (loss) from operations
                        
                        
                        (116,863
                        )
                        
                        
                        (16,724
                        )
                        
                        
                        7,143
                        
                        
                        
                        15,716
                        
                        
                        
                        13,688Gain
      from sale of equity interest in Ilypsa, Inc.
                        
                        
                        4,939
                        
                        
                        
                        40,826
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Interest
      and other income, net
                        
                        
                        135
                        
                        
                        
                        5,694
                        
                        
                        
                        7,709
                        
                        
                        
                        4,427
                        
                        
                        
                        2,521Income
      (loss) before income tax benefit (expense) and equity loss
                        
                        
                        (111,789
                        )
                        
                        
                        29,796
                        
                        
                        
                        14,852
                        
                        
                        
                        20,143
                        
                        
                        
                        16,209Income
      tax benefit (expense)
                        
                        
                        5,173
                        
                        
                        
                        (10,698
                        )
                        
                        
                        (6,382
                        )
                        
                        
                        (8,141
                        )
                        
                        
                        (3,327
                        )Equity
      in loss from investment in Visyx Technologies Inc.
                        
                        
                        -
                        
                        
                        
                        (314
                        )
                        
                        
                        (186
                        )
                        
                        
                        -
                        
                        
                        
                        -Net
      income (loss)
                        
                        $
                        (106,616
                        )
                        
                        $
                        18,784
                        
                        
                        $
                        8,284
                        
                        
                        $
                        12,002
                        
                        
                        $
                        12,882Basic
      net income (loss) per share
                        
                        $
                        (3.16
                        )
                        
                        $
                        0.57
                        
                        
                        $
                        0.25
                        
                        
                        $
                        0.37
                        
                        
                        $
                        0.40Diluted
      net income (loss) per share
                        
                        $
                        (3.16
                        )
                        
                        $
                        0.56
                        
                        
                        $
                        0.24
                        
                        
                        $
                        0.35
                        
                        
                        $
                        0.38Shares
      used in computing basic net income (loss) per share
                        
                        
                        33,747
                        
                        
                        
                        33,199
                        
                        
                        
                        33,199
                        
                        
                        
                        32,819
                        
                        
                        
                        32,067Shares
      used in computing diluted net income (loss) per share
                        
                        
                        33,747
                        
                        
                        
                        33,557
                        
                        
                        
                        34,214
                        
                        
                        
                        34,564
                        
                        
                        
                        33,872




26
 Table of Contents




December
      31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(In
      thousands)Consolidated
      Balance Sheet Data:Cash,
      cash equivalents and marketable securities
                
                $
                66,415
                
                
                $
                45,472
                
                
                $
                149,995
                
                
                $
                168,625
                
                
                $
                136,541Working
      capital
                
                $
                41,393
                
                
                $
                40,750
                
                
                $
                146,180
                
                
                $
                162,237
                
                
                $
                142,361Long-term
      investments
                
                $
                15,147
                
                
                $
                13,500
                
                
                $
                13,714
                
                
                $
                -
                
                
                $
                -Goodwill
      and intangible assets
                
                $
                93,247
                
                
                $
                180,515
                
                
                $
                31,657
                
                
                $
                32,065
                
                
                $
                24,397Total
      assets
                
                $
                224,514
                
                
                $
                316,898
                
                
                $
                260,006
                
                
                $
                241,412
                
                
                $
                207,002Total
      stockholders' equity
                
                $
                152,083
                
                
                $
                252,241
                
                
                $
                228,376
                
                
                $
                218,529
                
                
                $
                191,009





27
 Table of Contents





ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION





All
percentage amounts and ratios were calculated using the underlying data in
thousands. Operating results for the year ended December 31, 2008 are not
necessarily indicative of the results that may be expected for future fiscal
years. The following discussion and analysis should be read in conjunction with
our historical financial statements and the notes to those financial statements
that are included in Item 8 of Part II of this Annual Report on Form
10-K.





Overview





Since our
inception, we have invested heavily in developing technology, laboratory systems
and software to automate, accelerate and digitize traditional R&D and pursue
high-throughput materials research.  Our scientific team has deep technical
expertise. Through Symyx Software, we offer customers integrated R&D
collaboration, execution and analysis applications, and access to scientific
content and industry-leading chemical informatics, logistics and
decision-support applications. Through Symyx HPR, we provide research
services to our customers and sometimes enter into longer-term, broad technical
alliances for discovery and development of new materials.  We also apply
our expertise in high-throughput research technologies to offer automated tools
to enable improved R&D execution in our customers’
laboratories.





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





Recent
Events





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




·
            Impairment to goodwill,
      intangibles and other long-lived assets/valuation allowance-- In
      December 2008, we recorded a $90.3 million impairment charge to goodwill,
      intangible assets and other long-lived assets as discussed below under the
      heading of “Impairment to Goodwill, Intangibles and Other Long-Lived
      Assets.” We also recorded in the fourth quarter a $12.5 million valuation
      allowance against certain deferred tax assets. The impact of these charges
      and allowance on our financials is disclosed in Note 1 of Notes to
      Consolidated Financial Statements.




·
            Restructuring -- In
      December 2008, we announced a reorganization of our business in which we
      combined our former Symyx Tools and Symyx Research business units into a
      single unit, Symyx HPR, moved from a single combined sales force to
      dedicated sales forces within our business units, and reduced our
      workforce by approximately 15%. We expect to savings from these action
      will be approximately $15 million in 2009. We recorded restructuring
      charges of $5.0 million in 2008, including approximately $4.4 million of
      cash charges, of which $0.4 million was paid as of December 31, 2008. With
      regard to the restructuring plan commenced in October 2007 that related to
      the acquisition of MDL Information Systems, Inc. (“MDL”), we made cash
      payments of approximately $1.7 million in
2008.




·
            Symyx Notebook6.0 -- In April 2008,
      we announced the availability of Symyx Notebook 6.0, our new, enterprise
      ELN that is readily and easily configurable to meet the needs of
      biologists and analytical chemists, and enables R&D organizations to
      replace multiple discipline-specific ELNs with a single, multi-discipline
      application deployable across the enterprise.  Symyx Notebook
      6.1 became available in the fourth quarter of 2008, and was instrumental
      in customer successes with 2 of the top 15 worldwide pharmaceutical
      companies.




·
            Symyx Isentris 3.1-- In
      September 2008, we announced a significant release of the Symyx Isentris
      informatics system that provides scientists the freedom to create, manage,
      and share fully searchable local databases and to work offline. Going well
      beyond our industry-leading ISIS software, Symyx Isentris 3.1 is a key
      release in our continuing ISIS-to-Isentris customer
    migration.





28
 Table of Contents




·
            Acquisition of Integrity
      Biosolution, LLC -- In August 2008, we used $10.2 million cash to
      acquire Integrity Biosolution, a Camarillo, California-based provider of
      protein formulation and fill/finish services to the biotechnology
      sector.




·
            Research Services for Life
      Sciences Launch-- In July 2008, we launched our new
      client-directed and collaborative research services for life sciences,
      providing clients access to our installed base of parallel experimentation
      and testing capabilities through packaged offerings for solubility
      studies, polymorph screening, salt selection, co-crystallization, API
      stability in liquid and solid formulations, excipient compatibility,
      organic synthesis and process
optimization.





Impairment
to Goodwill, Intangibles and Other Long-lived Assets





In the
fourth quarter of 2008, pursuant to our accounting policy, we performed an
annual impairment test of goodwill. As a result of this analysis, we concluded
that the carrying amounts of goodwill included in our Symyx Software and Symyx
HPR segments exceeded their implied fair values and recorded an impairment
charge of approximately $76.5 million, which is included in the caption
“Impairment to Goodwill, Intangibles and Other Long-Lived
Assets.”  The impairment charge was determined by comparing the
carrying value of goodwill assigned to the reporting units within these segments
as of December 1, 2008, with the implied fair value of the goodwill. We
considered both the income and market approaches in determining the implied fair
value of the goodwill based upon a blended approach. The income approach uses
estimates of future operating results and cash flows of each of the reporting
units discounted at estimated discount rates ranging from 19% to 21%. The
estimates of future operating results and cash flows were principally derived
from an updated long-term financial forecast developed as part of our strategic
planning cycle conducted annually during the fourth quarter of 2008. The decline
in the implied fair value of the goodwill and resulting impairment charge was
primarily driven by the updated long-term financial forecasts, which showed
lower estimated near-term and longer-term profitability compared to estimates
developed at the time of the completion of the MDL and IntegrityBio
acquisitions. Refer to Note 1 of the Notes to the Consolidated Financial
Statements for further details.





In the
fourth quarter of 2008, due to the significant decline of our market
capitalization, we also performed an impairment test of long-lived assets. As a
result of this analysis, we concluded that the carrying amounts of intangibles
and other long-lived assets in Symyx HPR segments exceeded their implied fair
values and recorded an impairment charge of approximately $13.8 million, which
is also included in the caption “Impairment to Goodwill, Intangibles and Other
Long-Lived Assets.”





Business
Acquisitions





Acquisition
of Integrity Biosolution, LLC





On August
13, 2008, we acquired Integrity Biosolution, LLC (“IntegrityBio”), a
privately-held research service company based in Camarillo, California for
approximately $10.2 million, with additional contingent compensations as
described below. By acquiring IntegrityBio, we expanded our research service
offerings in the life sciences industry into biologic formulations,
complementing our existing chemical formulations services. The combination of
Symyx and IntegrityBio creates a differentiated set of large molecule
formulation services to customers in the pharmaceutical and biotechnology
industries by combining IntegrityBio's formulation expertise with Symyx's
advanced high-throughput research and informatics capabilities.





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





The total
preliminary purchase price recorded for this acquisition was $10.2 million,
consisting of approximately $9.4 million paid in cash (net of cash acquired),
working capital adjustments of $0.6 million paid in January 2009, and $0.2
million in transaction costs, consisting of legal and other professional service
fees. The purchase price is preliminary because we will owe to the founder
additional consideration calculated based on the revenue generated by
IntegrityBio’s operations during the period from September 2009 to August
2010.





29
 Table of Contents




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





AmountFair
      value of net assets acquired
                            
                            $
                            1,948Intangible
      assets
                            
                            
                            2,860Goodwill
                            
                            
                            5,440Total
                            
                            $
                            10,248








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





AmountCash
                    
                    $
                    32Accounts
      receivable
                    
                    
                    789Plant,
      property and equipment
                    
                    
                    1,379Accounts
      payable and other accrued liabilities
                    
                    
                    (127
                    )Accrued
      compensation
                    
                    
                    (47
                    )Deferred
      revenue
                    
                    
                    (78
                    )Fair
      value of IntegrityBio's net assets
                    
                    $
                    1,948





Goodwill
from the IntegrityBio acquisition is deductible for income tax
purposes.





Acquisition
of MDL Group Companies





On
October 1, 2007, we acquired MDL for $123 million in cash. Of the $123 million
cash paid, the parties placed $10 million in escrow pending their determination
of any detriments suffered or benefits enjoyed by MDL as a result of pre-closing
intercompany transactions between certain MDL group companies and the seller.
The escrow account (including interest earned) was subsequently reduced to $1.7
million after a March 2008 net working capital adjustment payment of $5.0
million to Symyx, and June 2008 distributions of $1.6 million to Symyx for
withholding tax and professional fee reimbursement and $1.7 million to the
seller. The remaining $1.7 million in the escrow account is expected to be
settled by June 2009.





The
purchase price for this acquisition was $121.5 million, consisting of
approximately $118.0 million in cash ($123 million cash paid, net of $5.0
million working capital adjustments received) and $3.5 million in transaction
costs, consisting of banking, legal and other professional service fees (net of
$325,000 reimbursement of transaction costs from the escrow account received in
June 2008).





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





AmountFair
      value of net liabilities assumed
                    
                    $
                    (4,594
                    )Accrued
      restructuring costs
                    
                    
                    (6,823
                    )In-process
      research and development
                    
                    
                    2,500Intangible
      assets
                    
                    
                    59,000Deferred
      tax liabilities
                    
                    
                    (17,710
                    )Goodwill
                    
                    
                    89,101Total
                    
                    $
                    121,474


30
 Table of Contents




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





AmountAccounts
      receivable, net
                    
                    $
                    4,417Prepaids
      and other assets
                    
                    
                    3,549Plant,
      property and equipment
                    
                    
                    4,851Accounts
      payable and other accrued liabilities
                    
                    
                    (2,046
                    )Accrued
      compensation
                    
                    
                    (4,961
                    )Deferred
      revenue
                    
                    
                    (10,404
                    )Fair
      value of MDL’s net liabilities
                    
                    $
                    (4,594
                    )





Goodwill
from the MDL acquisition is not deductible for federal income tax purposes and
partially deductible for state income tax purposes.





Critical
Accounting Policies





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 this
Annual Report on Form 10-K describes the significant accounting policies and
methods used in the preparation of the consolidated financial statements.
Preparing financial statements and related disclosures requires management to
exercise judgment in making estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses. These estimates and
assumptions are affected by management’s application of accounting policies.
Estimates include the 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.





Source
of Revenue and Revenue Recognition Policy





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





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





31
 Table of Contents




Service
Revenue





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





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





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





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





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





Product
Sales





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





Software
License and Database Content Fees





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





32
 Table of Contents




Intellectual
Property License Fees and Royalties





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





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





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





Accounts
Receivable and Allowance for Doubtful Accounts





Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest.





We assess
our allowance for doubtful accounts based on a combination of factors. In cases
where we are aware of circumstances that may impair a specific customer’s
ability to meet its financial obligations to us, we record a specific allowance
against amounts due to us and thereby reduce the net recognized receivable to
the amount we reasonably believe will be collected. For all other customers, we
record allowances for doubtful accounts based on the length of time the
receivables are past due, the current business environment and our historical
experience.





We
recorded an allowance for doubtful accounts in the amount of $53,000 upon the
acquisition of MDL Group Companies on October 1, 2007. As of December 31, 2008,
we had an allowance for doubtful accounts of $356,000.





Stock-Based
Compensation





We
adopted SFAS 123R, effective January 1, 2006, using the modified
prospective transition method. Under that transition method, stock-based
compensation expense recognized during the years after January 1, 2006 includes:
(a)  ESPP awards with offering periods commencing, and stock options
granted or assumed, prior to, but not yet vested as of December 31, 2005, based
on the grant-date fair value estimated in accordance with the original
provisions of Statement of Financial Accounting Standard No. 123 (“SFAS 123”);
(b) ESPP awards with offering periods commencing subsequent to December 31, 2005
in accordance with the provisions of SFAS 123R; and (c) restricted stock units,
restricted stock and stock options awarded subsequent to December 31, 2005 based
on the grant-date fair value estimated in accordance with the provisions of SFAS
123R. Under the modified prospective transition method, results for prior
periods are not restated. See Note 4 of the Notes to Consolidated Financial
Statements for further details.





33
 Table of Contents





Accrued
Warranty





A
warranty expense accrual is established at the time of customer acceptance of a
Symyx tools system and is included as a cost of product sold. Management is
required to exercise judgment in establishing the appropriate level of warranty
expense accrual for each Symyx tools system delivered and establishes the
accrual based, in part, on reference to actual warranty costs incurred on
similar systems. The actual results with regard to warranty expenditures could
have a material impact on our financial statements. When actual warranty costs
are anticipated to be higher than our original estimates, an additional expense
is charged to cost of products sold in the period in which such a determination
is made. When actual warranty costs are lower than our original estimates, the
difference will have a favorable impact to cost of products sold at the time the
warranty expires for the systems. In 2008, 2007 and 2006, we recorded favorable
adjustments of approximately $702,000, $128,000 and $200,000,
respectively.





Inventory





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





Goodwill,
Intangible Assets and Other Long-Lived Assets





We
account for goodwill in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). As required by SFAS No. 142, we
test goodwill of its reporting units for impairment annually during its fourth
quarter or whenever events occur or circumstances change, such as an adverse
change in business climate or a decline in the overall industry, that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. We used three reporting units in our 2008 impairment analysis: Symyx
Software, Symyx Research and Symyx Tools.





In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets(SFAS No. 144), we tests other long-lived
assets, including property, equipment and leasehold improvements and other
intangible assets subject to amortization, for recoverability whenever events or
changes in circumstances indicate that the carrying value of those assets may
not be recoverable.





In
estimating the fair value of the reporting units with recognized goodwill for
the purposes of our annual or periodic analyses, we make estimates and judgments
about the future cash flows of these reporting units. Our cash flow forecasts
are based on assumptions that are consistent with the plans and estimates we are
using to manage the underlying reporting units. In addition, we make certain
judgments about allocating shared assets such as accounts receivable and
property, plant and equipment to the estimated balance sheet for those reporting
units. We also consider our market capitalization (adjusted for unallocated
monetary assets such as cash, marketable debt securities and debt) on the date
we perform the analysis.





In 2008,
we recorded an impairment charge of $90.3 million to goodwill, intangible assets
and other long-lived assets. See further discussion in Note 1 of the Notes to
the Consolidated Financial Statements.





34
 Table of Contents




Accounting
for Income Taxes





Income
taxes have been provided using the liability method. A deferred tax asset or
liability is determined based on the difference between the financial statement
and tax basis of assets and liabilities as measured by the enacted tax rates
that will be in effect when these differences reverse. We also recognize the
impact of an uncertain income tax position on the income tax return at the
largest amount that is more-likely-than-not to be sustained upon audit by the
relevant taxing authority accordingly to Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109. An uncertain income
tax position will not be recognized if it has less than a 50% likelihood of
being sustained. We consider the realizability of deferred tax assets and record
valuation allowances when uncertainties related to the realization of such net
deferred tax assets exist. In 2008, as a result of weighing all the positive and
negative evidence, including our history of cumulative losses over the past
three years and the difficulty of forecasting sufficient future taxable income,
we recorded a $12.5 million valuation allowance against federal and state
deferred tax assets. See the detailed discussion under the heading “Provision
for Income Taxes” in this section.





Foreign
Currency Translation





We
account for foreign currency translation in accordance with Statement of
Financial Accounting Standard No. 52, Foreign Currency Translation,as amended. We translate the assets and liabilities of our international
non-U.S. dollar functional currency subsidiaries into U.S. dollars at the rates
of exchange in effect on the balance sheet date. Revenue and expenses are
translated using rates that approximate those in effect during the period.
Translation adjustments are included in stockholders’ equity in the Consolidated
Balance Sheet caption “Accumulated other comprehensive income.” Currency
transaction losses derived from monetary assets and liabilities stated in a
currency other than the functional currency and recognized in results of
operations were $2.0 million, $162,000 and $7,000 for the years ended December
31, 2008, 2007 and 2006, respectively. The effect of foreign currency rate
changes on cash and cash equivalents was decreases of $172,000, $498,000 and
$31,000 in the years ended December 31, 2008, 2007 and 2006,
respectively.





Results
of Operations





Revenue





2008
                                              
                                              
                                              2007
                                              
                                              
                                              2006Amount
                                                (in
      000’s)
                                              
                                              
                                              Change
                                                over
                                                Previous
      Year
                                              
                                              
                                              Amount
                                                (in
      000’s)
                                              
                                              
                                              Change
                                                over
                                                Previous
      Year
                                              
                                              
                                              Amount
                                                (in
      000’s)Service
                                              
                                              $
                                              74,892
                                              
                                              
                                              
                                              27
                                              %
                                              
                                              $
                                              59,034
                                              
                                              
                                              
                                              2
                                              %
                                              
                                              $
                                              57,933Product
                                              
                                              
                                              25,033
                                              
                                              
                                              
                                              (28
                                              %)
                                              
                                              
                                              34,898
                                              
                                              
                                              
                                              4
                                              %
                                              
                                              
                                              33,526License
      fees, content and royalties
                                              
                                              
                                              59,120
                                              
                                              
                                              
                                              90
                                              %
                                              
                                              
                                              31,140
                                              
                                              
                                              
                                              (7
                                              %)
                                              
                                              
                                              33,441Total
      revenue
                                              
                                              $
                                              159,045
                                              
                                              
                                              
                                              27
                                              %
                                              
                                              $
                                              125,072
                                              
                                              
                                              
                                              *
                                              
                                              
                                              $
                                              124,900*
      Less than 1%




Total
revenue increased 27% from 2007 to 2008 due to the increase in Symyx Software
revenue as a result of the MDL acquisition in October 2007, partially offset by
a decrease in research revenue from ExxonMobil and, to a lesser extent, Dow, as
well as lower HPR tools revenue due primarily to customer delays and
cancellations in the second half of 2008.





Our total
revenue in 2007 was $172,000 above revenue in 2006, as increases in Symyx
Software fourth quarter revenue (including service and content revenue) due to
the MDL acquisition and slightly higher tools sales offset a decline in research
service revenue and license fees and royalties.





35
 Table of Contents




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





2008
                        
                        
                        2007
                        
                        
                        2006United
      States
                        
                        
                        64
                        %
                        
                        
                        88
                        %
                        
                        
                        89
                        %Europe
                        
                        
                        26
                        %
                        
                        
                        9
                        %
                        
                        
                        8
                        %Asia
                        
                        
                        9
                        %
                        
                        
                        3
                        %
                        
                        
                        3
                        %Rest
      of the World
                        
                        
                        1
                        %
                        
                        
                        *
                        
                        
                        
                        *Total
                        
                        
                        100
                        %
                        
                        
                        100
                        %
                        
                        
                        100
                        %*
      Less than 1%





International
revenue increased significantly in 2008 due to the MDL acquisition, which
significantly expanded our life sciences customer base and increased our
presence in Europe and in Japan.





The following table lists our major
customers for the years ended December 31, 2008, 2007 and 2006 and revenue
generated from these customers as a percentage of our total revenue in the
respective periods. We expect that a significant portion of our revenue will
continue to be generated from a few key customers, though with the MDL
acquisition we substantially reduced the concentration of our customer
base.





2008
                        
                        
                        2007
                        
                        
                        2006ExxonMobil
                        
                        
                        15
                        %
                        
                        
                        29
                        %
                        
                        
                        41
                        %Dow
                        
                        
                        18
                        %
                        
                        
                        28
                        %
                        
                        
                        23
                        %Total
                        
                        
                        33
                        %
                        
                        
                        57
                        %
                        
                        
                        64
                        %








For 2009,
we expect Dow to be flat to slightly down as a percent of revenue, and expect
ExxonMobil to account for less than 10% of total revenue due to the May 2008
expiration of primary alliance agreement.





We
segregate revenue by the following businesses:





2008
                                                
                                                
                                                2007
                                                
                                                
                                                2006Amount
                                                  (in
      000’s)
                                                
                                                
                                                Change
      over Previous Year
                                                
                                                
                                                Amount
                                                  (in
      000’s)
                                                
                                                
                                                Change
      over Previous Year
                                                
                                                
                                                Amount
                                                  (in
      000’s)Symyx
      Software
                                                
                                                $
                                                94,200
                                                
                                                
                                                
                                                195
                                                %
                                                
                                                $
                                                31,893
                                                
                                                
                                                
                                                25
                                                %
                                                
                                                $
                                                25,495Symyx
      HPR
                                                
                                                
                                                64,845
                                                
                                                
                                                
                                                (30
                                                %)
                                                
                                                
                                                93,179
                                                
                                                
                                                
                                                (6
                                                %)
                                                
                                                
                                                99,405Total
                                                
                                                $
                                                159,045
                                                
                                                
                                                
                                                27
                                                %
                                                
                                                $
                                                125,072
                                                
                                                
                                                
                                                *
                                                
                                                
                                                $
                                                124,900*
      Less than 1%





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





Symyx
Software generates revenue primarily from the licensing of software, including
the Isentris platform and our LEA and Electronic Laboratory Notebook (ELN)
products, content subscriptions, and providing associated support, maintenance
and consulting services. Symyx Software revenue increased from 2006 to 2007 and
again to 2008, driven by products acquired through the MDL acquisition and
related services.





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 2008 from 2007 resulted from the decrease in service revenue, product sales
and license fees. The decrease of Symyx HPR service revenue was driven primarily
by the expiration of the collaborative research component of our alliance with
ExxonMobil on May 31, 2008. In addition, the decrease in product sales revenue
in 2008 compared to 2007 was primarily due to customer delays and cancellations
in the second half of the year and, to a lesser degree, lower tools revenues for
the year from Exxon-Mobil and Dow versus the prior year.  During the
years ended December 31, 2008, 2007 and 2006, we shipped 18, 41 and 26 tools,
respectively, including our CORE(x) modules and Benchtop products, to chemical,
life science, academic and several other customers.





36
 Table of Contents




Symyx HPR
revenue decreased from 2006 to 2007 was driven by lower research service revenue
due to the expiration of a number of other collaborations.





We
launched research services initiatives in the chemical, energy and life science
industries in late 2007 and mid-2008, respectively, contributing to our 2008
revenue. In August 2008, we acquired IntegrityBio. While current revenues from
these services initiatives are not material, we expect to focus on these
services initiatives as key areas of opportunity for growth in research service
in 2009. However, we can provide no assurances these initiatives will be
successful.





Prior to
its spin-out into Visyx Technologies Inc. in November 2006, Symyx Sensors group
provided development services and licenses for specific applications of our
sensor technology.  Symyx Sensors revenue in 2006 of $3.7 million
primarily consisted of payments received from Univation for sensor development
services. For reporting simplicity, we have grouped revenue from Symyx Sensors
group in 2006 with revenue from Symyx HPR.





Costs
of Revenue





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





Cost of
products sold in 2008 was $10.4 million or 42% of product sales revenue,
compared to $14.3 million or 41% of product sales revenue in 2007, and $11.8
million or 35% of product sales revenue in 2006. The fluctuation in the total
cost of products sold in the past three years was primarily due to changes in
product mix, as well as an inventory excess and obsolete charge of $1.2 million
in 2008 primarily due to the delays and cancellations from customers. Cost of
products sold as a percentage of product sales revenue in 2006 was lower
compared to other years due to changes in the product mix shipped in the
respective years, and the development costs related to prototypes sold being
expensed in prior periods as development costs, as discussed below.





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





The cost
of products sold may also be affected by adjustments to the accrued warranty
expense for pre-existing sales. When actual warranty costs are lower than our
estimates, the difference will have a favorable impact to cost of products sold
at the time the warranty expires for the systems. When actual warranty costs are
anticipated to be higher than our original estimates, an additional expense is
charged to cost of products sold in the period when such a determination is
made. In 2008, 2007 and 2006, we made favorable adjustments to accrued warranty
for pre-existing sales of $699,000, $128,000 and $200,000,
respectively.





37
 Table of Contents




Operating
Expenses





2008
                                                      
                                                      
                                                      2007
                                                      
                                                      
                                                      2006Amount
                                                        (in
      000’s)
                                                      
                                                      
                                                      As
      a
                                                        Percentage
      of
                                                        Total
      Revenue
                                                      
                                                      
                                                      Change
                                                        over
                                                        Previous
      Year
                                                      
                                                      
                                                      Amount
                                                        (in
      000’s)
                                                      
                                                      
                                                      As
      a
                                                        Percentage
      of
                                                        Total
      Revenue
                                                      
                                                      
                                                      Change
                                                        over
                                                        Previous
      Year
                                                      
                                                      
                                                      Amount
                                                        (in
      000’s)
                                                      
                                                      
                                                      As
      a
                                                        Percentage
      of
                                                        Total
      RevenueResearch
      and development
                                                      
                                                      $
                                                      75,365
                                                      
                                                      
                                                      
                                                      47
                                                      %
                                                      
                                                      
                                                      14
                                                      %
                                                      
                                                      $
                                                      66,186
                                                      
                                                      
                                                      
                                                      53
                                                      %
                                                      
                                                      
                                                      12
                                                      %
                                                      
                                                      $
                                                      59,268
                                                      
                                                      
                                                      
                                                      47
                                                      %Sales,
      general and administrative
                                                      
                                                      
                                                      54,589
                                                      
                                                      
                                                      
                                                      34
                                                      %
                                                      
                                                      
                                                      30
                                                      %
                                                      
                                                      
                                                      41,935
                                                      
                                                      
                                                      
                                                      33
                                                      %
                                                      
                                                      
                                                      22
                                                      %
                                                      
                                                      
                                                      34,497
                                                      
                                                      
                                                      
                                                      28
                                                      %Restructuring
      charges
                                                      
                                                      
                                                      4,952
                                                      
                                                      
                                                      
                                                      3
                                                      %
                                                      
                                                      na
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      %
                                                      
                                                      
                                                      %
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      %Impairment
      to goodwill, intangibles and other long-lived assets
                                                      
                                                      
                                                      90,330
                                                      
                                                      
                                                      
                                                      57
                                                      %
                                                      
                                                      na
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      %
                                                      
                                                      
                                                      %
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      %Acquired
      in-process research and development
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      0
                                                      %
                                                      
                                                      
                                                      (100
                                                      %)
                                                      
                                                      
                                                      2,500
                                                      
                                                      
                                                      
                                                      2
                                                      %
                                                      
                                                      
                                                      80
                                                      %
                                                      
                                                      
                                                      1,392
                                                      
                                                      
                                                      
                                                      1
                                                      %Amortization
      of intangible assets arising from business combinations
                                                      
                                                      
                                                      5,903
                                                      
                                                      
                                                      
                                                      4
                                                      %
                                                      
                                                      
                                                      162
                                                      %
                                                      
                                                      
                                                      2,253
                                                      
                                                      
                                                      
                                                      2
                                                      %
                                                      
                                                      
                                                      33
                                                      %
                                                      
                                                      
                                                      1,699
                                                      
                                                      
                                                      
                                                      1
                                                      %Total
      operating expenses
                                                      
                                                      $
                                                      231,139
                                                      
                                                      
                                                      
                                                      145
                                                      %
                                                      
                                                      
                                                      105
                                                      %
                                                      
                                                      $
                                                      112,874
                                                      
                                                      
                                                      
                                                      90
                                                      %
                                                      
                                                      
                                                      17
                                                      %
                                                      
                                                      $
                                                      96,856
                                                      
                                                      
                                                      
                                                      77
                                                      %





Included
in cost and operating expenses were stock-based compensation expense of $4.4
million, $5.7 million, and $10.3 million during the years ended December 31,
2008, 2007, and 2006, respectively. The decrease in stock-based compensation
expenses in 2008 and 2007 was primarily due to the change in our compensation
structure toward granting equity awards only to selected key employees and to
increases in forfeiture rate assumptions based on actual turnover rates.
Stock-based compensation expense recognized in our results of operations for the
years ended December 31, 2008, 2007, and 2006 was as follows (in
thousands):





2008
                      
                      
                      2007
                      
                      
                      2006Costs
      of revenue
                      
                      $
                      227
                      
                      
                      $
                      294
                      
                      
                      $
                      673Research
      and development
                      
                      
                      1,396
                      
                      
                      
                      2,627
                      
                      
                      
                      4,006Sales,
      general and administrative
                      
                      
                      2,745
                      
                      
                      
                      2,796
                      
                      
                      
                      5,617Total
                      
                      $
                      4,368
                      
                      
                      $
                      5,717
                      
                      
                      $
                      10,296





Research
and Development (“R&D”) Expenses





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





The table
below indicates the major collaborative partners, defined as those contributing
greater than 10% of collaborative research revenue in 2008, for whom we
conducted research and development, together with the date upon which the
current contract ended or ends and the primary focus of the
collaborations.





Partner
                    
                    Current Research Contract
    Ends
                    
                    Primary focus of current collaborative
      effortsDow
                    
                    12/31/2009
                    
                    Basic
      and specialty chemicals and materials researchExxonMobil
                    
                    5/31/2008
                    
                    Catalyst
      and process development for basic chemicals and refining
      applications





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





38
 Table of Contents




2008
                      
                      
                      2007
                      
                      
                      2006Customer-sponsored
      projects
                      
                      
                      37
                      %
                      
                      
                      55
                      %
                      
                      
                      61
                      %Internally-funded
      projects
                      
                      
                      63
                      %
                      
                      
                      45
                      %
                      
                      
                      39
                      %Total
                      
                      
                      100
                      %
                      
                      
                      100
                      %
                      
                      
                      100
                      %








Our
funded R&D efforts as a percentage of total R&D efforts decreased
significantly due to the expiration of our principal agreement with ExxonMobil
in May 2008, and to a lesser degree, reduced research efforts provided to Dow.
The increase of our R&D efforts on internally funded software development
projects as a percentage of total R&D efforts resulted from the expanded
software development workforce from the MDL acquisition.





The
increase of R&D expenses in 2008 over 2007 resulted primarily from
additional salary-related expenses and consulting fees related to the MDL
acquisition.





R&D
expenses as a percentage of total revenue decreased in 2008 compared to 2007 due
to the significant increase in revenue driven by the MDL acquisition and the
fact that R&D as a percentage of revenue is lower in our software business
than in our other business lines. R&D expenses as a percentage of total
revenue increased in 2007 compared to 2006 primarily due to the increase in
personnel-related expenses in the fourth quarter of 2007 from the MDL
acquisition without a fully corresponding revenue increase, as a significant
amount of fourth quarter deferred revenue from MDL was written down as required
by purchase accounting rules under U.S. GAAP.





Innovations
and advances generated by our research and development personnel support our
Symyx Software and Symyx HPR operations, and generate intellectual property and
discovered materials that support our licensing activities.  As a
result of the restructuring we implemented in the fourth quarter of 2008, we
expect our total R&D expense to decline compared to 2008.





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





Our
SG&A expenses consist primarily of personnel costs for sales, business
development, legal, general management, finance and human resources, as well as
payments of commissions to our sales personnel and professional expenses, such
as legal and accounting. The increase in SG&A expenses in 2008 was primarily
due to the increased personnel costs for employees from the MDL acquisition for
the full fiscal year. The increase in SG&A expenses in 2007 was due to the
MDL acquisition and to the increased personnel costs associated with our
expanded sales and marketing organizations and the reorganization of our
management team.





SG&A
expenses represented 34%, 33% and 28% of total revenue for years ended December
31, 2008, 2007 and 2006, respectively. The increase in SG&A expenses as a
percentage of total revenue from 2007 to 2008 was primarily due to annual salary
increase and increase in increased expenditures in marketing. The increase in
SG&A expenses as a percentage of total revenue from 2006 to 2007 was
primarily due to the fact that we could not recognize certain
acquisition-related MDL deferred revenue under GAAP to compensate for the
acquisition-driven increase in personnel costs.





Impairment
to Goodwill, Intangibles and Other Long-lived Assets





As
discussed in Note 1 of the Notes to Consolidated Financial Statements, we
performed an impairment analysis in December 2008 for all of our business units
and determined that the value of our goodwill, intangible assets and other
long-lived assets has been impaired primarily due to the significant decline of
our market capitalization. We recorded impairment charge of $90.3 million, which
included $76.5 million to goodwill, $2.6 million to intangible assets and $11.3
million to fixed assets.





Restructuring
Charges





On
December 3, 2008, in order to realign our operations to drive performance and
improve operating efficiency, we implemented a reorganization plan to combine
Symyx Tools and Symyx Research to create Symyx HPR.  The 2008 Plan included
a worldwide reduction in force of approximately 90 employees and the
consolidation of certain facilities. We recorded total restructuring charges of
$4,952,000 in the fourth quarter of 2008, consisting of $3.7 million of
severance and one-time benefits and $1.3 million of exit costs of facilities,
write-off of related fixed assets and associated legal costs.





39
 Table of Contents




Acquired
In-Process Research and Development





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





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





Amortization
of Intangible Assets Arising from Business Acquisitions





In
connection with various acquisitions, we have recorded an aggregate of $82.4
million of intangible assets (See Note 11 of the Notes to Consolidated Financial
Statements). These intangible assets are being amortized on a straight-line
basis over the estimated useful lives of the assets.  The amortization
of intangible assets was recorded partially as costs of revenue and partially as
operating expenses depending on the nature of these intangible
assets.





Gain
from Sale of Equity Interest in Ilypsa





We
recorded a $40.8 million gain in 2007 upon the sale of approximately 10% equity
interest in Ilypsa, Inc. In the third quarter of 2008, we received another $4.8
million in cash upon the release of holdback related to the same
transaction.





Interest
and Other Income, Net





Interest
and other income, net, for the years ended December 31, 2008, 2007 and 2006
consisted of interest income of approximately $871,000, $5.9 million and $7.7
million, respectively. Interest income represents interest income earned on our
cash, cash equivalents and marketable securities. Interest income decreased in
2008 and 2007 due to the significant decrease in our average investment balance
after the MDL acquisition and the impact of decreasing average interest rates.
Other expense for 2008 consisted of $2.0 million foreign currency losses,
partially offset by a $1.6 million gain from the sale of our Occupational Health
Service (OHS) business in May 2008. We recorded a significant amount of foreign
currency losses in 2008 due to the increased presence of our foreign operations
after the MDL acquisition and the material fluctuation of foreign currency
exchange rates during 2008.





Provision
for Income Taxes





We
recorded an income tax benefit of $5.2 million in 2008, and income tax expenses
of $10.7 million in 2007 and $6.4 million in 2006. Our effective income tax rate
was 4.6% for 2008, 36.3% for 2007 and 43.5% for 2006. The effective income tax
benefit rate was lower than our statutory combined federal and state rate of 40%
in 2008 due to the non-deductibility of the majority of goodwill impairments and
a $12.5 million valuation allowance for deferred tax assets. The effective
income tax rate was lower than our statutory combined federal and state rate of
40% in 2007 due to income tax benefits from research and development credits and
tax-exempt interest income. The effective income tax rate for 2006 was higher
than our statutory rate principally due to the non-deductibility of both the
in-process research and development charge from the Autodose acquisition and
certain stock-based compensation expenses.





40
 Table of Contents




We record
income tax expense using the asset and liability method. We recognize deferred
tax assets and liabilities for the expected future tax consequences attributable
to temporary differences between amounts reported for income tax purposes and
financial statement purposes, using current tax rates. We recognize a valuation
allowance if we anticipate that some or all of a deferred tax asset will not be
realized. We must assess the likelihood that our deferred tax assets will be
recovered from future taxable income and, to the extent that we believe that
recovery is not likely, it must establish a valuation allowance. Significant
management judgment is required in determining the provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recorded against
net deferred tax assets. We have recorded a valuation allowance of $12.5 million
as a result of uncertainties related to the realization of our net deferred tax
assets at December 31, 2008. We established the valuation allowance as a
result of weighing all positive and negative evidence, including our history of
cumulative losses over the past three years and the difficulty of forecasting
sufficient future taxable income. The valuation allowance reflects the
conclusion of management that it is more likely than not that the benefit from
certain deferred tax assets will not be realized. If the actual results differ
from these estimates or these estimates are adjusted in future periods, the
valuation allowance may require adjustment which could materially impact our
financial position and results of operations.





On
January 1, 2007, we adopted Financial Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109. As a result, we
recognized a $1.0 million increase in liability for unrecognized tax benefits.
As of December 31, 2008, our total unrecognized tax benefits were $4.7 million,
of which $1.1 million of tax benefits, if recognized, would affect the effective
income tax rate. We do not anticipate the total amounts of unrecognized income
tax benefits will significantly increase or decrease in the next 12
months.





Recent
Accounting Pronouncements





In
September 2006, the FASB issued Statement No. 157 (SFAS 157),
Fair Value
Measurements.  SFAS 157 provides guidance for using fair
value to measure assets and liabilities. It also responds to investors' requests
for expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings.  SFAS 157 applies
whenever other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair value in any new
circumstances.  SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. In February
2008, the FASB issued Staff Position 157-2 (FSP 157-2), Effective Date of FASB Statement No.
157, which delays the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years beginning after November 15,
2008.  Accordingly, we adopted certain provisions of SFAS 157 on
January 1, 2008 on a prospective basis for our financial assets and liabilities,
which require that we determine the fair value of financial assets and
liabilities using the fair value hierarchy established in SFAS 157. We also
elected to delay the adoption of SFAS 157 for our nonfinancial
assets/liabilities under FSP 157-2 until January 1, 2009 and is not expecting
the adoption will have a material impact on our consolidated financial
statements.





SFAS 157
describes three levels of inputs that may be used to measure fair value, as
follows:





·
            Level
      1 inputs, which include quoted prices in active markets for identical
      assets or liabilities;





·
            Level
      2 inputs, which include observable inputs other than Level 1 inputs, such
      as quoted prices for similar assets or liabilities; quoted prices for
      identical or similar assets or liabilities in markets that are not active;
      or other inputs that are observable or can be corroborated by observable
      market data for substantially the full term of the asset or liability;
      and





·
            Level
      3 inputs, which include unobservable inputs that are supported by little
      or no market activity and that are significant to the fair value of the
      underlying asset or liability. Level 3 assets and liabilities include
      those whose fair value measurements are determined using pricing models,
      discounted cash flow methodologies or similar valuation techniques, as
      well as significant management judgment or
  estimation.





41
 Table of Contents




The only
type of financial assets to be measured at fair value using Level 1 inputs on a
recurring basis was our money market funds. We derived the fair value of our
money market funds from quoted market price and measured the fair value of our
money market funds using Level 1 inputs to be $52.0 million.





In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007) (SFAS 141(R)),
Business Combinations.
Under SFAS No. 141(R), an entity is required to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date. It further requires
that: acquisition-related costs be recognized separately from the acquisition
and expensed as incurred, restructuring costs generally be expensed in periods
subsequent to the acquisition date, and changes in accounting for deferred tax
asset valuation allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. In addition, acquired in-process
research and development (IPR&D) is capitalized as an intangible asset and
amortized over its estimated useful life. The adoption of SFAS No. 141(R)
will change our accounting treatment for business combinations on a prospective
basis beginning January 1, 2009.





In
December 2007, the FASB issued SFAS No. 160 (SFAS 160), Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.SFAS 160
is based on the economic entity concept of consolidated financial statements,
under which all residual economic interest holders in an entity have an equity
interest in the consolidated entity, even if the residual interest is relative
to only a portion of the entity. SFAS 160 requires that a noncontrolling
interest in a consolidated subsidiary be displayed in the consolidated statement
of financial position as a separate component of equity because the FASB
concluded that noncontrolling interests meet the definition of equity of the
consolidated entity. In addition, net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement.  SFAS 160 is effective for the first annual reporting
period on or after December 15, 2008. Earlier adoption is prohibited. We do not
have any noncontrolling interest as of December 31, 2008.





In March
2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivative
Instruments and Hedging Activities. SFAS 161 is intended to improve
financial reporting of derivative instruments and hedging activities by
requiring enhanced disclosures to enable financial statement users to better
understand the effects of derivatives and hedging on an entity’s financial
position, financial performance and cash flows. The provisions of SFAS 161 are
effective for interim periods and fiscal years beginning after November 15,
2008. We do not anticipate the adoption of SFAS 161 will have material impact on
our condensed consolidated financial statements.





In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FAS 142-3”). This guidance is intended to improve the
consistency between the useful life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible Assets(“SFAS 142”), and the period of expected cash flows used to measure the
fair value of the asset under SFAS 141R when the underlying arrangement
includes renewal or extension of terms that would require substantial costs or
result in a material modification to the asset upon renewal or extension.
Companies estimating the useful life of a recognized intangible asset must now
consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, must consider
assumptions that market participants would use about renewal or extension as
adjusted for SFAS 142’s entity-specific factors. FAS 142-3 is effective for us
beginning January 1, 2009 and will impact future business
combinations.





Liquidity
and Capital Resources





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





Balance
Sheet and Cash Flows





We had
positive cash flow from operating activities for the year ended December 31,
2008. We ended fiscal year 2008 with cash, cash equivalents and marketable
securities of approximately $66.4 million.This compared to cash,
cash equivalents and marketable securities of approximately $45.5 million at
December 31, 2007.





42
 Table of Contents




Our
operating activities provided $28.4 million and $29.9 million of cash in 2008
and 2006, respectively, and used $14.7 million of cash in 2007. The sources of
cash for the three years were primarily the receipt of funding from research
partners, payments from product sales and licensing fees. In 2007 we paid
approximately $20.9 million in income taxes, of which the majority was related
to the gain from the Ilypsa transaction (described below). Because this tax
payment was recorded against operating cash flow while the original sales
proceeds were recorded as investing cash flow, our cash flow from operating
activities was negative for 2007. Our accounts receivable balance at December
31, 2008 decreased significantly compared to December 31, 2007 due to the
collection of payments for tools shipped in the fourth quarter of 2007 and
comparatively lower tools shipments in the fourth quarter of 2008. Current
liabilities increased by approximately $7.0 million at December 31, 2008 as
compared to December 31, 2007 primarily due to the increase in deferred revenue,
as our deferred revenues associated with the MDL business returned to more
normalized levels.  On
October 2, 2007, we completed the acquisition of MDL and reduced MDL’s content
subscriptions and product support obligations to estimated fair values as
of the acquisition date. To the extent former MDL customers renew these content
subscriptions and product support contracts, we will recognize the full value of
the content subscriptions and product support contracts as deferred revenues and
recognize the related revenue ratably over the contract
period.





We currently expect net positive
operating cash flow for 2009, but that operating cash flow will be positive or
negative in certain quarters, reflecting the seasonality of our
businesses.





As a
result of adopting SFAS 123R, $42,000, $163,000 and $2.7 million of excess tax
benefits for the years ended December 31, 2008, 2007 and 2006, respectively,
have been classified as an operating cash outflow and a financing cash
inflow.





Net cash
used in investing activities was $111,000 and $53.0 million in 2008 and 2006,
respectively. Net cash from investing activities was $15.4 million in 2007.
Included in the cash used in investing activities for 2008 were net cash
payments for IntegrityBio acquisition of $10.2 million and an additional
investment in Intermolecular of $1.6 million, partially offset by a $5.0 working
capital adjustment in connection with the MDL acquisition and a $4.8 million
from the sale of Ilypsa equity interest received in 2008. Included in the cash
from investing activities for 2007 were net proceeds of $109.0 million from
marketable securities, proceeds from the sale of Ilypsa equity interest of $41.2
million, partially offset by a net cash payment for MDL acquisition of $125.9
million. Included in the 2006 cash used in investing activities were $13.9
million for long-term investments in Intermolecular and Visyx and a net of $4.2
million for the acquisition of Autodose. During 2006, the majority of proceeds
from the maturities of marketable securities were re-invested in marketable
securities. The other fluctuations from period to period were due primarily to
the timing of purchases, sales, and maturities of our marketable securities.
Cash used in purchases of property, plant and equipment was $7.1 million, $7.7
million and $19.6 million, respectively, in 2008, 2007 and 2006. The large
amount of cash used in purchases of property, plant and equipment in 2006 was
primarily associated with the build-out of an additional leased facility. We
believe we have built out sufficient facilities spaces for our current business
needs, but believe we may incur additional one-time charges in facilities
consolidation and reconfiguration in the near-term to address the ongoing
evolution of our businesses.





Financing
activities provided $1.2 million and $745,000 of cash in 2008 and 2007,
respectively, and used $11.4 million of cash in 2006. The cash inflows were
primarily the proceeds from the exercise of stock options and sale of stock
under the Employee Stock Purchase Plan in each of 2008, 2007 and 2006, and for
2006, excess tax benefits from stock-based compensation. Cash outflows from
financing activities in 2008 and 2007 included approximately $499,000 and $2.0
million, respectively, payment of employee withholding tax in lieu of issuing
common stock upon the vest of restricted stock units. Cash outflows in 2006
consisted of $30.0 million of cash used to repurchase our common
stock.





On
September 28, 2007, we entered into a Credit Agreement (the “Credit Agreement”)
with Bank of America, N.A., as Administrative Agent and L/C Issuer (the
“Agent”), and each lender from time to time a party thereto. Under the Credit
Agreement, the Agent has agreed to provide a $25 million aggregate commitment
for a two-year revolving credit facility and issuances of letters of credit for
Symyx (the “Facility”), secured by substantially all of our assets excluding
intellectual property.  As of
December 31, 2008, we had no borrowing under the Facility. In the fourth quarter
of 2008, due to the non-cash impairment charges and valuation allowances
recorded, we did not meet the Consolidated Net Worth covenant related to the
Facility (“Existing Default”) as of December 31, 2008. In March 2009, we entered
into an amendment to the Facility with the Agent which provided a waiver with
respect to the Existing Default and lowered the Consolidated Net Worth covenant
amount for future measurement dates.




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





43
 Table of Contents




Contractual
Commitments





Our
contractual commitments consist of our obligations under operating leases
(Facility Commitments), our commitments to purchase inventory and fixed assets
and services (Purchase Commitments), and our commitments for royalty payments
(Royalty Commitments, due when we receive customer payments). As of December 31,
2008 and 2007, our contractual commitments were $34.4 million and $37.6 million,
respectively. The decrease in our contractual commitments in 2008 was due to
facility lease payments made in 2008, partially offset by commitments from our
various new leases. We expect to satisfy these obligations as they become due
over the next eight years.





Future
principal commitments as of December 31, 2008 were as follows (in
thousands):





Total
                    
                    
                    Less
      than 1 Year
                    
                    
                    1-3
      Years
                    
                    
                    3-5
      Years
                    
                    
                    More
      Than 5 YearsFacility
      Commitments
                    
                    $
                    29,596
                    
                    
                    $
                    4,853
                    
                    
                    $
                    9,016
                    
                    
                    $
                    8,110
                    
                    
                    $
                    7,617Purchase
      Commitments
                    
                    
                    2,868
                    
                    
                    
                    2,868
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Royalty
      Commitments
                    
                    
                    1,939
                    
                    
                    
                    1,859
                    
                    
                    
                    80
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    34,403
                    
                    
                    $
                    9,580
                    
                    
                    $
                    9,096
                    
                    
                    $
                    8,110
                    
                    
                    $
                    7,617





Other
Commitments





As of
December 31, 2008, we carried a $4.1 million accrued liability associated with
uncertainties in income taxes. We are unable to make reasonably reliable
estimates of the periods of any cash settlement with the respective tax
authorities and have recorded the liability as a long-term payable on our
Consolidated Balance Sheets.





Customer
Indemnification





From time
to time, we agree to indemnify our customers against certain third party
liabilities, including liability if our products infringe a third party’s
intellectual property rights. We account for such indemnification provisions in
accordance with the Financial Accounting Standards Board (FASB) Interpretation
No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. Other than for limited exceptions (e.g.,
intellectual property indemnity or bodily harm), our indemnification obligation
in these arrangements is typically limited to no more than the amount paid by
the customer. As of December 31, 2008, we were not subject to any pending
intellectual property-related litigation. We have not received any requests for
and have not been required to make any payments under these indemnification
provisions during any periods covered in these consolidated financial
statements.





Contingencies





As
discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements,
the former stockholders of Autodose SA are eligible to receive additional
purchase price consideration of up to 7.1 million Swiss Franc (or equivalent to
$6.7 million using foreign currency exchange rate in effect on December 31,
2008) upon the achievement of certain 2008 and 2009 revenue targets with respect
to our Autodose product line. We evaluate the possibility of achieving these
targets from time to time. If any of the revenue targets are met or are probable
to be met, we would record the fair value of any additional consideration as an
additional cost of the acquisition. No additional consideration was recorded as
of December 31, 2008. Based on our current forecast of revenue from our Autodose
product line, we do not expect to record any additional consideration during the
remainder of 2009.





44
 Table of Contents




Pursuant
to the terms of the purchase agreement, the founder of IntegrityBio will earn an
additional $1.75 million in cash, so long as the founder serves as our employee
continuously for 24 months from the acquisition date. We are accruing this
liability ratably over the required service period of 24 months. As of December
31, 2008, we have recorded $336,000 long-term payable to the founder. We also
agreed to pay 46% of total revenue generated by IntegrityBio during the one-year
period starting from September 1, 2009 to the founder as an additional
consideration pursuant to the terms of the purchase agreement. We will start to
accrue the associated additional consideration in the third of quarter of 2009
at 46% of the periodic revenue generated by IntegrityBio.





Insurance





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





Off-Balance
Sheet Arrangements





We have
not entered into any off-balance sheet financing arrangements and have not
established any special purpose entities as of December 31, 2008. We have not
guaranteed any debt or commitments of other entities or entered into any options
on non-financial assets.





Dividend
Policy





We have
never declared or paid any dividends on our capital stock. Further, under the
terms of our Credit Agreement with Bank of America, N.A., we are restricted from
making any cash dividend payments. We currently expect to retain future
earnings, if any, to support the development of our business and do not
anticipate paying any cash dividends in the foreseeable future.





ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK





Foreign
Currency Risk
  We do not
use derivative instruments to manage risks associated with foreign currency
transactions in order to minimize the impact of changes in foreign currency
exchange rates on earnings. We provide our products and services to customers in
the United States, Europe and elsewhere throughout the world. Sales are
primarily made in U.S. dollars, and to a lesser but increasing extent, Swiss
francs, Euros, Japanese yens, and British pounds. A strengthening of the U.S.
dollar could make our products less competitive in foreign markets.
  Our
exposure to foreign exchange rate fluctuations also arises in part from
inter-company accounts with our foreign subsidiaries. These inter-company
accounts are typically denominated in the functional currency of the foreign
subsidiary, and, when re-measured and translated in U.S. dollars, have an impact
on our operating results depending upon the movement in foreign currency rates.
During fiscal 2008, our total realized and unrealized gains due to movements in
foreign currencies, primarily Swiss francs, Euros, Japanese yens, and British
pounds was $2.0 million. As exchange rates vary, these foreign exchange results
may vary and adversely or favorably impact operating results. An unfavorable
change of 10% in foreign currency rates would not have a material impact on our
financial statements.





Our
exposure to market risk is principally confined to our cash equivalents and
marketable investments which have maturities of less than two years. However, in
2008 we maintained our cash in treasury-bill money market funds, classified as
cash and cash equivalents, and at December 31, 2008 did not have any short term
investments.  As a result, we did not have any exposure to interest
rate changes.  In 2007 we maintained a non-trading investment
portfolio of investment grade, liquid debt securities that limit the amount of
credit exposure to any one issue, issuer or type of instrument. At December 31,
2007 our investment portfolio was comprised of approximately $22.5 million in
money market funds and $8.4 million in U.S. corporate debt instruments. The
securities in our investment portfolio were not leveraged, were classified as
available-for-sale and were subject to interest rate risk. We currently do not
hedge interest rate exposure. If market interest rates were to increase by 100
basis points, or 1%, from December 31, 2007 levels, the impact on the fair value
of our portfolio would have been insignificant. The modeling technique used
measures the change in fair values arising from an immediate hypothetical shift
in market interest rates and assumes ending fair values include principal plus
accrued interest.





Interest
Rate Sensitivity:


Principal
Amount by Expected Maturity (in thousands)


Average
Interest Rate





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




45
 Table of Contents




ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA




Index
      to Consolidated Financial Statements
                PageReport
      of Independent Registered Public Accounting Firm
                49Consolidated
      Balance Sheets at December 31, 2008 and 2007
                50Consolidated
      Statements of Operations for the Years Ended December 31, 2008, 2007 and
      2006
                51Consolidated
      Statements of Stockholders' Equity for the Years Ended December 31, 2008,
      2007 and 2006
                52Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006
                53Notes
      to Consolidated Financial Statements
                55





46
 Table of Contents




Report
of Independent Registered Public Accounting Firm





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





We have
audited the accompanying consolidated balance sheets of Symyx Technologies, Inc.
as of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Symyx Technologies,
Inc. at December 31, 2008 and 2007, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.





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





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Symyx Technologies, Inc.'s internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 12, 2009
expressed an unqualified opinion thereon.





/s/
      Ernst & Young LLP





San Jose,
California





March 12,
2009





47
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share and per share information)





December
      31,2008
                        
                        
                        2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        66,415
                        
                        
                        $
                        37,077Marketable
      securities
                        
                        
                        -
                        
                        
                        
                        8,395Accounts
      receivable, net
                        
                        
                        11,993
                        
                        
                        
                        23,047Inventories
                        
                        
                        3,308
                        
                        
                        
                        4,077Deferred
      tax assets, current
                        
                        
                        1,449
                        
                        
                        
                        2,984Income
      tax receivable
                        
                        
                        6,549
                        
                        
                        
                        1,916Receivable
      from the seller of an acquired business
                        
                        
                        -
                        
                        
                        
                        4,954Other
      current assets
                        
                        
                        6,351
                        
                        
                        
                        5,994Total
      current assets
                        
                        
                        96,065
                        
                        
                        
                        88,444Property,
      plant and equipment, net
                        
                        
                        18,447
                        
                        
                        
                        32,969Goodwill
                        
                        
                        39,979
                        
                        
                        
                        114,110Intangible
      assets, net
                        
                        
                        53,268
                        
                        
                        
                        66,405Long-term
      investments
                        
                        
                        15,147
                        
                        
                        
                        13,500Deferred
      tax and other assets
                        
                        
                        1,608
                        
                        
                        
                        1,470Total
      assets
                        
                        $
                        224,514
                        
                        
                        $
                        316,898LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                        
                        $
                        3,056
                        
                        
                        $
                        2,124Other
      accrued liabilities
                        
                        
                        9,947
                        
                        
                        
                        12,334Accrued
      compensation and employee benefits
                        
                        
                        9,377
                        
                        
                        
                        11,364Accrued
      royalty
                        
                        
                        3,628
                        
                        
                        
                        3,692Income
      taxes payable
                        
                        
                        567
                        
                        
                        
                        -Accrued
      restructuring costs
                        
                        
                        4,578
                        
                        
                        
                        2,275Deferred
      revenue
                        
                        
                        23,519
                        
                        
                        
                        15,905Total
      current liabilities
                        
                        
                        54,672
                        
                        
                        
                        47,694Long-term
      payable
                        
                        
                        4,457
                        
                        
                        
                        4,672Long-term
      deferred revenue
                        
                        
                        7,421
                        
                        
                        
                        -Noncurrent
      deferred tax liabilities
                        
                        
                        5,881
                        
                        
                        
                        12,291Total
      noncurrent liabilities
                        
                        
                        17,759
                        
                        
                        
                        16,963Commitments
      and contingencies (Note 3)Stockholders'
      equity:Preferred
      stock, $0.001 par value, 10,000,000 shares authorized, issuable in series;
      no shares issued and outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, $0.001 par value, 60,000,000 shares authorized and 34,014,660 and
      33,589,426  shares issued and outstanding at December 31, 2008
      and 2007, respectively
                        
                        
                        34
                        
                        
                        
                        34Additional
      paid-in capital
                        
                        
                        207,690
                        
                        
                        
                        203,237Accumulated
      other comprehensive gain (loss)
                        
                        
                        2,606
                        
                        
                        
                        601Retained
      earnings (accumulated deficits)
                        
                        
                        (58,247
                        )
                        
                        
                        48,369Total
      stockholders' equity
                        
                        
                        152,083
                        
                        
                        
                        252,241Total
      liabilities and stockholders’ equity
                        
                        $
                        224,514
                        
                        
                        $
                        316,898





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





48
 Table of Contents




SYMYX
TECHNOLOGIES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)





2008
                      
                      
                      2007
                      
                      
                      2006Revenue:Service
                      
                      $
                      74,892
                      
                      
                      $
                      59,034
                      
                      
                      $
                      57,933Product
                      
                      
                      25,033
                      
                      
                      
                      34,898
                      
                      
                      
                      33,526License
      fees, content and royalties
                      
                      
                      59,120
                      
                      
                      
                      31,140
                      
                      
                      
                      33,441Total
      revenue
                      
                      
                      159,045
                      
                      
                      
                      125,072
                      
                      
                      
                      124,900Costs:Cost
      of service
                      
                      
                      21,094
                      
                      
                      
                      8,995
                      
                      
                      
                      6,519Cost
      of products
                      
                      
                      10,444
                      
                      
                      
                      14,281
                      
                      
                      
                      11,811Cost
      of license fees, content and royalties
                      
                      
                      5,876
                      
                      
                      
                      1,773
                      
                      
                      
                      -Amortization
      of intangible assets
                      
                      
                      7,355
                      
                      
                      
                      3,873
                      
                      
                      
                      2,571Total
      costs
                      
                      
                      44,769
                      
                      
                      
                      28,922
                      
                      
                      
                      20,901Gross
      profit
                      
                      
                      114,276
                      
                      
                      
                      96,150
                      
                      
                      
                      103,999Operating
      expenses:Research
      and development
                      
                      
                      75,365
                      
                      
                      
                      66,186
                      
                      
                      
                      59,268Sales,
      general and administrative
                      
                      
                      54,589
                      
                      
                      
                      41,935
                      
                      
                      
                      34,497Restructuring
      charges
                      
                      
                      4,952
                      
                      
                      
                      -
                      
                      
                      
                      -Impairment
      to goodwill, intangibles and other long-lived assets
                      
                      
                      90,330
                      
                      
                      
                      -
                      
                      
                      
                      -Acquired
      in-process research and development
                      
                      
                      -
                      
                      
                      
                      2,500
                      
                      
                      
                      1,392Amortization
      of intangible assets arising from business combinations
                      
                      
                      5,903
                      
                      
                      
                      2,253
                      
                      
                      
                      1,699Total
      operating expenses
                      
                      
                      231,139
                      
                      
                      
                      112,874
                      
                      
                      
                      96,856Income
      (loss) from operations
                      
                      
                      (116,863
                      )
                      
                      
                      (16,724
                      )
                      
                      
                      7,143Gain
      from sale of equity interest in Ilypsa, Inc.
                      
                      
                      4,939
                      
                      
                      
                      40,826
                      
                      
                      
                      --Interest
      and other income, net
                      
                      
                      135
                      
                      
                      
                      5,694
                      
                      
                      
                      7,709Income
      before income tax benefit (expense) and equity loss
                      
                      
                      (111,789
                      )
                      
                      
                      29,796
                      
                      
                      
                      14,852Income
      tax benefit (expense)
                      
                      
                      5,173
                      
                      
                      
                      (10,698
                      )
                      
                      
                      (6,382
                      )Equity
      in loss from investment in Visyx Technologies Inc.
                      
                      
                      -
                      
                      
                      
                      (314
                      )
                      
                      
                      (186
                      )Net
      income (loss)
                      
                      $
                      (106,616
                      )
                      
                      $
                      18,784
                      
                      
                      $
                      8,284Basic
      net income (loss) per share
                      
                      $
                      (3.16
                      )
                      
                      $
                      0.57
                      
                      
                      $
                      0.25Diluted
      net income (loss) per share
                      
                      $
                      (3.16
                      )
                      
                      $
                      0.56
                      
                      
                      $
                      0.24Shares
      used in computing basic net income (loss) per share
                      
                      
                      33,747
                      
                      
                      
                      33,199
                      
                      
                      
                      33,199Shares
      used in computing diluted net income (loss) per share
                      
                      
                      33,747
                      
                      
                      
                      33,557
                      
                      
                      
                      34,214





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





49
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


(In
thousands)





Preferred
      Stock
                              
                              
                              Common
      StockShares
                              
                              
                              Amount
                              
                              
                              Shares
                              
                              
                              Amount
                              
                              
                              Additional
      Paid-In Capital
                              
                              
                              Deferred
      Stock Compens-ation
                              
                              
                              Accumulated
      Other Comprehensive Loss
                              
                              
                              Retained
      Earnings (accumulated deficits)
                              
                              
                              Total
      Stockholders’ EquityBalance
      at January 1, 2006
                              
                              
                              -
                              
                              
                              $
                              -
                              
                              
                              
                              33,194
                              
                              
                              $
                              33
                              
                              
                              $
                              196,815
                              
                              
                              $
                              (261
                              )
                              
                              $
                              (298
                              )
                              
                              $
                              22,240
                              
                              
                              $
                              218,529Issuance
      of common stock on exercise of options
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              940
                              
                              
                              
                              1
                              
                              
                              
                              14,030
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              14,031Issuance
      of common stock under employee share purchase plan
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              90
                              
                              
                              
                              -
                              
                              
                              
                              1,877
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,877Repurchase
      of common stock
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,249
                              )
                              
                              
                              (1
                              )
                              
                              
                              (29,999
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (30,000
                              )Stock-based
      compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              10,055
                              
                              
                              
                              261
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              10,316Tax
      benefit from employee stock option plans
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,045
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,045Comprehensive
      income:Net
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              8,284
                              
                              
                              
                              8,284Unrealized
      gain on foreign currency translation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              13
                              
                              
                              
                              -
                              
                              
                              
                              13Unrealized
      gain on marketable securities, net of income taxes of $16
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              281
                              
                              
                              
                              -
                              
                              
                              
                              281Comprehensive
      income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              8,578Balance
      at December 31, 2006
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              32,975
                              
                              
                              
                              33
                              
                              
                              
                              197,823
                              
                              
                              
                              -
                              
                              
                              
                              (4
                              )
                              
                              
                              30,524
                              
                              
                              
                              228,376Issuance
      of common stock on exercise of options
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              96
                              
                              
                              
                              -
                              
                              
                              
                              629
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              629Issuance
      of common stock under employee share purchase plan
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              219
                              
                              
                              
                              1
                              
                              
                              
                              1,908
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,909Issuance
      of common stock for vested restricted stock units, net
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              208
                              
                              
                              
                              -
                              
                              
                              
                              (1,956
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,956
                              )Issuance
      of restricted common stock
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              91
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Stock-based
      compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,702
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,702Tax
      deficiency from employee stock option plans
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (812
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (812
                              )Cumulative
      effect of adopting FIN 48
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (57
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (939
                              )
                              
                              
                              (996
                              )Comprehensive
      income:
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -Net
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              18,784
                              
                              
                              
                              18,784Unrealized
      gain on foreign currency translation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              628
                              
                              
                              
                              -
                              
                              
                              
                              628Unrealized
      loss on marketable securities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (23
                              )
                              
                              
                              -
                              
                              
                              
                              (23
                              )Comprehensive
      income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              19,389Balance
      at December 31, 2007
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              33,589
                              
                              
                              
                              34
                              
                              
                              
                              203,237
                              
                              
                              
                              -
                              
                              
                              
                              601
                              
                              
                              
                              48,369
                              
                              
                              
                              252,241Issuance
      of common stock on exercise of options
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              30
                              
                              
                              
                              -
                              
                              
                              
                              83
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              83Issuance
      of common stock under employee share purchase plan
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              335
                              
                              
                              
                              -
                              
                              
                              
                              1,592
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,592Issuance
      of common stock for vested restricted stock units, net
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              151
                              
                              
                              
                              -
                              
                              
                              
                              (499
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (499
                              )Cancellation
      of restricted common stock
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (91
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Stock-based
      compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              4,368
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              4,368Tax
      deficiency from employee stock option plans
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,091
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,091
                              )Comprehensive
      loss:
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -Net
      loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (106,616
                              )
                              
                              
                              (106,616
                              )Unrealized
      gain on foreign currency translation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,006
                              
                              
                              
                              -
                              
                              
                              
                              2,006Unrealized
      loss on marketable securities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1
                              )
                              
                              
                              -
                              
                              
                              
                              (1
                              )Comprehensive
      loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (104,611
                              )Balance
      at December 31, 2008
                              
                              
                              -
                              
                              
                              $
                              -
                              
                              
                              
                              34,014
                              
                              
                              $
                              34
                              
                              
                              $
                              207,690
                              
                              
                              $
                              -
                              
                              
                              $
                              2,606
                              
                              
                              $
                              (58,247
                              )
                              
                              $
                              152,083





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





50
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)





2008
                        
                        
                        2007
                        
                        
                        2006Operating
      activitiesNet
      income (loss)
                        
                        $
                        (106,616
                        )
                        
                        $
                        18,784
                        
                        
                        $
                        8,284Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Impairment
      of goodwill, intangibles and long-lived assets
                        
                        
                        90,330
                        
                        
                        
                        -
                        
                        
                        
                        -Depreciation
      and amortization
                        
                        
                        11,355
                        
                        
                        
                        7,603
                        
                        
                        
                        10,135Amortization
      of intangible assets arising from business combinations
                        
                        
                        13,235
                        
                        
                        
                        6,126
                        
                        
                        
                        4,270Acquired
      in-process research and development
                        
                        
                        -
                        
                        
                        
                        2,500
                        
                        
                        
                        1,392Stock-based
      compensation
                        
                        
                        4,368
                        
                        
                        
                        5,702
                        
                        
                        
                        10,296Equity
      in loss from investment in Visyx Technologies Inc.
                        
                        
                        -
                        
                        
                        
                        314
                        
                        
                        
                        186Gain
      from sale of equity interest in Ilypsa, Inc.
                        
                        
                        (4,939
                        )
                        
                        
                        (40,826
                        )
                        
                        
                        -Gain
      on sale of property, plant and equipment
                        
                        
                        (1,606
                        )
                        
                        
                        -
                        
                        
                        
                        (7
                        )Deferred
      income taxes
                        
                        
                        (306
                        )
                        
                        
                        (3,534
                        )
                        
                        
                        (5,694
                        )Excess
      tax benefits from stock-based compensation
                        
                        
                        (42
                        )
                        
                        
                        (163
                        )
                        
                        
                        (2,667
                        )Tax
      benefit (deficiency) from employee stock transactions
                        
                        
                        (1,091
                        )
                        
                        
                        (812
                        )
                        
                        
                        5,045Changes
      in operating assets and liabilities, excluding effects of business
      acquisitions:Accounts
      receivable, net
                        
                        
                        11,978
                        
                        
                        
                        (2,028
                        )
                        
                        
                        (6,417
                        )Inventories
                        
                        
                        830
                        
                        
                        
                        (1,397
                        )
                        
                        
                        (831
                        )Other
      current assets
                        
                        
                        (1,590
                        )
                        
                        
                        (2,043
                        )
                        
                        
                        908Other
      long-term assets
                        
                        
                        (106
                        )
                        
                        
                        607
                        
                        
                        
                        (1,176
                        )Accounts
      payable
                        
                        
                        852
                        
                        
                        
                        (1,791
                        )
                        
                        
                        979Other
      accrued liabilities
                        
                        
                        (15
                        )
                        
                        
                        1,991
                        
                        
                        
                        1,204Accrued
      compensation and employee benefits
                        
                        
                        (2,034
                        )
                        
                        
                        97
                        
                        
                        
                        13Accrued
      royalties
                        
                        
                        (64
                        )
                        
                        
                        3,692
                        
                        
                        
                        -Income
      taxes receivable and payable
                        
                        
                        (3,896
                        )
                        
                        
                        (5,658
                        )
                        
                        
                        3,430Accrued
      restructuring charges
                        
                        
                        2,913
                        
                        
                        
                        (4,548
                        )
                        
                        
                        -Deferred
      revenue
                        
                        
                        15,062
                        
                        
                        
                        648
                        
                        
                        
                        570Long-term
      payable
                        
                        
                        (215
                        )
                        
                        
                        -
                        
                        
                        
                        -Net
      cash provided by (used in) operating activities
                        
                        
                        28,403
                        
                        
                        
                        (14,736
                        )
                        
                        
                        29,920Investing
      activitiesPurchase
      of property, plant and equipment, net
                        
                        
                        (7,074
                        )
                        
                        
                        (7,712
                        )
                        
                        
                        (19,649
                        )Proceeds
      from divesting assets
                        
                        
                        694
                        
                        
                        
                        -
                        
                        
                        
                        -Purchase
      of marketable securities
                        
                        
                        -
                        
                        
                        
                        (101,932
                        )
                        
                        
                        (144,018
                        )Proceeds
      from maturities of marketable securities
                        
                        
                        8,400
                        
                        
                        
                        202,900
                        
                        
                        
                        128,832Proceeds
      from sales of marketable securities
                        
                        
                        -
                        
                        
                        
                        7,986
                        
                        
                        
                        -Proceeds
      from sale of equity interest in Ilypsa, Inc.
                        
                        
                        4,778
                        
                        
                        
                        41,238
                        
                        
                        
                        -Long-term
      investments
                        
                        
                        (1,647
                        )
                        
                        
                        (100
                        )
                        
                        
                        (13,900
                        )Acquisition
      of businesses, net of cash acquired
                        
                        
                        (5,262
                        )
                        
                        
                        (125,910
                        )
                        
                        
                        (4,216
                        )Release
      of payment to shareholders of an acquired business
                        
                        
                        -
                        
                        
                        
                        (1,024
                        )
                        
                        
                        -Net
      cash provided by (used in) investing activities
                        
                        
                        (111
                        )
                        
                        
                        15,446
                        
                        
                        
                        (52,951
                        )Financing
      activitiesProceeds
      from issuance of common stock
                        
                        
                        1,675
                        
                        
                        
                        2,538
                        
                        
                        
                        15,908Repurchase
      of common stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (30,000
                        )Payment
      of employee withholding tax in lieu of issuing common stock upon vesting
      of restricted stock units
                        
                        
                        (499
                        )
                        
                        
                        (1,956
                        )
                        
                        
                        -Excess
      tax benefits from stock-based compensation
                        
                        
                        42
                        
                        
                        
                        163
                        
                        
                        
                        2,667Net
      cash provided by (used in) financing activities
                        
                        
                        1,218
                        
                        
                        
                        745
                        
                        
                        
                        (11,425
                        )Effect
      of foreign exchange rate changes on cash and cash
    equivalents
                        
                        
                        (172
                        )
                        
                        
                        (498
                        )
                        
                        
                        (31
                        )Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        29,338
                        
                        
                        
                        957
                        
                        
                        
                        (34,487
                        )Cash
      and cash equivalents at beginning of year
                        
                        
                        37,077
                        
                        
                        
                        36,120
                        
                        
                        
                        70,607Cash
      and cash equivalents at end of year
                        
                        $
                        66,415
                        
                        
                        $
                        37,077
                        
                        
                        $
                        36,120




51
 Table of Contents




2008
                
                
                2007
                
                
                2006Supplemental
      disclosure of cash flow informationIncome
      taxes paid, net
                
                $
                4,331
                
                
                $
                20,940
                
                
                $
                3,562Supplemental
      disclosure of non-cash investing and financing activitiesNet
      working capital adjustments receivable from the seller of an acquired
      business
                
                $
                -
                
                
                $
                (4,954
                )
                
                $
                -Payable
      related to transaction costs for a business acquisition
                
                $
                -
                
                
                $
                562
                
                
                $
                -Payable
      to stockholders of an acquired business
                
                $
                -
                
                
                $
                -
                
                
                $
                1,024




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





52
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.  Summary
of Significant Accounting Policies





Business
and Basis of Presentation





Symyx
Technologies, Inc. (together with its wholly-owned subsidiaries, the “Company”
or “Symyx”) 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 its abilities in scientific
informatics management, workflow optimization, and micro-scale, parallel
experimentation, Symyx helps companies transform their R&D operations to
minimize the time their scientists spend on routine, repetitive tasks and to
maximize their return on R&D investments.





Principles
of consolidation





These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. On August 13, 2008, the Company acquired 100%
ownership of Integrity Biosolution, LLC (“IntegrityBio”), a privately-held
research provider (see Note 10). The operating results of IntegrityBio have been
consolidated into the Company’s financial statements since the acquisition
date.  As of the date of this Report, IntegrityBio has been merged
with and into Symyx Software, Inc.





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





Reclassifications





Certain
reclassifications have been made to prior period amounts to conform to the
current period presentation, as follows: (i) liabilities accrued for uncertain
income tax positions have been reclassified as long-term payable; (ii) income
taxes receivable previously netted against income taxes payable have been
reclassified as current assets; and (iii) Symyx Research and Symyx Tools have
been combined as one reporting segment as Symyx High-Productivity Research
(“Symyx HPR”) as discussed in Note 6.





Use
of Estimates





Preparing
financial statements in accordance with US generally accepted accounting
principles (“GAAP”) requires management to make estimates and assumptions that
affect the reported amounts in Symyx’s consolidated financial statements and
accompanying notes. 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 receivable, reserve for excess and/or
obsolete inventory, future warranty expenditures, and assumptions such as the
elements comprising a revenue arrangement, including the distinction between
software upgrades/enhancements and new products, when the Company’s products
achieve technological feasibility, the potential outcome of future tax
consequences of events recognized in the Company’s financial statements or tax
returns, and the value of acquired intangible assets. Actual results and
outcomes may differ from management’s estimates and assumptions. For example, if
system failures or the cost to repair systems are
significantly greater than the rates used in estimating the accrued
warranty, the additional charges could have a material unfavorable impact on the
Company's financial results in the relevant period(s).





Cash
and Cash Equivalents





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





53
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Investments





In 2008,
the Company maintained its cash in treasury-bill money market funds, classified
as cash and cash equivalents.





In 2007,
the Company invested its excess cash in debt securities, classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported in other comprehensive
income (loss). Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. The estimated fair value amounts have been determined by the Company
using available market information.





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





By
policy, the Company restricts its investments to long-term bank obligations
rated "A" or higher and short-term obligations rated "P1" or higher by Moody's
or "A1" or higher by Standard & Poor's ("S&P"), and corporate
obligations, including intermediate term notes rated "A" or higher, and
commercial paper rated "P1" or higher by Moody's, or "A1" or higher by S&P.
By policy, the Company restricts its investments to instruments with maturities
of less than twenty-four months.





The
Company did not have any marketable securities as of December 31, 2008. Its
total cash and cash equivalents were $66,415,000 and cost approximated fair
value of any cash equivalents. Marketable securities as of December 31, 2007
consisted of US corporate debt securities of $8,394,000 with unrealized gain of
$1,000, total fair value of $8,395,000 and maturity date within one year. There
were no unrealized losses as of December 31, 2008 and 2007.





The
Company had no realized gains or losses for the years ended December 31,
2008 and 2006. Realized losses on the sale of marketable securities for the year
ended December 31, 2007 were immaterial. Unrealized gains and losses for the
years ended December 31, 2008, 2007 and 2006 are included in this Note 1 of
Notes to the Consolidated Financial Statements under “Comprehensive Income
(Loss).”





The
Company determines the accounting method used to account for investments in
equity securities in which it does not have a controlling interest primarily
based on the Company’s ownership of the investee and whether the Company has the
ability to exercise significant influence over the strategic, operating,
investing, and financing activities of the investee. Accordingly, the Company
accounts for its investments in Intermolecular, Inc. using the cost method of
accounting while it accounts for its November 2006 investment in Visyx
Technologies Inc. (“Visyx”) using the equity method of accounting. At December
31, 2008, the carrying value of Intermolecular was $15,147,000. The Company
determines that it is not practical to estimate the fair value of the
investments and believes that there are no identified events or changes in
circumstances that may have a significant adverse effect on the fair value of
the investments. At December 31, 2008, the carrying value of Visyx was
$0.





The
Company did not receive any dividends from Visyx in the years ended December 31,
2008, 2007 and 2006.





Goodwill,
Intangible Assets and Other Long-Lived Assets





The
Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). As required by SFAS No. 142, the
Company tests goodwill of its reporting units for impairment annually during its
fourth quarter or whenever events occur or circumstances change, such as an
adverse change in business climate or a decline in the overall industry, that
would more likely than not reduce the fair value of a reporting unit below its
carrying amount. The Company allocated goodwill into three reporting units:
Symyx Software, Symyx Research and Symyx Tools.





54
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)




Testing
goodwill for impairment requires a two-step approach under SFAS No. 142. In
determining the fair value of its reporting units in step one of its SFAS
No. 142 impairment analysis, the Company uses a combination of the income
approach, which is based on the present value of discounted cash flows and
terminal value projected for the reporting unit, and the market approach, which
estimates fair value based on an appropriate valuation multiple of revenue or
earnings derived from comparable companies, adjusted by an estimated control
premium. These calculations are dependent on several subjective factors
including the timing of future cash flows, future growth rates, the discount
rate, and a selection of peer market transactions. The discount rate that the
Company uses in the income approach of valuation represents the weighted average
cost of capital that the Company believes is reflective of the relevant risk
associated with the projected cash flows.





If the
estimated fair value of a reporting unit’s goodwill exceeds its net book value,
the Company concludes that its goodwill is not impaired. Otherwise, the Company
performs step two of the above test to compare the estimated implied fair value
of goodwill to its carrying value. The excess carrying value of goodwill as
compared to the implied is recorded as a goodwill impairment.  In the
fourth quarter of 2008, the Company performed an impairment test of each
reporting unit’s goodwill. As a result of this analysis, the Company concluded
that the carrying amounts of goodwill exceeded the implied fair value of
goodwill in the Symyx Software and Symyx Research reporting units and recorded
an impairment charge.





In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets(SFAS No. 144), the Company tests other
long-lived assets, including property, equipment and leasehold improvements and
other intangible assets subject to amortization, for recoverability whenever
events or changes in circumstances indicate that the carrying value of those
assets may not be recoverable. The Company assesses the recoverability of
an asset group by determining if the carrying value of the asset group exceeds
the sum of the projected undiscounted cash flows expected to result from the use
and eventual disposition of the assets over the remaining economic life of the
primary asset in the asset group. If the recoverability test indicates that
the carrying value of the asset group is not recoverable, the Company will
estimate the fair value of the asset group using the same approaches indicated
above for SFAS No. 142 step two and compare it to its carrying
value. The excess of the carrying value over the fair value is allocated pro
rata to derive the adjusted carrying value. The adjusted carrying value of each
asset in the asset group is not reduced below its fair value.  In the
fourth quarter of 2008, due to the significant decline of its market
capitalization, the Company also performed an impairment test of long-lived
assets. As a result of this analysis, the Company concluded that the carrying
amounts of intangibles and other long-lived assets in Symyx Research and Symyx
Tools reporting units exceeded their implied fair values and recorded an
impairment charge.





Based on
the impairment analysis conducted in the fourth quarter of 2008, the Company
recorded the following impairment charges by reporting unit (in
thousands):





Goodwill
                      
                      
                      Intangible
      Assets
                      
                      
                      Plant,
      Property and Equipment
                      
                      
                      TotalSymyx
      Software
                      
                      $
                      71,085
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      71,085Symyx
      HPR:
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Symyx
      Research
                      
                      
                      
                      
                      
                      
                      1,760
                      
                      
                      
                      11,224
                      
                      
                      
                      12,984Symyx
      Tools
                      
                      
                      5,404
                      
                      
                      
                      814
                      
                      
                      
                      43
                      
                      
                      
                      6,261Total
      impairment charges
                      
                      $
                      76,489
                      
                      
                      $
                      2,574
                      
                      
                      $
                      11,267
                      
                      
                      $
                      90,330





The
following table illustrates the change in the Company’s goodwill in 2008 and
2007 by business segment (in thousands):





Symyx
      Software
                    
                    
                    Symyx
      HPR
                    
                    
                    TotalBalance
      as of January 1, 2007
                    
                    $
                    17,672
                    
                    
                    $
                    374
                    
                    
                    $
                    18,046Goodwill
      acquired during the period
                    
                    
                    95,150
                    
                    
                    
                    -
                    
                    
                    
                    95,150Adjustments
      to goodwill
                    
                    
                    877
                    
                    
                    
                    37
                    
                    
                    
                    914Balance
      as of December 31, 2007
                    
                    
                    113,699
                    
                    
                    
                    411
                    
                    
                    
                    114,110Goodwill
      acquired during the period
                    
                    
                    -
                    
                    
                    
                    5,440
                    
                    
                    
                    5,440Goodwill
      impairment
                    
                    
                    (71,085
                    )
                    
                    
                    (5,404
                    )
                    
                    
                    (76,489
                    )Adjustments
      to goodwill
                    
                    
                    (3,075
                    )
                    
                    
                    (7
                    )
                    
                    
                    (3,082
                    )Balance
      as of December 31, 2008
                    
                    $
                    39,539
                    
                    
                    $
                    440
                    
                    
                    $
                    39,979




55
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





Intangible
assets, with the exception of goodwill which is not subject to amortization, are
amortized using the straight-line method over their estimated period of benefit,
ranging from one to eight years. See Note 11 of the Notes to Consolidated
Financial Statements for detail.





Property,
plant and equipment are stated at cost. Depreciation of equipment is computed
using the straight-line method over lives of three to five years for financial
reporting purposes and by accelerated methods for income tax purposes.
Depreciation of buildings is computed using the straight-line method over lives
of thirty years for financial reporting purposes. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of the
assets for financial reporting purposes and over a 40-year period for income tax
reporting purposes. After writing down the gross costs for property, plant, and
equipment in Symyx Research and Symyx Tools reporting units by the impairment
charges as discussed above, property, plant and equipment consist of the
following (in thousands):





December
      31,2008
                      
                      
                      2007Machinery
      and equipment
                      
                      $
                      34,958
                      
                      
                      $
                      37,882Computers
      and software
                      
                      
                      10,314
                      
                      
                      
                      7,528Land
      and building
                      
                      
                      3,551
                      
                      
                      
                      3,551Leasehold
      improvements
                      
                      
                      27,035
                      
                      
                      
                      36,859Construction
      in progress
                      
                      
                      1,913
                      
                      
                      
                      696Furniture
      and fixtures
                      
                      
                      2,801
                      
                      
                      
                      3,036Property,
      plant and equipment, gross
                      
                      
                      80,572
                      
                      
                      
                      89,552Less
      accumulated depreciation and amortization
                      
                      
                      (62,125
                      )
                      
                      
                      (56,583
                      )Property,
      plant and equipment, net
                      
                      $
                      18,447
                      
                      
                      $
                      32,969





At
December 31, 2008, all property, plant and equipment were pledged as collateral
under the Company’s bank credit facility as detailed in Note 5 of the Notes to
Consolidated Financial Statements. However, the Company had no borrowings as of
December 31, 2008 under this bank credit facility. Amortization of leasehold
improvements is included in depreciation expense. Depreciation expense was
$11,078,000, $10,818,000 and $10,217,000 in 2008, 2007, and 2006,
respectively.





Revenue
Recognition





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





56
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





Service
Revenue





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





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





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





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





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





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





Product
Sales





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





57
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





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





Software
License and Database Content Fees





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





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





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





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





Intellectual
Property License Fees and Royalties





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





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





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





58
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





Concentration
of Revenue





During
the years ended December 31, 2008, 2007 and 2006, the following customers
contributed more than 10% of the Company’s total revenue for the year (in
thousands):





Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006ExxonMobil
                    
                    $
                    24,514
                    
                    
                    $
                    36,489
                    
                    
                    $
                    51,318Dow
                    
                    
                    28,681
                    
                    
                    
                    35,301
                    
                    
                    
                    29,302Total
                    
                    $
                    53,195
                    
                    
                    $
                    71,790
                    
                    
                    $
                    80,620





The
revenue from the above customers has been included in the following reportable
segments for the years ended December 31, 2008, 2007 and 2006 (in
thousands):





Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Symyx
      Software
                    
                    $
                    9,744
                    
                    
                    $
                    9,343
                    
                    
                    $
                    9,948Symyx
      HPR
                    
                    
                    43,451
                    
                    
                    
                    62,447
                    
                    
                    
                    70,672Total
                    
                    $
                    53,195
                    
                    
                    $
                    71,790
                    
                    
                    $
                    80,620





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





Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Service
      revenue
                    
                    $
                    24,323
                    
                    
                    $
                    35,939
                    
                    
                    $
                    36,854Product
      sales
                    
                    
                    14,055
                    
                    
                    
                    16,472
                    
                    
                    
                    24,232License
      fees, content revenue and royalties
                    
                    
                    14,817
                    
                    
                    
                    19,379
                    
                    
                    
                    19,534Total
                    
                    $
                    53,195
                    
                    
                    $
                    71,790
                    
                    
                    $
                    80,620





Inventory





Work-in-process
inventory consists of purchased parts and fabricated sub-assemblies for Symyx
tools in the process of being built. Finished goods inventory consists of
customized systems that have been finished but are pending shipment to
customers. Inventories are carried at the lower of cost or market, with cost
determined on a specific identification basis. The Company’s inventory balances
at December 31, 2008 and December 31, 2007 were as follows (in
thousands):





December
      31,2008
                    
                    
                    2007Raw
      Materials
                    
                    $
                    20
                    
                    
                    $
                    269Work-in-process
                    
                    
                    3,288
                    
                    
                    
                    2,707Finished
      goods
                    
                    
                    -
                    
                    
                    
                    1,101Total
                    
                    $
                    3,308
                    
                    
                    $
                    4,077





Accounts
Receivable and Allowance for Doubtful Accounts





Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest.





59
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





The
Company assesses its allowance for doubtful accounts based on a combination of
factors. In cases where the Company is aware of circumstances that may impair a
specific customer’s ability to meet its financial obligations to us, the Company
records a specific allowance against amounts due and thereby reduce the net
recognized receivable to the amount it reasonably believes will be collected.
For all other customers, the Company records allowances for doubtful accounts
based on the length of time the receivables are past due, the current business
environment and its historical experience.





The
Company started recording allowance for doubtful accounts in 2007. For the years
ended December 31, 2008 and 2007, the Company’s allowance for doubtful accounts
changed as follows (in thousands):





2008
                        
                        
                        2007Balance
      as of January 1
                        
                        $
                        53
                        
                        
                        $
                        -New
      allowance accrued
                        
                        
                        336
                        
                        
                        
                        53Adjustments
      written-off and other adjustments
                        
                        
                        (33
                        )
                        
                        
                        -Balance
      as of December 31
                        
                        $
                        356
                        
                        
                        $
                        53





Accrued
Warranty





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





Changes
in the Company’s accrued warranty during the years ended December 31, 2008 and
2007 are as follows (in thousands):





2008
                    
                    
                    2007Balance
      as of January 1
                    
                    $
                    1,728
                    
                    
                    $
                    952New
      warranties issued during the period
                    
                    
                    983
                    
                    
                    
                    1,485Costs
      incurred during the period on specific systems
                    
                    
                    (603
                    )
                    
                    
                    (581
                    )Changes
      in liability for pre-existing warranties during the period, including
      expirations
                    
                    
                    (699
                    )
                    
                    
                    (128
                    )Balance
      as of December 31
                    
                    $
                    1,409
                    
                    
                    $
                    1,728





Research
and Development





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





Income
Taxes





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





60
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





Software
Development Costs





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





Net
Income (Loss) per Share





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





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





Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Net
      income (loss)
                    
                    $
                    (106,616
                    )
                    
                    $
                    18,784
                    
                    
                    $
                    8,284Weighted-average
      shares of common stock outstanding
                    
                    
                    33,765
                    
                    
                    
                    33,301
                    
                    
                    
                    33,199Less:
      weighted-average restricted stock
                    
                    
                    (18
                    )
                    
                    
                    (102
                    )
                    
                    
                    -Weighted-average
      shares used in computing basic net income (loss) per share
                    
                    
                    33,747
                    
                    
                    
                    33,199
                    
                    
                    
                    33,199Dilutive
      effect of employee stock options and restricted stock units, using the
      treasury stock method
                    
                    
                    -
                    
                    
                    
                    358
                    
                    
                    
                    1,015Weighted-average
      shares used in computing diluted net income (loss) per
    share
                    
                    
                    33,747
                    
                    
                    
                    33,557
                    
                    
                    
                    34,214Basic
      net income (loss) per share
                    
                    $
                    (3.16
                    )
                    
                    $
                    0.57
                    
                    
                    $
                    0.25Diluted
      net income (loss) per share
                    
                    $
                    (3.16
                    )
                    
                    $
                    0.56
                    
                    
                    $
                    0.24





The
following shares were excluded from the calculation of diluted net income (loss)
per share for 2008, 2007 and 2006, respectively, because all were anti-dilutive
for the respective periods (in thousands):





2008
                      
                      
                      2007
                      
                      
                      2006Options
                      
                      
                      5,276
                      
                      
                      
                      5,072
                      
                      
                      
                      3,938Restricted
      stock units
                      
                      
                      740
                      
                      
                      
                      -
                      
                      
                      
                      -Restricted
      stock
                      
                      
                      -
                      
                      
                      
                      91
                      
                      
                      
                      -Total
      anti-dilutive shares
                      
                      
                      6,016
                      
                      
                      
                      5,163
                      
                      
                      
                      3,938




61
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





Employee
Savings Plan





The
Company has a savings plan in the United States that qualifies under Section
401(k) of the Internal Revenue Code. Participating U.S. employees may contribute
up to 60% of their pretax salary, but not more than statutory limits. For each
dollar a participant contributes under this plan, the Company makes employer
contribution to the plan of 50 cents, with a maximum matching contribution of 2%
of a participant’s earnings. Matching contributions for the plan were
$1,010,000, $795,000 and $629,000 in 2008, 2007 and 2006, respectively. Matching
contributions are invested proportionate to each participant’s voluntary
contributions in the investment options provided under the plan. Symyx common
stock is not an investment option under the plan.




The
Company participates in defined contribution plans in non U.S. locations.
Contributions to defined contribution plans are expensed when employees have
rendered services in exchange for such contributions, generally in the year of
contribution. Employer contributions for the plans were approximately $300,000
and $205,000 in 2008 and 2007. Contributions in 2006 were
immaterial.


Foreign
Currency Translation





The
Company accounts for foreign currency translation in accordance with Statement
of Financial Accounting Standard No. 52, Foreign Currency Translation,as amended. The Company translates the assets and liabilities of its
international non-U.S. dollar functional currency subsidiaries into U.S. dollars
at the rates of exchange in effect on the balance sheet date. Revenue and
expenses are translated using rates that approximate those in effect during the
period. Translation adjustments are included in stockholders’ equity in the
Consolidated Balance Sheet caption “Accumulated other comprehensive income.”
Currency transaction losses derived from monetary assets and liabilities stated
in a currency other than the functional currency and recognized in results of
operations were $1,963,000, $162,000 and $7,000 for the years ended December 31,
2008, 2007 and 2006, respectively. The effect of foreign currency rate changes
on cash and cash equivalents was decreases of $172,000, $498,000 and $31,000 for
the years ended December 31, 2008, 2007 and 2006, respectively.





Comprehensive
Income (Loss)





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





The
components of accumulated other comprehensive income (loss) at December 31,
2008, 2007 and 2006 are as follows (in thousands):





Foreign
      Currency Translation Adjustments
                          
                          
                          Unrealized
      Gain (Loss) On Available-For-Sale Securities
                          
                          
                          TotalBalance
      at January 1, 2006
                          
                          $
                          (41
                          )
                          
                          $
                          (257
                          )
                          
                          $
                          (298
                          )Foreign
      currency translation adjustment
                          
                          
                          13
                          
                          
                          
                          -
                          
                          
                          
                          13Unrealized
      gain on available-for-sale securities, net of $16 taxes
                          
                          
                          -
                          
                          
                          
                          281
                          
                          
                          
                          281Balance
      at December 31, 2006
                          
                          
                          (28
                          )
                          
                          
                          24
                          
                          
                          
                          (4
                          )Foreign
      currency translation adjustment
                          
                          
                          628
                          
                          
                          
                          -
                          
                          
                          
                          628Unrealized
      gain on available-for-sale securities
                          
                          
                          -
                          
                          
                          
                          (23
                          )
                          
                          
                          (23
                          )Balance
      at December 31, 2007
                          
                          
                          600
                          
                          
                          
                          1
                          
                          
                          
                          601Foreign
      currency translation adjustment
                          
                          
                          2,006
                          
                          
                          
                          -
                          
                          
                          
                          2,006Unrealized
      gain on available-for-sale securities
                          
                          
                          -
                          
                          
                          
                          (1
                          )
                          
                          
                          (1
                          )Balance
      at December 31, 2008
                          
                          $
                          2,606
                          
                          
                          $
                          -
                          
                          
                          $
                          2,606




62
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





Effect
of New Accounting Pronouncements





Fair
Value Measurements





In
September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value Measurements.
SFAS 157 provides guidance for using fair value to measure assets and
liabilities. It also responds to investors’ requests for expanded information
about the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings.  SFAS 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value
and does not expand the use of fair value in any new
circumstances.  SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. In February
2008, the FASB issued Staff Position 157-2 (FSP 157-2), Effective Date of FASB Statement No.
157, which delays the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years beginning after November 15,
2008.  Accordingly, the Company adopted certain provisions of SFAS 157
on January 1, 2008 on a prospective basis for its financial assets and
liabilities, which require that the Company determine the fair value of
financial assets and liabilities using the fair value hierarchy established in
SFAS 157. The Company also elected to delay the adoption of SFAS 157 for its
nonfinancial assets/liabilities under FSP 157-2 until January 1, 2009. The
adoption of SFAS157 is not expected to have material impact on the Company’s
financial statements.





SFAS 157
describes three levels of inputs that may be used to measure fair value, as
follows:





·
            Level
      1 inputs, which include quoted prices in active markets for identical
      assets or liabilities;





·
            Level
      2 inputs, which include observable inputs other than Level 1 inputs, such
      as quoted prices for similar assets or liabilities; quoted prices for
      identical or similar assets or liabilities in markets that are not active;
      or other inputs that are observable or can be corroborated by observable
      market data for substantially the full term of the asset or liability;
      and





·
            Level
      3 inputs, which include unobservable inputs that are supported by little
      or no market activity and that are significant to determining the fair
      value of the underlying asset or liability. Level 3 assets and liabilities
      include those whose fair value measurements are determined using pricing
      models, discounted cash flow methodologies or similar valuation
      techniques, as well as significant management judgment or
      estimation.





The
Company’s only type of financial assets to be measured at fair value using Level
1 inputs on a recurring basis was its money market funds. The Company derived
the fair value of its money market funds from quoted market prices and measured
the fair value of its money market funds using Level 1 inputs to be $51,999,000
at December 31, 2008.





In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business Combinations(“SFAS
141(R)”). Under SFAS
No. 141(R), an entity is required to recognize the assets acquired,
liabilities assumed, contractual contingencies, and contingent consideration at
their fair value on the acquisition date. It further requires that:
acquisition-related costs be recognized separately from the acquisition and
expensed as incurred, restructuring costs generally be expensed in periods
subsequent to the acquisition date, and changes in accounting for deferred tax
asset valuation allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. In addition, acquired in-process
research and development (IPR&D) is capitalized as an intangible asset and
amortized over its estimated useful life. The adoption of SFAS No. 141(R)
will change our accounting treatment for business combinations on a prospective
basis beginning in the first quarter of fiscal year 2009. The Company is
currently assessing the impact that the adoption of SFAS No. 141R will have
on its financial position and results of operations.





In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), Noncontrolling interests in
Consolidated Financial Statements, an amendment of ARB No. 51.SFAS 160
is based on the economic entity concept of consolidated financial statements,
under which all residual economic interest holders in an entity have an equity
interest in the consolidated entity, even if the residual interest is relative
to only a portion of the entity. SFAS 160 requires that a noncontrolling
interest in a consolidated subsidiary be displayed in the consolidated statement
of financial position as a separate component of equity because the FASB
concluded that noncontrolling interests meet the definition of equity of the
consolidated entity. SFAS 160 is effective for the first annual reporting period
on or after December 15, 2008, and earlier adoption is prohibited. The Company
does not have any noncontrolling interest as of December 31, 2008.





63
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





In March
2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivative
Instruments and Hedging Activities. SFAS 161 is intended to improve
financial reporting of derivative instruments and hedging activities by
requiring enhanced disclosures to enable financial statement users to better
understand the effects of derivatives and hedging on an entity’s financial
position, financial performance and cash flows. The provisions of SFAS 161 are
effective for interim periods and fiscal years beginning after November 15,
2008. The Company anticipates no impact upon the adoption of SFAS 161 on its
condensed consolidated financial statements.





In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FAS 142-3”). This guidance is intended to improve the
consistency between the useful life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible Assets(“SFAS 142”), and the period of expected cash flows used to measure the
fair value of the asset under SFAS 141R when the underlying arrangement
includes renewal or extension of terms that would require substantial costs or
result in a material modification to the asset upon renewal or extension.
Companies estimating the useful life of a recognized intangible asset must now
consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, must consider
assumptions that market participants would use about renewal or extension as
adjusted for SFAS 142’s entity-specific factors. FAS 142-3 is effective for the
Company beginning January 1, 2009 and will impact future business
combinations.





2.  Research
and Development Arrangements





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





The table
below indicates the significant collaborative partners for whom the Company
conducted research and development in 2008, together with the primary focus of
the collaborations. In addition to these partners the Company has a number of
other undisclosed partners, none of which individually constituted more than 5%
of total revenue in 2008:





Partner
                        
                        Current Research Contract
    Ends
                        
                        Primary focus of current collaborative
      effortsDow
                        
                        12/31/2009
                        
                        Basic
      and specialty chemicals and materials researchExxonMobil
                        
                        5/31/2008
                        
                        Catalyst
      and process development for basic chemicals and refining
      applications





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





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





64
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





2008
                      
                      
                      2007
                      
                      
                      2006Customer-sponsored
      projects
                      
                      
                      37
                      %
                      
                      
                      55
                      %
                      
                      
                      61
                      %Internally-funded
      projects
                      
                      
                      63
                      %
                      
                      
                      45
                      %
                      
                      
                      39
                      %Total
                      
                      
                      100
                      %
                      
                      
                      100
                      %
                      
                      
                      100
                      %





3.
Commitments and Contingencies





Leases





The
Company has entered into various operating lease agreements for facilities in
five states and two foreign countries with lease terms ranging from one to ten
years. Rent expense, which is being recognized on a straight-line basis over the
lease terms, was approximately $5,610,000, $3,902,000 and $2,724,000 for the
years ended December 31, 2008, 2007 and 2006, respectively.  Future
commitments and obligations under the operating leases for the Company’s
facilities, to be satisfied as they become due, are as follows (in
thousands):





Years
      ending December 31,
                      
                      Amount2009
                      
                      $
                      4,8532010
                      
                      
                      4,5852011
                      
                      
                      4,4312012
                      
                      
                      4,1312013
                      
                      
                      3,979Thereafter
                      
                      
                      7,617Total
                      
                      $
                      29,596





Estimated
future rents receivable from sublease agreements through 2012, not included
above, amount to approximately $374,000.





Other
Commitments





As of
December 31, 2008, the Company had firm purchase commitments for inventory,
fixed assets and services of approximately $2,868,000. The Company also had
committed to pay royalties to third parties on future database content revenue
of approximately $1,940,000 upon cash receipts from customers.





As of
December 31, 2008, the Company recorded $4,121,000 liabilities associated with
uncertainties in income taxes under FIN 48. The Company could not make
reasonably reliable estimates of the periods of cash settlement with the
respective tax authorities and as such has determined to record the liabilities
as noncurrent on its Consolidated Balance Sheet.





As of
December 31, 2008, the Company had no amounts due under loan agreements and had
an unused line of credit with Bank of America as detailed in Note 5 of the Notes
to Consolidated Financial Statements.





Customer
Indemnification





From time
to time, the Company agrees to indemnify its customers against certain third
party liabilities, including liability if its products infringe a third party’s
intellectual property rights. The Company accounts for such indemnification
provisions in accordance with the Financial Accounting Standards Board (FASB)
Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. Other than for limited exceptions (e.g.,
intellectual property indemnity or bodily harm), the Company’s indemnification
obligation in these arrangements is typically limited to no more than the amount
paid by the customer. As of December 31, 2008, the Company was not subject to
any pending intellectual property-related litigation. The Company has not
received any requests for and has not been required to make any payments under
these indemnification provisions during any periods covered in these
consolidated financial statements.





65
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





Contingencies





In July
2006, the Company acquired all of the outstanding shares of Autodose SA
(Autodose).  Pursuant to the terms of the merger agreement the Company
entered into with Autodose, the former stockholders of Autodose are eligible to
receive additional purchase price consideration of up to 7,100,000 Swiss Franc
(equivalent to $6,723,000 using the foreign currency exchange rate in effect on
December 31, 2008) upon achievement of certain 2008 and 2009 revenue targets
with respect to the Company’s Autodose product line. The Company evaluates the
likelihood of achieving these targets from time to time. If any of the revenue
targets are met or are probable to be met, the Company would record the fair
value of any additional consideration as an additional cost of the acquisition.
The 2008 revenue targets for Autodose product line were not achieved. Therefore,
no additional consideration was recorded as of December 31, 2008.





With
respect to the IntegrityBio acquisition as discussed in Note 7, pursuant to the
terms of the purchase agreement, the founder of IntegrityBio will earn an
additional $1.75 million in cash, so long as the founder serves as an employee
of the Company or its affiliates continuously for 24 months from the acquisition
date. The Company has determined it is probable the amounts will be earned and
paid and has recorded $336,000 related to this payable to the founder as of
December 31, 2008. The Company also agreed to pay 46% of total revenue generated
by IntegrityBio during the one-year period starting from September 1, 2009 to
the founder as additional consideration pursuant to the terms of the purchase
agreement, for which the Company cannot yet estimate the total
liability.





4.  Stockholders’
Equity





Stock
Purchase Plan





The
Company has an Employee Stock Purchase Plan (the "Purchase Plan") that permits
eligible employees to purchase common stock at a discount, but only through
payroll deductions, during concurrent 12-month offering periods. Each offering
period will be divided into two consecutive six-month purchase periods. The
price at which stock is purchased under the Purchase Plan is equal to 85% of the
fair market value of the common stock on the first or last day of the offering
period, whichever is lower. In addition, the Purchase Plan provides for annual
increases in the number of shares available for issuance under the Purchase Plan
on the first day of each fiscal year, equal to the lesser of 1% of the
outstanding shares of common stock on the first day of the fiscal year, 350,000
shares, or a lesser amount as determined by the Board of Directors. At December
31, 2008, the number of shares of common stock available for future issue under
the Purchase Plan was 1,235,310.





Stock
Option Plans





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





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





In
October 2001, the Company's Board of Directors approved the adoption of the 2001
Nonstatutory Stock Option Plan (the "NSO Plan"). The NSO Plan provides for the
issuance of options for up to 1,000,000 shares of common stock to non-executive
employees and consultants. As of December 31, 2008, all authorized shares of
options under the NSO Plan had been granted.





66
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





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





At the
Company’s annual stockholder meeting on June 16, 2008, the Company’s
stockholders approved a proposal to amend the Company’s 2007 Stock Incentive
Plan (2007 Plan) to increase the total authorized shares available for grant
under such plan by 4,700,000 shares and reduce the number of shares available
for issuance under the 2007 Plan (i) by one share for each share of common stock
subject to a stock option or stock appreciation right; and (ii) by one and
sixty-five hundredths (1.65) shares for each share of common stock subject to
any other type of award issued under the 2007 Plan. As of December 31, 2008,
4,466,836 shares were available for issuance under the 2007 Plan.





The
Company’s stockholders also approved a voluntary stock option exchange program
to allow eligible employees holding stock options with exercise prices equal to
or greater than $12.00 per share the opportunity to exchange eligible stock
options for new stock options with a lower exercise price but covering fewer
shares.  The Company’s directors, executive officers, consultants and
employees with a tax residence outside of the United States were not allowed to
participate in this program. The Company completed the stock option exchange in
the third quarter of 2008. Eligible participants tendered options to purchase
2,042,812 shares of common stock in exchange for replacement options to purchase
394,509 shares of common stock under the Company’s 2007 Plan, resulting in
$111,000 of incremental stock-based compensation to be amortized on a
straight-line basis over the vesting period of the replacement options (a
maximum of 2 years). The shares subject to options canceled in this program were
not returned to the 2007 Plan for future issuance.





In
connection with the acquisition of IntelliChem, the Company assumed all the
unvested outstanding stock options issued pursuant to IntelliChem’s 2003 Stock
Option Plan (“IntelliChem Plan”) and converted them into options to purchase
44,126 shares of the Company’s common stock. In connection with the acquisition
of Synthematix, the Company assumed all the unvested outstanding stock options
issued pursuant to Synthematix’s 2000 Equity Compensation Plan (“Synthematix
Plan”), as amended, and converted them into options to purchase 23,876 shares of
the Company’s common stock. These options generally retained all of the rights,
terms, and conditions of the plan under which they were originally granted. As
of December 31, 2008, options to purchase 13,146 and 2,971 shares of common
stock were available for future grant under the IntelliChem Plan and Synthematix
Plan, respectively.





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





67
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





A summary
of activity under all the above stock option plans is as follows:





Outstanding
      Stock OptionsNumber
      of
                                      Shares
                                    
                                    
                                    Exercise
                                      Price
                                    
                                    
                                    Weighted-
                                      Average
                                      Exercise
      PriceBalance
      at January 1, 2006
                                    
                                    
                                    8,093,812
                                    
                                    
                                    $
                                    0.19
      - $58.25
                                    
                                    
                                    $
                                    25.91Options
      exercised
                                    
                                    
                                    (940,496
                                    )
                                    
                                    $
                                    0.39
      - $27.99
                                    
                                    
                                    $
                                    14.92Options
      cancelled
                                    
                                    
                                    (390,724
                                    )
                                    
                                    $
                                    0.39
      - $51.50
                                    
                                    
                                    $
                                    27.58Balance
      at December 31, 2006
                                    
                                    
                                    6,762,592
                                    
                                    
                                    $
                                    0.19
      - $58.25
                                    
                                    
                                    $
                                    27.35Options
      granted
                                    
                                    
                                    1,423,500
                                    
                                    
                                    $
                                    4.29
      - $ 8.58
                                    
                                    
                                    $
                                    6.68Options
      exercised
                                    
                                    
                                    (96,122
                                    )
                                    
                                    $
                                    0.39
      - $18.95
                                    
                                    
                                    $
                                    6.55Options
      cancelled
                                    
                                    
                                    (1,222,527
                                    )
                                    
                                    $
                                    0.19
      - $57.00
                                    
                                    
                                    $
                                    28.31Balance
      at December 31, 2007
                                    
                                    
                                    6,867,443
                                    
                                    
                                    $
                                    0.39
      - $58.25
                                    
                                    
                                    $
                                    23.18Options
      granted
                                    
                                    
                                    2,038,009
                                    
                                    
                                    $
                                    3.03
      - $26.19
                                    
                                    
                                    $
                                    6.20Options
      exercised
                                    
                                    
                                    (30,451
                                    )
                                    
                                    $
                                    0.39
      - $10.47
                                    
                                    
                                    $
                                    2.72Options
      cancelled
                                    
                                    
                                    (3,599,230
                                    )
                                    
                                    $
                                    0.96
      - $58.25
                                    
                                    
                                    $
                                    27.24Balance
      at December 31, 2008
                                    
                                    
                                    5,275,771
                                    
                                    
                                    $
                                    0.51
      - $57.00
                                    
                                    
                                    $
                                    13.97





At
December 31, 2008, 2007 and 2006, vested and outstanding options for the
purchase of 2,354,850, 5,411,627 and 6,514,413 shares of common stock were
exercisable at weighted-average exercise prices of $23.76, $27.53 and $27.62,
respectively.





An
analysis of options outstanding at December 31, 2008 is as follows:





Options
      ExercisableExercise
      Price
                        
                        Options
      Outstanding at December 31, 2008
                        
                        
                        Weighted-Average
      Remaining Contractual Life (in years)
                        
                        
                        Weighted-Average
      Exercise Price
                        
                        
                        Oustanding
      at December 31, 2008
                        
                        
                        Weighted-Average
      Remaining Contractual Life (in years)
                        
                        
                        Weighted-Average
      Exercise Price$0.51
      - 0.964
                        
                        
                        40,520
                        
                        
                        
                        0.4
                        
                        
                        $
                        0.94
                        
                        
                        
                        40,485
                        
                        
                        
                        0.4
                        
                        
                        $
                        0.94$1.929
      - $3.03
                        
                        
                        52,392
                        
                        
                        
                        5.8
                        
                        
                        $
                        2.78
                        
                        
                        
                        19,892
                        
                        
                        
                        3.9
                        
                        
                        $
                        2.38$3.69
      - $6.429
                        
                        
                        1,714,668
                        
                        
                        
                        5.7
                        
                        
                        $
                        3.85
                        
                        
                        
                        6,168
                        
                        
                        
                        0.6
                        
                        
                        $
                        4.90$6.81
      - $10.39
                        
                        
                        923,876
                        
                        
                        
                        5.0
                        
                        
                        $
                        8.52
                        
                        
                        
                        21,376
                        
                        
                        
                        4.3
                        
                        
                        $
                        8.39$10.47
      - $16.00
                        
                        
                        1,182,170
                        
                        
                        
                        3.7
                        
                        
                        $
                        12.80
                        
                        
                        
                        905,742
                        
                        
                        
                        3.3
                        
                        
                        $
                        12.99$16.23
      - $24.42
                        
                        
                        332,816
                        
                        
                        
                        4.3
                        
                        
                        $
                        18.94
                        
                        
                        
                        331,858
                        
                        
                        
                        4.3
                        
                        
                        $
                        18.93$24.67
      - $57
                        
                        
                        1,029,329
                        
                        
                        
                        3.3
                        
                        
                        $
                        36.54
                        
                        
                        
                        1,029,329
                        
                        
                        
                        3.3
                        
                        
                        $
                        36.545,275,771
                        
                        
                        
                        4.5
                        
                        
                        $
                        13.97
                        
                        
                        
                        2,354,850
                        
                        
                        
                        3.4
                        
                        
                        $
                        23.76





The
aggregate intrinsic values for the above outstanding and exercisable stock
options were $3,592,000 and $281,000, respectively. The aggregate intrinsic
value is calculated as the difference between the exercise price of the
underlying awards and the close price of the Company’s common stock for
in-the-money options at December 31, 2008. During the years ended December 31,
2008, 2007 and 2006, the aggregate intrinsic value of options exercised under
the Company’s stock option plans was $123,000, $859,000 and $11,716,000,
respectively. The aggregated fair value of stock options vested during 2008 and
2007 was $99,000 and $1,330,000, respectively. As of December 31, 2008,
$5,719,000 of total unrecognized compensation cost related to unvested stock
options granted and outstanding is expected to be amortized over a
weighted-average period of 1.4 years.





The
Company granted stock options to purchase 2,038,009 shares of common stock in
2008, including options to purchase 394,509 shares of common stock from the
Company’s option exchange program. The Company granted stock options to purchase
1,423,500 shares of common stock in 2007, including options to purchase 620,000
shares of common stock granted to non-executive employees at an exercise price
equal to 50% of the grant date fair market value. The weighted-average grant
date fair value of options granted (excluding the shares from stock option
exchange program where only incremental charges were recorded) during the years
ended December 31, 2008 and 2007 were $2.15 and $4.08, respectively. No options
were granted in 2006. The Company valued options granted in 2008 and 2007 using
the Black-Scholes method with the following valuation assumptions:





68
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





2008
                  
                  
                  2007Range
                  
                  
                  Weighted-Average
                  
                  
                  Range
                  
                  
                  Weighted-AverageExpected
      dividend
                  
                  
                  0%-0
                  %
                  
                  
                  0
                  %
                  
                  
                  0%-0
                  %
                  
                  
                  0
                  %Risk-free
      interest rate
                  
                  
                  1.7%-3.5
                  %
                  
                  
                  2.0
                  %
                  
                  
                  4.1%-4.4
                  %
                  
                  
                  4.3
                  %Expected
      volatility
                  
                  
                  46%-60
                  %
                  
                  
                  57
                  %
                  
                  
                  43%-48
                  %
                  
                  
                  44
                  %Expected
      life (in years)
                  
                  
                  3.6-5.1
                  
                  
                  
                  4.3
                  
                  
                  
                  1.75-5.17
                  
                  
                  
                  3.5





The
computation of expected volatility is based on historical volatility. Expected
life is calculated based on estimated settlement patterns, assuming options will
be exercised evenly after they become exercisable and before they expire. The
interest rate for periods within the contractual life of the award is based on
the U.S. Treasury yield curve in effect at the time of grant.





Starting
in March 2006, the Company granted restricted stock units to its employees and
members of the Board of Directors under its stock option plans. The fair value
of the Company’s restricted stock units was calculated based upon the fair
market value of the Company’s stock at the date of grant. As of December 31,
2008, $2,873,000 of total unrecognized compensation cost related to unvested
restricted stock units granted is expected to be amortized over a
weighted-average period of 1.2 years. The Company plans to issue new common
stock to settle the restricted stock units.





The
following table illustrates the changes in status of the Company’s restricted
stock units and restricted stock during the year ended December 31,
2008:





Restricted
      Stock Units
                                      
                                      
                                      Restricted
      StockShares
                                      
                                      
                                      Weighted-Average
      Grant-Date Fair Value
                                      
                                      
                                      Shares
                                      
                                      
                                      Weighted-Average
      Grant-Date Fair ValueUnvested
      at January 1, 2006
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Granted
                                      
                                      
                                      350,461
                                      
                                      
                                      $
                                      29.04
                                      
                                      
                                      
                                      -Vested
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Cancelled
                                      
                                      
                                      (22,411
                                      )
                                      
                                      $
                                      28.82
                                      
                                      
                                      
                                      -Unvested
      at December 31, 2006
                                      
                                      
                                      328,050
                                      
                                      
                                      $
                                      29.05
                                      
                                      
                                      
                                      -Granted
                                      
                                      
                                      595,011
                                      
                                      
                                      $
                                      17.26
                                      
                                      
                                      
                                      176,400
                                      
                                      
                                      $
                                      18.06Vested
                                      
                                      
                                      (325,406
                                      )
                                      
                                      $
                                      29.05
                                      
                                      
                                      
                                      -Cancelled
                                      
                                      
                                      (152,169
                                      )
                                      
                                      $
                                      17.79
                                      
                                      
                                      
                                      (85,300
                                      )
                                      
                                      $
                                      17.96Unvested
      at December 31, 2007
                                      
                                      
                                      445,486
                                      
                                      
                                      $
                                      17.16
                                      
                                      
                                      
                                      91,100
                                      
                                      
                                      $
                                      18.15Granted
                                      
                                      
                                      635,953
                                      
                                      
                                      $
                                      3.93
                                      
                                      
                                      
                                      -Vested
                                      
                                      
                                      (226,590
                                      )
                                      
                                      $
                                      16.76
                                      
                                      
                                      
                                      -Cancelled
                                      
                                      
                                      (114,829
                                      )
                                      
                                      $
                                      17.35
                                      
                                      
                                      
                                      (91,100
                                      )
                                      
                                      $
                                      18.15Unvested
      at December 31, 2008
                                      
                                      
                                      740,020
                                      
                                      
                                      $
                                      5.88
                                      
                                      
                                      
                                      -





During
the year ended December 31, 2008, the Company valued awards under the Purchase
Plan using the Black-Scholes method with the following valuation
assumptions:





69
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





2008
                            
                            
                            2007
                            
                            
                            2006Expected
      dividend
                            
                            
                            0
                            %
                            
                            
                            0
                            %
                            
                            
                            0
                            %Risk-free
      interest rate
                            
                            
                            2.4
                            %
                            
                            
                            4.7
                            %
                            
                            
                            4.9
                            %Expected
      volatility
                            
                            
                            69
                            %
                            
                            
                            55
                            %
                            
                            
                            51
                            %Weighted-average
      expected life (in years)
                            
                            
                            0.8
                            
                            
                            
                            0.83
                            
                            
                            
                            1.25





As of
December 31, 2008, $358,000 of total unrecognized compensation cost related to
the Purchase Plan is expected to be amortized over a weighted-average period
of 4 months.





As of
December 31, 2008, the Company has reserved 11,734,054 shares of common stock
for future issuance in relation to the Company’s stock option
plans.





The
Company recognized stock-based compensation expenses of $4,368,000, $5,717,000
and $10,296,000, respectively, during the years ended December 31, 2008, 2007
and 2006. Stock-based compensation expense recognized in the Company’s results
of operations for the year ended December 31, 2008, 2007 and 2006 was as follows
(in thousands):





2008
                      
                      
                      2007
                      
                      
                      2006Costs
      of revenue
                      
                      $
                      227
                      
                      
                      $
                      294
                      
                      
                      $
                      673Research
      and development
                      
                      
                      1,396
                      
                      
                      
                      2,627
                      
                      
                      
                      4,006Sales,
      general and administrative
                      
                      
                      2,745
                      
                      
                      
                      2,796
                      
                      
                      
                      5,617Total
                      
                      $
                      4,368
                      
                      
                      $
                      5,717
                      
                      
                      $
                      10,296





The
income tax benefit recognized in the consolidated statements of operations
related to stock-based compensation expense was $1,410,000, $1,873,000 and
$2,995,000 in 2008, 2007 and 2006, respectively.





5.  Bank
Credit Facility





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





Loans
under the Credit Agreement bear interest at either (i) for Eurodollar rate
loans, the rate per annum equal to the British Bankers Association LIBOR plus a
margin ranging from 0.25 percent to 0.50 percent or (ii) a formula based on the
Agent’s prime rate and the federal funds effective rate.  Subject to
certain conditions stated in the Credit Agreement, the Company may borrow,
pre-pay and re-borrow amounts under the Facility at any time during the term of
the Credit Agreement.  The Credit Agreement will terminate and all
amounts owing thereunder will be due and payable on September 28, 2009, unless
the commitments are earlier terminated, either at the Company’s request or, if
an event of default occurs, by the lenders. The Company may also, upon the
agreement of either the Agent or additional banks not currently a party to the
Credit Agreement, increase the commitments under the Facility up to an
additional $50 million. The Credit Agreement contains customary representations,
warranties, affirmative and negative covenants, including financial covenants
and events of default.  The negative covenants set forth in the Credit
Agreement include restrictions on additional indebtedness and liens, fundamental
changes and entering into burdensome agreements. The financial covenants require
the Company to meet quarterly financial tests with respect to consolidated net
worth and consolidated interest coverage ratio, and financial tests with respect
to a consolidated leverage ratio. As of December 31, 2008, the Company had no
borrowing under the credit facility.





Due to
the non-cash impairment charges and valuation allowances recorded in the fourth
quarter of 2008, the Company did not meet the Consolidated Net Worth covenant
related to the Facility (“Existing Default”) as of December 31, 2008. In March
2009, the Company and the Agent executed an amendment to the Facility which
provided a waiver with respect to the Existing Default and lowered the
Consolidated Net Worth covenant amount for future measurement
dates.





70
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





6.
Segment Disclosure





SFAS No.
131 (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information, requires disclosures of certain information regarding operating
segments, products and services, geographic areas of operation and major
customers. The method for determining what information to report under SFAS 131
is based upon the "management approach," or the way that management organizes
the operating segments within a company for which separate financial information
is available and evaluated regularly by the Chief Operating Decision Maker
(CODM) when deciding how to allocate resources and in assessing performance. The
Company’s Chief Executive Officer is its CODM, who allocates resources to and
assessed the performance of each business unit using information about the
business unit’s revenue.





Revenue
is defined as revenue from external customers and is disaggregated
into:





·
            Symyx
      Software – (i) license of electronic laboratory notebook, lab execution
      and experiment analysis, logistics and decision support software, and
      subscriptions to scientific content, and (ii) provision of associated
      support, maintenance and consulting
services.


·
            Symyx
      HPR – (i) research services, (ii) license fees and royalties associated
      with the Company’s patents, trade secrets and other intellectual property,
      including materials discovered in the Company’s research collaborations,
      (iii) sale of laboratory automation systems, and (iv) system support
      services.





In the
fourth quarter of 2008, the Company completed a reorganization that combined the
Symyx Research and Symyx Tool businesses into Symyx HPR.  The historical
results have been adjusted to reflect this reorganization. Prior-period amounts
have also been adjusted retrospectively to reflect other minor
reorganizations.





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





Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Symyx
      Software
                      
                      $
                      94,200
                      
                      
                      $
                      31,893
                      
                      
                      $
                      25,495Symyx
      HPR
                      
                      
                      64,845
                      
                      
                      
                      93,179
                      
                      
                      
                      99,405Total
                      
                      $
                      159,045
                      
                      
                      $
                      125,072
                      
                      
                      $
                      124,900








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





Year
      Ended December 31, 2008Service
      Revenue
                      
                      
                      Product
      Sales
                      
                      
                      License
      Fees, Content and Royalties
                      
                      
                      Total
      RevenueSymyx
      Software
                      
                      $
                      45,016
                      
                      
                      $
                      -
                      
                      
                      $
                      49,184
                      
                      
                      $
                      94,200Symyx
      HPR
                      
                      
                      29,876
                      
                      
                      
                      25,033
                      
                      
                      
                      9,936
                      
                      
                      
                      64,845Total
                      
                      $
                      74,892
                      
                      
                      $
                      25,033
                      
                      
                      $
                      59,120
                      
                      
                      $
                      159,045




71
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





Year
      Ended December 31, 2007Service
      Revenue
                      
                      
                      Product
      Sales
                      
                      
                      License
      Fees, Content and Royalties
                      
                      
                      Total
      RevenueSymyx
      Software
                      
                      $
                      16,622
                      
                      
                      $
                      -
                      
                      
                      $
                      15,271
                      
                      
                      $
                      31,893Symyx
      HPR
                      
                      
                      42,412
                      
                      
                      
                      34,898
                      
                      
                      
                      15,869
                      
                      
                      
                      93,179Total
                      
                      $
                      59,034
                      
                      
                      $
                      34,898
                      
                      
                      $
                      31,140
                      
                      
                      $
                      125,072





Year
      Ended December 31, 2006Service
      Revenue
                      
                      
                      Product
      Sales
                      
                      
                      License
      Fees, Content and Royalties
                      
                      
                      Total
      RevenueSymyx
      Software
                      
                      $
                      10,733
                      
                      
                      $
                      -
                      
                      
                      $
                      14,762
                      
                      
                      $
                      25,495Symyx
      HPR
                      
                      
                      47,200
                      
                      
                      
                      33,526
                      
                      
                      
                      18,679
                      
                      
                      
                      99,405Total
                      
                      $
                      57,933
                      
                      
                      $
                      33,526
                      
                      
                      $
                      33,441
                      
                      
                      $
                      124,900





Geographic
Area Data





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





Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006United
      States
                      
                      $
                      102,042
                      
                      
                      $
                      109,741
                      
                      
                      $
                      111,158Asia
                      
                      
                      14,300
                      
                      
                      
                      3,712
                      
                      
                      
                      3,953Europe
                      
                      
                      40,885
                      
                      
                      
                      11,065
                      
                      
                      
                      9,281Rest
      of the World
                      
                      
                      1,818
                      
                      
                      
                      554
                      
                      
                      
                      508Total
                      
                      $
                      159,045
                      
                      
                      $
                      125,072
                      
                      
                      $
                      124,900





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





Years
      Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006Revenue
      generated by U.S. operations
                        
                        $
                        132,629
                        
                        
                        $
                        114,242
                        
                        
                        $
                        122,997Revenue
      generated by foreign operations
                        
                        
                        26,416
                        
                        
                        
                        10,830
                        
                        
                        
                        1,903Total
      revenue from unaffiliated customers
                        
                        $
                        159,045
                        
                        
                        $
                        125,072
                        
                        
                        $
                        124,900Long-lived
      assets in U.S.
                        
                        $
                        114,373
                        
                        
                        $
                        195,246
                        
                        
                        $
                        82,487Long-lived
      assets in foreign countries
                        
                        
                        14,076
                        
                        
                        
                        33,207
                        
                        
                        
                        3,902Total
      long-lived assets
                        
                        $
                        128,449
                        
                        
                        $
                        228,453
                        
                        
                        $
                        86,389





7.
Business Combinations





Acquisition
of Integrity Biosolution, LLC





On August
13, 2008, the Company acquired 100% of the ownership of Integrity Biosolution,
LLC (“IntegrityBio”), a privately held research service company based in
Camarillo, California. By acquiring IntegrityBio, the Company expanded its
research service offerings in the life sciences industry into biologic
formulations, complementing its existing chemical formulations services.
IntegrityBio has since been merged with and into Symyx Software, Inc. effective
December 31, 2008, and its results of operations have been included in the
Company’s consolidated financial statements since the acquisition
date.





72
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





The
preliminary purchase price for IntegrityBio was $10,248,000, including
$9,446,000 paid in cash to the seller, $570,000 of working capital adjustments
paid to the seller and $232,000 in transaction costs, consisting of legal and
other professional service fees. Pursuant to the terms of the purchase
agreement, the founder of IntegrityBio will earn an additional $1.75 million in
cash, so long as the founder serves as the Company’s employee continuously for
24 months from the acquisition date. Due to service requirements of this
payment, the Company will record the associated liabilities as compensation
expenses rather than as part of the purchase price.





The
purchase price is preliminary because there is contingent consideration related
to future revenue. As part of the purchase agreement, the Company also agreed to
pay 46% of total revenue generated by IntegrityBio during the one-year period
starting from September 1, 2009 to the founder as additional consideration
according to the purchase agreement.





In
accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, the
Company allocated the preliminary purchase price to the tangible assets,
liabilities, and intangible assets acquired based on their estimated fair value.
The excess purchase price over the fair value was recorded as
goodwill.





The
allocation of the preliminary purchase price of IntegrityBio was as follows (in
thousands):





AmountFair
      value of net assets acquired
                        
                        $
                        1,948Intangible
      assets
                        
                        
                        2,860Goodwill
                        
                        
                        5,440Total
                        
                        $
                        10,248





The fair
value of IntegrityBio’s net assets as of the acquisition date was (in
thousands):





AmountCash
                    
                    $
                    32Accounts
      receivable
                    
                    
                    789Plant,
      property and equipment
                    
                    
                    1,379Accounts
      payable and other accrued liabilities
                    
                    
                    (127
                    )Accrued
      compensation
                    
                    
                    (47
                    )Deferred
      revenue
                    
                    
                    (78
                    )Fair
      value of IntegrityBio's net assets
                    
                    $
                    1,948





Identifiable
intangible assets purchased in the IntegrityBio acquisition consisted of the
following (in thousands, except for useful life) with a weighted average useful
life of 4.9 years and no significant residual value estimated:




Amount
                            
                            
                            Useful
      Life (in years)Customer
      Relationships
                            
                            $
                            2,120
                            
                            
                            
                            5Customer
      Backlog
                            
                            
                            130
                            
                            
                            
                            2Non-competing
      Agreement
                            
                            
                            610
                            
                            
                            
                            5Total
                            
                            $
                            2,860




Goodwill
from IntegrityBio has been recorded in the Symyx Research reporting unit of
Symyx HPR and is expected to be deductible for income tax purposes. Subsequently
in the fourth quarter of 2008, as part of the annual impairment analysis,
goodwill from IntegrityBio acquisition was written-off.  Additionally,
the Company reduced the carrying value of identifiable intangible assets by
$1,604,000 in connection with its review of the recoverability long-lived
assets.See detail in Note 1 of the Notes to Consolidated Financial
Statements.





73
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





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





Acquisition
of MDL Group Companies





On
October 1, 2007, the Company acquired MDL Information Systems, Inc. (MDL) for
$123,000,000 in cash. Of the cash paid, the Company and the seller placed
$10,000,000 in escrow pending their determination of any detriments suffered or
benefits enjoyed by MDL as a result of certain pre-closing intercompany
transactions. The escrow account (including interest earned) was subsequently
reduced to $1,735,000 after a March 2008 net working capital adjustment payment
of $4,954,000 to the Company, and June 2008 distributions of $1,626,000 to the
Company for withholding tax and professional fee reimbursement and $1,735,000 to
the seller. The remaining amount in the escrow account will be settled by June
2009.





The
adjusted total purchase price for this acquisition was $121,474,000, consisting
of approximately $118,046,000 in cash ($123,000,000 cash paid, net of $4,954,000
working capital adjustments received) and $3,428,000 in transaction costs,
consisting of banking, legal and other professional service fees (net of
$325,000 reimbursement of transaction costs from the escrow account received in
June 2008).





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





AmountFair
      value of net liabilities assumed
                    
                    $
                    (4,594
                    )Accrued
      restructuring costs
                    
                    
                    (6,823
                    )In-process
      research and development
                    
                    
                    2,500Intangible
      assets
                    
                    
                    59,000Deferred
      tax liabilities
                    
                    
                    (17,710
                    )Goodwill
                    
                    
                    89,101Total
                    
                    $
                    121,474




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





AmountAccounts
      receivable, net
                    
                    $
                    4,417Prepaids
      and other assets
                    
                    
                    3,549Plant,
      property and equipment
                    
                    
                    4,851Accounts
      payable and other accrued liabilities
                    
                    
                    (2,046
                    )Accrued
      compensation
                    
                    
                    (4,961
                    )Deferred
      revenue
                    
                    
                    (10,404
                    )Fair
      value of MDL’s net liabilities
                    
                    $
                    (4,594
                    )





8.
Related Party Transactions





On July
18, 2007, Amgen Inc. ("Amgen") completed its acquisition of Ilypsa, Inc.
(“Ilypsa”). The Company received approximately $41,238,000 in cash before taxes
in August 2007 in exchange for an approximate 10% equity interest in
Ilypsa. The Company also received $4,778,000 in cash before taxes in July 2008,
representing the Company’s portion of the holdback in the original purchase
transaction released by the buyer on the first anniversary of the sale. Prior
to this sale, the Company accounted for its Ilypsa interest using
the cost method, as the Company did not have the ability to exercise significant
influence over Ilypsa’s strategic, operating, investing, and financing
activities. Ilypsa licensed software and purchased products from the Company. In
the years ended December 31, 2008, 2007 and 2006 the Company recorded revenue
from Ilypsa of $0, $0 and $181,000, respectively.





74
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





The
Company entered into a Collaborative Development and License Agreement in March
2005 and an Alliance Agreement in December 2005 with Intermolecular, Inc.
(Intermolecular). Under these agreements, the two companies worked together to
conduct research and development and other activities with respect to materials
and high-throughput technology for use in semiconductor applications. Each
party bore its own expenses. In November 2007, following the conclusion of the
joint research and development activities, these agreements were amended. Under
the amended agreements, the Company has an ongoing obligation to provide two
employees to modify and integrate certain Symyx software with and into
Intermolecular products and to provide Intermolecular access to certain Symyx
equipment for development purposes. In August 2006, the Company invested
$13,500,000 in exchange for approximately 13% of Intermolecular’s outstanding
shares, and in December 2008 invested an additional $1,647,000, maintaining the
Company’s 13% interest in Intermolecular. The Company accounts for its ownership
interest in Intermolecular using the cost method, because the Company does not
have the ability to exercise significant influence over Intermolecular’s
strategic, operating, investing and financing activities. Isy Goldwasser, the
Company’s chief executive officer, is a director of Intermolecular. For the
years ended December 31, 2008, 2007 and 2006, the Company recognized revenue
from Intermolecular of $1,418,000, $912,000 and $52,000, respectively. As
of December 31, 2008, the Company recorded $32,000 of deferred revenue and a
$77,000 customer deposit from Intermolecular. As of December 31, 2007, the
Company recorded $84,000 of deferred revenue from Intermolecular.





In
November 2006, the Company invested $400,000 in cash plus certain intellectual
property with no cost basis related to sensor technology in exchange for
approximately 38% of the outstanding shares of Visyx Technologies Inc.
(“Visyx”). The Company had a 45% voting right in relation to its shareholding.
Isy Goldwasser, the Company’s chief executive officer, is a Visyx board member.
During the twelve months ended December 31, 2007 and 2006, the Company reported
a $314,000 and $186,000 equity loss, respectively, based on its share of the
loss reported by Visyx, in accordance with the equity method of accounting. In
November 2007, Visyx sold all its assets to MeasurementSpecialties, Inc. The
Company will share in future distributions, if any, subject to certain preferred
stock liquidation preferences. The Company does not have any commitments to fund
this entity. As of December 31, 2008, the Company had a $0 carrying value of
this investment.





9.
Income Taxes





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





Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006U.
      S.
                      
                      $
                      (84,293
                      )
                      
                      $
                      31,510
                      
                      
                      $
                      15,584Foreign
                      
                      
                      (27,496
                      )
                      
                      
                      (2,028
                      )
                      
                      
                      (918
                      )Total
                      
                      $
                      (111,789
                      )
                      
                      $
                      29,482
                      
                      
                      $
                      14,666




75
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





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





Years
      Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006Current:Federal
                        
                        $
                        (4,503
                        )
                        
                        $
                        12,759
                        
                        
                        $
                        10,685State
                        
                        
                        121
                        
                        
                        
                        645
                        
                        
                        
                        1,140Foreign
                        
                        
                        302
                        
                        
                        
                        542
                        
                        
                        
                        259Total
                        
                        
                        (4,080
                        )
                        
                        
                        13,946
                        
                        
                        
                        12,084Deferred:Federal
                        
                        
                        908
                        
                        
                        
                        (2,276
                        )
                        
                        
                        (4,862
                        )State
                        
                        
                        800
                        
                        
                        
                        472
                        
                        
                        
                        (621
                        )Foreign
                        
                        
                        (2,801
                        )
                        
                        
                        (1,444
                        )
                        
                        
                        (219
                        )Total
                        
                        
                        (1,093
                        )
                        
                        
                        (3,248
                        )
                        
                        
                        (5,702
                        )Provision
      (benefit) for income taxes
                        
                        $
                        (5,173
                        )
                        
                        $
                        10,698
                        
                        
                        $
                        6,382





Tax
benefits or (deficiencies) resulting from the vesting of restricted stock units,
the exercise of nonqualified stock options and the disqualifying dispositions of
shares issued under the Company's stock-based compensation plans were
approximately ($1,091,000) in 2008, ($868,000) in 2007 and $5,045,000 in 2006.
Such benefits (deficiencies) were recorded in additional paid-in
capital.





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





Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Expected
      provision (benefit) at federal statutory rate
                      
                      $
                      (39,126
                      )
                      
                      $
                      10,318
                      
                      
                      $
                      5,133State
      taxes, net of federal impact
                      
                      
                      921
                      
                      
                      
                      571
                      
                      
                      
                      519Research
      and development credits
                      
                      
                      (493
                      )
                      
                      
                      (321
                      )
                      
                      
                      (197
                      )Permanent
      difference related to goodwill impairment
                      
                      
                      24,761
                      
                      
                      
                      -
                      
                      
                      
                      -Permanent
      difference related to stock-based compensation
                      
                      
                      230
                      
                      
                      
                      366
                      
                      
                      
                      998Permanent
      difference related to acquisitions
                      
                      
                      -
                      
                      
                      
                      875
                      
                      
                      
                      487Permanent
      difference related to tax-exempt interest
                      
                      
                      (50
                      )
                      
                      
                      (631
                      )
                      
                      
                      (307
                      )Valuation
      allowance for deferred tax assets
                      
                      
                      7,995
                      
                      
                      
                      -
                      
                      
                      
                      -Other
      individually immaterial items
                      
                      
                      589
                      
                      
                      
                      (480
                      )
                      
                      
                      (251
                      )Provision
      (benefit) for income taxes
                      
                      $
                      (5,173
                      )
                      
                      $
                      10,698
                      
                      
                      $
                      6,382





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





76
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





December
      31,2008
                        
                        
                        2007Deferred
      tax assets:Net
      operating loss carry-forwards
                        
                        $
                        2,534
                        
                        
                        $
                        113Goodwill
                        
                        
                        3,482
                        
                        
                        
                        -Deferred
      revenue
                        
                        
                        1,488
                        
                        
                        
                        -Capitalized
      research and development
                        
                        
                        349
                        
                        
                        
                        88Depreciation
                        
                        
                        11,069
                        
                        
                        
                        7,655Stock-based
      compensation
                        
                        
                        2,031
                        
                        
                        
                        2,043Warranty
      expense accrual
                        
                        
                        545
                        
                        
                        
                        676Research
      and development and other credits
                        
                        
                        2,102
                        
                        
                        
                        675Other
      accruals and reserves
                        
                        
                        2,927
                        
                        
                        
                        4,337Total
      deferred tax assets before valuation allowance
                        
                        
                        26,527
                        
                        
                        
                        15,587Less
      valuation allowance for deferred tax assets
                        
                        
                        (12,485
                        )
                        
                        
                        -Total
      deferred tax assets
                        
                        
                        14,042
                        
                        
                        
                        15,587Deferred
      tax liabilities:Prepaid
      insurance and property tax
                        
                        
                        (452
                        )
                        
                        
                        (536
                        )Deferred
      revenue
                        
                        
                        -
                        
                        
                        
                        (2,791
                        )Intangible
      assets
                        
                        
                        (18,023
                        )
                        
                        
                        (21,567
                        )Total
      deferred tax liabilities
                        
                        
                        (18,475
                        )
                        
                        
                        (24,894
                        )Net
      deferred tax liabilities
                        
                        $
                        (4,433
                        )
                        
                        $
                        (9,307
                        )








Income
tax expense is recorded using the asset and liability method. Deferred tax
assets and liabilities are recognized for the expected future tax consequences
attributable to temporary differences between amounts reported for income tax
purposes and financial statement purposes, using current tax rates. The Company
has recorded a $12,485,000 valuation allowance (including $7,995,000 for federal
deferred tax assets and $4,490,000 for state deferred tax assets) as a result of
uncertainties related to the realization of its net deferred tax assets at
December 31, 2008. The valuation allowance was established as a result of
weighing all positive and negative evidence, including the Company’s history of
cumulative losses over the past three years and the difficulty of forecasting
sufficient future taxable income. The valuation allowance reflects the
conclusion of management that it is more likely than not that benefits from
certain deferred tax assets will not be realized. If actual results differ from
these estimates or these estimates are adjusted in future periods, the valuation
allowance may require adjustment which could materially impact the Company’s
financial position and results of operations.





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





As of
December 31, 2008, the Company had federal net operating loss carryforwards of
approximately $141,000. The net operating losses from the acquisition of
Synthematix may be subject to an annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization. The net operating loss
carryforwards will start to expire in 2010, if not utilized. As of December 31,
2008, the Company had California net operating loss carryforwards of
approximately $18,444,000, which will start to expire in 2019, if not utilized.
As of December 31, 2008, the Company also had Swiss net operating loss
carryforwards of approximately $6,430,000, which will start to expire in 2014,
if not utilized.





As of
December 31, 2008, the Company had federal and California research and
development tax credit carryforwards of approximately $131,000 and $3,783,000,
respectively. The state research and development credits have no expiration
date. The research and development tax credits from the acquisitions of
IntelliChem and Synthematix may be subject to an annual limitation of Section
383 due to ownership change limitations provided by the Internal Revenue Code of
1986, as amended, and similar state provisions.





77
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





10.
Accounting for Uncertainty in Income Taxes





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





The
following is a tabular reconciliation of the total amounts of unrecognized tax
benefits for the years ended December 31, 2008 and 2007 (in
thousands):





2008
                      
                      
                      2007Unrecognized
      tax benefit at January 1
                      
                      $
                      4,965
                      
                      
                      $
                      4,273Increase
      (decrease) in tax positions for prior period
                      
                      
                      (590
                      )
                      
                      
                      287Increase
      (decrease) in tax positions for current period
                      
                      
                      318
                      
                      
                      
                      526Settlements
                      
                      
                      -Lapse
      of statute of limitations
                      
                      
                      -
                      
                      
                      
                      (121
                      )Total
      unrecognized tax benefit at December 31
                      
                      $
                      4,693
                      
                      
                      $
                      4,965




Included
in the balance of unrecognized tax benefits at December 31, 2008,
was $1,144,000 of tax benefits that, if recognized, would affect
the effective tax rate.


The
Company recognizes interest accrued related to unrecognized income tax benefits
in interest expense and penalties as a component of the income tax provision, in
the accompanying Consolidated Statement of Operations. Related to the uncertain
tax benefits noted above, the Company has recognized a liability for interest
and penalties of $502,000 and $201,000 as of December 31, 2008 and 2007,
respectively.





The
Company is subject to taxation in the U.S. and various state and foreign
jurisdictions. The Company is not currently under audit by any tax authorities.
Because the Company used some of the tax attributes carried forward from
previous years to tax years that are still open, statutes of limitation remain
open for all tax years to the extent of the attributes carried forward into tax
year 2005.





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





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





78
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





11.
Intangible Assets





The
Company acquired certain patent rights and know-how from third parties. It also
obtained certain intangible assets in various business combinations. These
intangible assets are being amortized on a straight-line basis over the
estimated useful lives of the assets. Because some of the intangible assets
related to the Autodose acquisition were recorded in foreign currencies, the
balance of these intangible assets may be affected by foreign currency exchange
rate fluctuations when converted to U.S. dollars at each reporting period. As
discussed in Note 1 of Notes to Consolidated Financial Statements, the Company
evaluated the recoverability of intangible assets and recorded an impairment
charge of $2,574,000 in 2008. The current estimated weighted-average useful
lives and carrying amounts of these intangible assets are as follows (in
thousands, except for useful lives):




December 31, 2008Weighted-Average Useful Lives
      (Years)
                                              
                                              
                                              Gross Carrying Amount
                                              
                                              
                                              Accumulated Amortization
                                              
                                              
                                              Net Carrying AmountAcquired
      technology
                                              
                                              
                                              5.0
                                              
                                              
                                              $
                                              2,973
                                              
                                              
                                              $
                                              (2,874
                                              )
                                              
                                              $
                                              99Trade
      name
                                              
                                              
                                              3.3
                                              
                                              
                                              
                                              1,697
                                              
                                              
                                              
                                              (781
                                              )
                                              
                                              
                                              916Core/Developed
      technology
                                              
                                              
                                              5.7
                                              
                                              
                                              
                                              23,168
                                              
                                              
                                              
                                              (12,611
                                              )
                                              
                                              
                                              10,557Customer
      relationships
                                              
                                              
                                              7.7
                                              
                                              
                                              
                                              40,736
                                              
                                              
                                              
                                              (9,139
                                              )
                                              
                                              
                                              31,597Proprietary
      content
                                              
                                              
                                              6.0
                                              
                                              
                                              
                                              7,800
                                              
                                              
                                              
                                              (1,625
                                              )
                                              
                                              
                                              6,175License
      agreements
                                              
                                              
                                              3.0
                                              
                                              
                                              
                                              4,400
                                              
                                              
                                              
                                              (1,833
                                              )
                                              
                                              
                                              2,567Bargain
      lease
                                              
                                              
                                              8.0
                                              
                                              
                                              
                                              1,300
                                              
                                              
                                              
                                              (203
                                              )
                                              
                                              
                                              1,097Customer
      backlog
                                              
                                              
                                              2.0
                                              
                                              
                                              
                                              66
                                              
                                              
                                              
                                              (25
                                              )
                                              
                                              
                                              41Non-compete
      agreement
                                              
                                              
                                              5.0
                                              
                                              
                                              
                                              266
                                              
                                              
                                              
                                              (47
                                              )
                                              
                                              
                                              219Total
      intangibles
                                              
                                              
                                              6.5
                                              
                                              
                                              $
                                              82,406
                                              
                                              
                                              $
                                              (29,138
                                              )
                                              
                                              $
                                              53,268
 
 December 31, 2007Weighted-Average Useful Lives
      (Years)
                                        
                                        
                                        Gross Carrying Amount
                                        
                                        
                                        Accumulated Amortization
                                        
                                        
                                        Net Carrying AmountAcquired
      technology
                                        
                                        
                                        5.0
                                        
                                        
                                        $
                                        3,130
                                        
                                        
                                        $
                                        (2,591
                                        )
                                        
                                        $
                                        539Trade
      name
                                        
                                        
                                        3.4
                                        
                                        
                                        
                                        1,774
                                        
                                        
                                        
                                        (226
                                        )
                                        
                                        
                                        1,548Core/Developed
      technology
                                        
                                        
                                        5.7
                                        
                                        
                                        
                                        23,463
                                        
                                        
                                        
                                        (8,200
                                        )
                                        
                                        
                                        15,263Customer
      relationships
                                        
                                        
                                        7.8
                                        
                                        
                                        
                                        40,042
                                        
                                        
                                        
                                        (3,755
                                        )
                                        
                                        
                                        36,287Proprietary
      content
                                        
                                        
                                        6.0
                                        
                                        
                                        
                                        7,800
                                        
                                        
                                        
                                        (325
                                        )
                                        
                                        
                                        7,475License
      agreements
                                        
                                        
                                        3.0
                                        
                                        
                                        
                                        4,400
                                        
                                        
                                        
                                        (366
                                        )
                                        
                                        
                                        4,034Bargain
      lease
                                        
                                        
                                        8.0
                                        
                                        
                                        
                                        1,300
                                        
                                        
                                        
                                        (41
                                        )
                                        
                                        
                                        1,259Total
      intangibles
                                        
                                        
                                        6.6
                                        
                                        
                                        $
                                        81,909
                                        
                                        
                                        $
                                        (15,504
                                        )
                                        
                                        $
                                        66,405


In the
years ended December 31, 2008, 2007 and 2006, the Company recorded amortization
expense for intangible assets of $13,542,000, $6,418,000 and $4,562,000,
respectively. Assuming no subsequent impairment of the underlying assets, the
annual amortization expense of total intangible assets is expected to be
approximately $11,860,000 in 2009, $10,101,000 in 2010, $8,057,000 in 2011,
$7,518,000 in 2012, $6,973,000 in 2013 and $8,759,000 thereafter.





12.
Financial Instruments





The
Company has not entered into any derivative contracts at December 31, 2008. It
maintains cash and cash equivalents in treasury-bill money market funds. The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:





79
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





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





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





13.
Restructuring Charges





In order
to realign its operations to drive performance and improve operating efficiency,
on December 3, 2008, the Company initiated a reorganization plan (“2008 Plan”)
to combine Symyx Tools and Symyx Research to create Symyx HPR.  The 2008
Plan included a worldwide reduction in force of approximately 90 employees and
the consolidation of certain facilities.





The
Company recorded total restructuring charges of $4,952,000 in the fourth quarter
of 2008 according to FASB Statement No. 146 (“FAS 146”), consisting of
$3,701,000 of severance and one-time benefits, $1,251,000 of exit costs of
facilities, write-off of related fixed assets and associated legal costs. These
charges have been aggregated and appear as “Restructuring Charges” in the
Company’s Consolidated Statements of Operations.





The
Company estimated the cost of exiting and terminating facility leases or
acquired leases by referring to the contractual terms of the agreements and by
evaluating the current real estate market conditions. In addition, the Company
has estimated sublease income by evaluating the current real estate market
conditions or, where applicable, by referring to amounts being negotiated. The
ability to generate this amount of sublease income, as well as the ability to
terminate lease obligations at estimated amounts, is highly dependent upon the
commercial real estate market conditions in certain geographies at the time the
evaluations and negotiations are performed.





The
amounts we have accrued represent the Company’s best estimate of the obligations
expect to be incur and could be subject to adjustment as market conditions
change.





On
October 2, 2007, in connection with the MDL Acquisition, the Company announced a
restructuring plan (2007 Plan) to terminate approximately 120 employees of the
Company, comprised of approximately 100 positions in the United States and
approximately 20 positions internationally. Total estimated restructuring
termination benefits were $7,040,000, consisting primarily of involuntary
employee termination benefits. Of the total restructuring charges, $6,823,000
was associated with the former MDL employees and therefore was accrued as part
of the liabilities assumed at the time of MDL acquisition according to FASB
Statement No. 141, Accounting
for Business Combinations, as well as EITF Consensus No. 95-3. The
remaining balance associated with the termination of employees of the acquiring
company was recorded as part of the operating expenses according to FASB
Statement No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. As of December 31,
2008, the Company completed the majority of the restructuring plan but estimates
that, up to $683,000 may yet be incurred in legal fees and other expenses
pertaining to the termination of certain former employees of MDL.





The
following table illustrates the change in accrued restructuring costs during the
year ended December 31, 2008 (in thousands):





2007
      Plan
                  
                  
                  2008
      Plan
                  
                  
                  TotalBalance
      as of January 1, 2008
                  
                  $
                  2,275
                  
                  
                  $
                  -
                  
                  
                  $
                  2,275New
      charges accrued during the period
                  
                  
                  723
                  
                  
                  
                  4,952
                  
                  
                  
                  5,675Payments
      made during the period
                  
                  
                  (1,663
                  )
                  
                  
                  (442
                  )
                  
                  
                  (2,105
                  )Non-cash
      liabilities settled during the period
                  
                  
                  -
                  
                  
                  
                  (583
                  )
                  
                  
                  (583
                  )Adjustments
      to liabilities during the period, including foreign currency exchange rate
      effect
                  
                  
                  (684
                  )
                  
                  
                  -
                  
                  
                  
                  (684
                  )Balance
      as of December 31, 2008
                  
                  $
                  651
                  
                  
                  $
                  3,927
                  
                  
                  $
                  4,578




80
 Table of Contents





SYMYX
TECHNOLOGIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





14.
Quarterly Results of Operations (Unaudited)





The
following is a summary of the quarterly results of operations for the years
ended December 31, 2008 and 2007 (in thousands, except per share
amounts).





Three
      Months Ended2008
                      
                      March
      31,
                      
                      
                      June
      30,
                      
                      
                      September
      30,
                      
                      
                      December
      31,Total
      revenue
                      
                      $
                      36,907
                      
                      
                      $
                      40,651
                      
                      
                      $
                      38,909
                      
                      
                      $
                      42,578Total
      Costs
                      
                      
                      10,237
                      
                      
                      
                      10,387
                      
                      
                      
                      10,397
                      
                      
                      
                      13,747Gross
      Profit
                      
                      
                      26,670
                      
                      
                      
                      30,264
                      
                      
                      
                      28,512
                      
                      
                      
                      28,831Operating
      expenses:Research
      and development
                      
                      
                      20,687
                      
                      
                      
                      19,729
                      
                      
                      
                      18,814
                      
                      
                      
                      16,135Sales,
      general and administrative
                      
                      
                      15,233
                      
                      
                      
                      14,288
                      
                      
                      
                      12,375
                      
                      
                      
                      12,693Restructuring
      charges (a)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,952Impairment
      to goodwill, intangibles, and other long-lived assets (b)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      90,330Amortization
      of intangible assets arising from business combinations
                      
                      
                      1,477
                      
                      
                      
                      1,479
                      
                      
                      
                      1,476
                      
                      
                      
                      1,471Total
      operating expenses
                      
                      
                      37,397
                      
                      
                      
                      35,496
                      
                      
                      
                      32,665
                      
                      
                      
                      125,581Loss
      from operations
                      
                      
                      (10,727
                      )
                      
                      
                      (5,232
                      )
                      
                      
                      (4,153
                      )
                      
                      
                      (96,750
                      )Gain
      from sale of equity interest in Ilypsa, Inc.
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,939
                      
                      
                      
                      -Interest
      and other income
                      
                      
                      (396
                      )
                      
                      
                      2,792
                      
                      
                      
                      (1,692
                      )
                      
                      
                      (569
                      )Loss
      before income tax provision and equity loss
                      
                      
                      (11,123
                      )
                      
                      
                      (2,440
                      )
                      
                      
                      (906
                      )
                      
                      
                      (97,319
                      )Income
      tax provision
                      
                      
                      4,331
                      
                      
                      
                      915
                      
                      
                      
                      161
                      
                      
                      
                      (234
                      )Net
      loss
                      
                      $
                      (6,792
                      )
                      
                      $
                      (1,525
                      )
                      
                      $
                      (745
                      )
                      
                      $
                      (97,553
                      )Basic
      net loss per share
                      
                      $
                      (0.20
                      )
                      
                      $
                      (0.05
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      (2.87
                      )Diluted
      net loss per share
                      
                      $
                      (0.20
                      )
                      
                      $
                      (0.05
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      (2.87
                      )






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





(a)See Note 13 of the Notes to
Consolidated Financial Statements for detail discussion.


(b) See
Note 1 of the Notes to Consolidated Financial Statements for detail
discussion.





81
 Table of Contents





ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE





None





ITEM 9A. CONTROLS AND PROCEDURES




EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation,
our Chief Executive Officer and our Chief Financial Officer have concluded that,
as of December 31, 2008, such disclosure controls and procedures were
effective,at a
reasonable assurance level, to ensure that the information required to be
disclosed by us in reports we file with the SEC is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
instructions for such reports.





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.




LIMITATIONS
ON THE EFFECTIVENESS OF CONTROLS





Our
disclosure controls and procedures are designed to provide reasonable, not
absolute, assurance that the objectives of our disclosure control system are
met. Because of inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Our Chief Executive Officer and Chief Financial
Officer have concluded, based on their evaluation as of the end of the period
covered by this report, that our disclosure controls and procedures were
sufficiently effective to provide reasonable assurance that the objectives of
our disclosure control system were met.




CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING





There
were no changes in our internal control over financial reporting that occurred
during the fourth fiscal quarter ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.





MANAGEMENT
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




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




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





82
 Table of Contents




Symyx’s
management assessed the effectiveness of Symyx’s internal control over financial
reporting as of December 31, 2008. In making this assessment, Symyx’s management
used criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework.




Based on
its assessment, Symyx’s management believes that, as of December 31, 2008,
Symyx’s internal control over financial reporting was effective based on the
criteria set forth by COSO.




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







Report
of Independent Registered Public Accounting Firm





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





We have
audited Symyx Technologies, Inc.’s internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Symyx Technologies, Inc.’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management Report
on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the company’s internal control over financial reporting based on
our audit.





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





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





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





In our
opinion, Symyx Technologies, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based onthe COSO
criteria.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2008 consolidated financial statements of
Symyx Technologies, Inc. and our report dated March 12, 2009 expressed an
unqualified opinion thereon.





/s/
      Ernst & Young LLP





San Jose,
California





March 12,
2009





83
 Table of Contents





ITEM 9A(T). CONTROLS AND PROCEDURES





Not
applicable.





ITEM 9B. OTHER INFORMATION





None.





84
 Table of Contents





PART
III




Certain
information required by Part III is omitted from this Annual Report on Form 10-K
because the registrant will file with the U.S. Securities and Exchange
Commission a definitive proxy statement pursuant to Regulation 14A in connection
with the solicitation of proxies for Symyx’s Annual Meeting of Stockholders
expected to be held in June 2009 (the “Proxy Statement”) not later than 120 days
after the end of the fiscal year covered by this Annual Report on Form 10-K, and
certain information included therein is incorporated herein by
reference.





ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





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





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





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





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





ITEM 11.  EXECUTIVE COMPENSATION





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





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





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





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





The
information required by this Item with respect to security ownership of certain
beneficial owners and management is incorporated herein by reference to the
information appearing in our 2009 Proxy Statement under the heading “Security
Ownership of Certain Beneficial Owners and Management.”




Securities
Authorized for Issuance under the Equity Compensation Plans





The
following table provides information as of December 31, 2008 with respect to
shares of our common stock issuable under our existing equity compensation
plans.





85
 Table of Contents




A
                  
                  
                  B
                  
                  
                  C
                  
                  
                  D
                  
                  
                  EPlan
      Category
                  
                  Number
      of Securities to Be Issued Upon Exercise of Outstanding
      Options
                  
                  
                  Weighted
      Average Exercise Price of Outstanding Options
                  
                  
                  Number
      of Securities to Be Issued Upon Vesting of Outstanding Restricted Stock
      Units
                  
                  
                  Weighted
      Average Grant Price of Outstanding Restricted Stock Units
                  
                  
                  Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans (Excluding Securities Reflected in Columns A and
      C)Equity
      Compensation Plans Approved by Stockholders (1)
                  
                  
                  4,769,282
                  (3)
                  
                  $
                  14.74
                  
                  
                  
                  740,020
                  
                  
                  $
                  5.88
                  
                  
                  
                  5,702,146
                  (4)Equity
      Compensation Plans Not Approved by Stockholders (2)
                  
                  
                  506,489
                  
                  
                  $
                  6.69
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  16,117Total
                  
                  
                  5,275,771
                  
                  
                  $
                  13.97
                  
                  
                  
                  740,020
                  
                  
                  $
                  5.88
                  
                  
                  
                  5,718,263





(1)
            Consists
      of the 2007 Stock Incentive Plan and the 1999 Employee Stock Purchase
      Plan.





(2)
            Consists
      of 2001 Nonstatutory Plan, IntelliChem, Inc. 2003 Stock Option Plan
      assumed in connection with the IntelliChem acquisition and the
      Synthematix, Inc. 2000 Equity Compensation Plan, as amended, assumed in
      connection with the Synthematix acquisition. A description of these plans
      is available in Note 4 of the Notes to Consolidated Financial
      Statements.





(3)
            Excludes
      purchase rights accruing under our 1999 Employee Stock Purchase Plan which
      has a stockholder approved reserve of 1,235,310 shares as of December 31,
      2008. Under the 1999 Employee Stock Purchase Plan, each eligible employee
      may purchase up to a maximum of 10,000 shares per annum of common stock at
      semi-annual intervals on the last United States business day of April and
      October each year at a purchase price per share equal to 85% of the lower
      of (i) the closing selling price per share of common stock on the
      employee’s entry date into the 12-month offering period in which that
      semi-annual purchase date occurs or (ii) the closing selling price
      per share on the semi-annual purchase date.  Eligible employees
      may defer up to 10% of their salary, but not to exceed $25,000, in any
      calendar year, to purchase shares under this
  Plan.





(4)
            Consists
      of shares available for future issuance under our 2007 Stock Incentive
      Plan and the 1999 Employee Stock Purchase Plan. As of December 31, 2008,
      an aggregate of 1,235,310 shares of common stock were available for
      issuance under the 1999 Employee Stock Purchase Plan and 4,466,836 shares
      of common stock were available for issuance under the 2007 Stock Incentive
      Plan. The 1999 Employee Stock Purchase Plan provides for annual increases
      in the number of shares available for issuance under the Plan on the first
      day of each fiscal year, equal to the lesser of 1% of the outstanding
      shares of common stock on the first day of the fiscal year, 350,000
      shares, or a lesser amount as determined by our Board of
      Directors.





ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE





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





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





ITEM 14.  PRINCIPAL ACCOUNTING FEES AND
SERVICES





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





86
 Table of Contents





PART
IV





ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)(
1).  FINANCIAL STATEMENTS





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





Report of
Independent Registered Public Accounting Firm


Consolidated
Balance Sheets at December 31, 2008 and 2007


Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007and
2006


Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2008,
2007and 2006


Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007and
2006


Notes to
Consolidated Financial Statements





(a)
(2).  FINANCIAL STATEMENT SCHEDULES





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





(a)
(3).  EXHIBITS





Refer to
(b) below.





(b)
EXHIBITS





Exhibit
                    Number
                  
                  Description
      of Document*2.1
                  (7)
                  Agreement
      and Plan of Merger, dated as of November 12, 2004, by and among Symyx
      Technologies, Inc., and  IntelliChem, Inc.#2.2
                  (20)
                  Sale
      Agreement by and among Elsevier Inc., Elsevier Swiss Holdings S.A.,
      Elsevier Japan KK, Elsevier Limited and MDL Information Systems (UK)
      Limited as sellers and Symyx Technologies, Inc. as
buyer3.1
                  (1)
                  Amended
      and Restated Certificate of Incorporation3.2
                  (18)
                  Amended
      and Restated Bylaws of Symyx Technologies, Inc.3.3
                  (8)
                  Certificate
      of Amendment to the Amended and Restated Bylaws of Symyx Technologies,
      Inc.4.1
                  (2)
                  Specimen
      Common Stock Certificate**10.1
                  (9)
                  Synthematix,
      Inc. Amended and Restated 2000 Equity Compensation Plan and forms of
      agreements thereunder**10.2
                  (2)
                  1996
      Stock Plan and forms of agreements thereunder**10.3
                  (11)
                  Amended
      and Restated 1997 Stock Plan and forms of agreements
      thereunder**10.4
                  (2)
                  1999
      Employee Stock Purchase Plan**10.8
                  (16)
                  Form
      of Restricted Stock Agreement under the Symyx Technologies, Inc. 1997
      Stock Plan10.10
                  (2)
                  Collaborative
      Research and License Agreement dated January 1, 1999 between Symyx and The
      Dow Chemical Company10.11
                  (2)
                  License
      Agreement dated June 22, 1995 between Symyx and Lawrence Berkeley
      Laboratory, on behalf of The Regents of the University of
      California10.13
                  (3)
                  Lease
      by and between East Arques Sunnyvale, LLC and Symyx Technologies, Inc. for
      the premises at 1263 E. Arques, Sunnyvale, California, and addenda and
      inserts thereto**10.14
                  (4)
                  2001
      Nonstatutory Stock Option Plan*10.16
                  (5)
                  Alliance,
      Technology Transfer, and License Agreement effective April 1, 2003 between
      Symyx Technologies, Inc., Symyx Discovery Tools, Inc. and ExxonMobil
      Research and Engineering Company*10.17
                  (8)
                  Alliance
      Agreement dated December 16, 2004 between Symyx Technologies, Inc., Symyx
      Discovery Tools, Inc. and The Dow Chemical
  Company




87
 Table of Contents




**10.18
                    (8)
                    2003
      IntelliChem, Inc. Stock Option Plan and forms of agreements
      thereunder10.19
                    (10)
                    Lease
      by and between Oakmead Ventures LLC and Symyx Technologies, Inc. for the
      premises at 415 Oakmead Parkway, Sunnyvale, California, and addenda and
      inserts thereto**10.20
                    (16)
                    Form
      of Restricted Stock Unit Agreement under the Symyx Technologies, Inc. 1997
      Stock Plan.10.21
                    (13)
                    First
      Amendment to Lease dated  January 19, 2007 by and between Symyx
      Technologies, Inc. and East Arques Sunnyvale,  LLC for the
      premises at 1263 East Arques Avenue, Sunnyvale, California and addenda and
      inserts thereto**10.23
                    (17)
                    Symyx
      Technologies, Inc. Executive Change in Control and Severance Benefit
      Plan**10.26
                    (21)
                    Form
      of Restricted Stock Unit Award under the Symyx Technologies, Inc. 2007
      Stock Incentive Plan**10.27
                    (21)
                    Form
      of Director and Executive Officer Indemnification
  Agreement10.28
                    (22)
                    Credit
      Agreement, dated as of September 28, 2007, by and among Symyx
      Technologies, Inc. as borrower, Bank of America, N.A. as administrative
      agent and L/C issuer, and the other lenders from time to time party
      thereto**10.29
                    (23)
                    Form
      of Stock Option Agreement under the Symyx Technologies, Inc. 2007 Stock
      Incentive Plan**10.30
                    (24)
                    Form
      of Stock Option Agreement under the Symyx Technologies, Inc. 2001
      Nonstatutory Stock Option Plan**10.31
                    (25)
                    2007
      Stock Incentive Plan, as amended*10.32
                    (26)
                    Supplemental
      Agreement, by and between Symyx Technologies, Inc. and The Dow Chemical
      Company**10.34
                    (27)
                    Fiscal
      Year 2008/2009 Base Salaries and Target Bonus Payouts for Executive
      Officers**10.35
                    (12)
                    Symyx
      Technologies, Inc.’s Offer Letter to Rex S. Jackson Dated January 30,
      2007**10.36
                    (12)
                    Symyx
      Technologies, Inc.’s Offer Letter to Timothy E. Campbell Dated February 6,
      2007**10.37
                    (12)
                    Symyx
      Technologies, Inc.’s Offer Letter to Richard Boehner Dated March 13,
      2007**10.38
                    (14)
                    Consulting
      and Independent Contractor Services Agreement between Symyx Technologies,
      Inc. and David Hill**10.39
                    (14)
                    Symyx
      Technologies, Inc. Executive Change in Control and Severance Benefit Plan
      Confirmation by Dr. W. Henry Weinberg**10.40
                    (14)
                    Symyx
      Technologies, Inc.’s Offer Letter to Dr. W. Henry Weinberg Dated March 6,
      1996**10.41
                    (14)
                    Symyx
      Technologies, Inc.’s Offer Letter to Mr. Steven D. Goldby Dated April 28,
      1998**10.42
                    (19)
                    First
      Amendment to the Consulting and Independent Contractor and Service
      Agreement and Work Orders between Symyx Technologies, Inc. and David C.
      Hill*10.43
                    (28)
                    Research
      and License Agreement effective January 1, 2008 among Symyx Technologies,
      Inc.,  Symyx Tools, Inc. and Symyx Software, Inc. and ExxonMobil
      Research and Engineering Company and ExxonMobil Chemical
      Company10.44
                    (28)
                    Amendment
      to Credit Agreement, dated as of March 12, 2009, among Symyx Technologies,
      Inc., each lender from time to time party thereto, and Bank of America,
      N.A. as administrative agent and L/C issuer14
                    (6)
                    Symyx
      Technologies, Inc. Code of Conduct and Ethics21
                    (28)
                    List
      of Subsidiaries23.1
                    (28)
                    Consent
      of Independent Registered Public Accounting Firm24.1
                    
                    Power
      of Attorney (reference is made to the signature page of this
      report)31.1
                    (28)
                    Certification
      of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as amended, as
      adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of
      2002.31.2
                    (28)
                    Certification
      of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as amended, as
      adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of
      2002.32.1
                    (28)
                    Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
                    (28)
                    Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.




88
 Table of Contents




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


**    Management
contracts or compensatory plans or arrangements.


#      All
schedules and similar attachments to the sales agreement have been omitted.
Copies of such schedules and similar attachments will be furnished
supplementally to the SEC upon request.


___________________





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


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


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


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


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


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


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


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


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


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


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


(12)
Incorporated by reference to the same number exhibit filed with Registrant’s
Quarterly Report on Form 10-Q for the period ended March 31, 2008.


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


(14)
Incorporated by reference to the same number exhibit filed with Registrant’s
Quarterly Report on Form 10-Q for the period ended June 30, 2008.


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


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


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


(18)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K filed on December 1, 2008 (SEC File No.
000-27765).


(19)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K on November 7, 2008.


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


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


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


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


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


(25)
Incorporated by reference to Exhibit 99.1 filed with Registrant’s Registration
Statement on Form S-8 filed on August 8, 2008 (SEC File No.
333-152893).


(26)
Incorporated by reference to the same number exhibit filed with Registrant’s
Annual Report on Form 10-K for the period ended December 31, 2007.


(27)
Incorporated by reference to Item 5.02 of the Registrant’s Current Report on
Form 8-K filed on February 24, 2009.


(28)
Filed here within.





89
 Table of Contents





SIGNATURES








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














SYMYX
      TECHNOLOGIES, INC.(Registrant)Date:  March
      13, 2009
                      /s/
      Isy GoldwasserIsy
      GoldwasserChief
      Executive Officer(Principal
      Executive Officer)Date:  March
      13, 2009
                      /s/
      Rex S. JacksonRex
      S. JacksonExecutive
      Vice President,Chief
      Financial Officer(Principal
      Financial
Officer)





90
 Table of Contents




POWER
OF ATTORNEY







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





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





Signature
                                  
                                  Title
                                  
                                  DateBy
                                  /s/ ISY GOLDWASSER
                                  
                                  Chief
      Executive Officer and Director
                                  
                                  March
      13, 2009Isy
      Goldwasser
                                  
                                  (Principal
      Executive Officer)By
                                  /s/ REX S. JACKSON
                                  
                                  Executive
      Vice President
                                  
                                  March
      13, 2009Rex
      S. Jackson
                                  
                                  and
      Chief Financial Officer(Principal
      Financial Officer)By
                                  /s/ RICHARD J. ROSENTHAL
                                  
                                  Senior
      Vice President of Finance
                                  
                                  March
      13, 2009Richard
      J. Rosenthal
                                  
                                  (Principal
      Accounting Officer)By
                                  /s/ STEVEN D. GOLDBY
                                  
                                  Chairman
      of the Board
                                  
                                  March
      13, 2009Steven
      D. GoldbyBy
                                  /s/ TIMOTHY HARKNESS
                                  
                                  Director
                                  
                                  March
      13, 2009Timothy
      HarknessBy
                                  /s/ DAVID C. HILL
                                  
                                  Director
                                  
                                  March
      13, 2009David
      C. HillBy
                                  /s/ CHRIS VAN INGEN
                                  
                                  Director
                                  
                                  March
      13, 2009Chris
      van Ingen




91
 Table of Contents





EXHIBIT
INDEX





Exhibit
                  Number
                
                Description
      of Document*2.1
                (7)
                Agreement
      and Plan of Merger, dated as of November 12, 2004, by and among Symyx
      Technologies, Inc., and  IntelliChem, Inc.#2.2
                (20)
                Sale
      Agreement by and among Elsevier Inc., Elsevier Swiss Holdings S.A.,
      Elsevier Japan KK, Elsevier Limited and MDL Information Systems (UK)
      Limited as sellers and Symyx Technologies, Inc. as
buyer3.1
                (1)
                Amended
      and Restated Certificate of Incorporation3.2
                (18)
                Amended
      and Restated Bylaws of Symyx Technologies, Inc.3.3
                (8)
                Certificate
      of Amendment to the Amended and Restated Bylaws of Symyx Technologies,
      Inc.4.1
                (2)
                Specimen
      Common Stock Certificate**10.1
                (9)
                Synthematix,
      Inc. Amended and Restated 2000 Equity Compensation Plan and forms of
      agreements thereunder**10.2
                (2)
                1996
      Stock Plan and forms of agreements thereunder**10.3
                (11)
                Amended
      and Restated 1997 Stock Plan and forms of agreements
      thereunder**10.4
                (2)
                1999
      Employee Stock Purchase Plan**10.8
                (16)
                Form
      of Restricted Stock Agreement under the Symyx Technologies, Inc. 1997
      Stock Plan10.10
                (2)
                Collaborative
      Research and License Agreement dated January 1, 1999 between Symyx and The
      Dow Chemical Company10.11
                (2)
                License
      Agreement dated June 22, 1995 between Symyx and Lawrence Berkeley
      Laboratory, on behalf of The Regents of the University of
      California10.13
                (3)
                Lease
      by and between East Arques Sunnyvale, LLC and Symyx Technologies, Inc. for
      the premises at 1263 E. Arques, Sunnyvale, California, and addenda and
      inserts thereto**10.14
                (4)
                2001
      Nonstatutory Stock Option Plan*10.16
                (5)
                Alliance,
      Technology Transfer, and License Agreement effective April 1, 2003 between
      Symyx Technologies, Inc., Symyx Discovery Tools, Inc. and ExxonMobil
      Research and Engineering Company*10.17
                (8)
                Alliance
      Agreement dated December 16, 2004 between Symyx Technologies, Inc., Symyx
      Discovery Tools, Inc. and The Dow Chemical Company**10.18
                (8)
                2003
      IntelliChem, Inc. Stock Option Plan and forms of agreements
      thereunder10.19
                (10)
                Lease
      by and between Oakmead Ventures LLC and Symyx Technologies, Inc. for the
      premises at 415 Oakmead Parkway, Sunnyvale, California, and addenda and
      inserts thereto**10.20
                (16)
                Form
      of Restricted Stock Unit Agreement under the Symyx Technologies, Inc. 1997
      Stock Plan.10.21
                (13)
                First
      Amendment to Lease dated  January 19, 2007 by and between Symyx
      Technologies, Inc. and East Arques Sunnyvale,  LLC for the
      premises at 1263 East Arques Avenue, Sunnyvale, California and addenda and
      inserts thereto**10.23
                (17)
                Symyx
      Technologies, Inc. Executive Change in Control and Severance Benefit
      Plan**10.26
                (21)
                Form
      of Restricted Stock Unit Award under the Symyx Technologies, Inc. 2007
      Stock Incentive Plan**10.27
                (21)
                Form
      of Director and Executive Officer Indemnification
  Agreement10.28
                (22)
                Credit
      Agreement, dated as of September 28, 2007, by and among Symyx
      Technologies, Inc. as borrower, Bank of America, N.A. as administrative
      agent and L/C issuer, and the other lenders from time to time party
      thereto**10.29
                (23)
                Form
      of Stock Option Agreement under the Symyx Technologies, Inc. 2007 Stock
      Incentive Plan**10.30
                (24)
                Form
      of Stock Option Agreement under the Symyx Technologies, Inc. 2001
      Nonstatutory Stock Option Plan**10.31
                (25)
                2007
      Stock Incentive Plan, as amended*10.32
                (26)
                Supplemental
      Agreement, by and between Symyx Technologies, Inc. and The Dow Chemical
      Company**10.34
                (27)
                Fiscal
      Year 2008/2009 Base Salaries and Target Bonus Payouts for Executive
      Officers**10.35
                (12)
                Symyx
      Technologies, Inc.’s Offer Letter to Rex S. Jackson Dated January 30,
      2007**10.36
                (12)
                Symyx
      Technologies, Inc.’s Offer Letter to Timothy E. Campbell Dated February 6,
      2007




Table of Contents




**10.37
                    (12)
                    Symyx
      Technologies, Inc.’s Offer Letter to Richard Boehner Dated March 13,
      2007**10.38
                    (14)
                    Consulting
      and Independent Contractor Services Agreement between Symyx Technologies,
      Inc. and David Hill**10.39
                    (14)
                    Symyx
      Technologies, Inc. Executive Change in Control and Severance Benefit Plan
      Confirmation by Dr. W. Henry Weinberg**10.40
                    (14)
                    Symyx
      Technologies, Inc.’s Offer Letter to Dr. W. Henry Weinberg Dated March 6,
      1996**10.41
                    (14)
                    Symyx
      Technologies, Inc.’s Offer Letter to Mr. Steven D. Goldby Dated April 28,
      1998**10.42
                    (19)
                    First
      Amendment to the Consulting and Independent Contractor and Service
      Agreement and Work Orders between Symyx Technologies, Inc. and David C.
      Hill*10.43
                    (28)
                    Research
      and License Agreement effective January 1, 2008 among Symyx Technologies,
      Inc.,  Symyx Tools, Inc. and Symyx Software, Inc. and ExxonMobil
      Research and Engineering Company and ExxonMobil Chemical
      Company10.44
                    (28)
                    Amendment
      to Credit Agreement, dated as of March 12, 2009, among Symyx Technologies,
      Inc., each lender from time to time party thereto, and Bank of America,
      N.A. as administrative agent and L/C issuer14
                    (6)
                    Symyx
      Technologies, Inc. Code of Conduct and Ethics21
                    (28)
                    List
      of Subsidiaries23.1
                    (28)
                    Consent
      of Independent Registered Public Accounting Firm24.1
                    
                    Power
      of Attorney (reference is made to the signature page of this
      report)31.1
                    (28)
                    Certification
      of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as amended, as
      adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of
      2002.31.2
                    (28)
                    Certification
      of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as amended, as
      adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of
      2002.32.1
                    (28)
                    Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
                    (28)
                    Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.





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


**     Management
contracts or compensatory plans or arrangements.


#      
All schedules and similar attachments to the sales agreement have been omitted.
Copies of such schedules and similar attachments will be furnished
supplementally to the SEC upon request.


___________________





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


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


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


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


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


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


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





Table of Contents




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


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


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


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


(12)
Incorporated by reference to the same number exhibit filed with Registrant’s
Quarterly Report on Form 10-Q for the period ended March 31, 2008.


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


(14)
Incorporated by reference to the same number exhibit filed with Registrant’s
Quarterly Report on Form 10-Q for the period ended June 30, 2008.


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


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


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


(18)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K filed on December 1, 2008 (SEC File No.
000-27765).


(19)
Incorporated by reference to the same number exhibit filed with Registrant’s
Current Report on Form 8-K on November 7, 2008.


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


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


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


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


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


(25)
Incorporated by reference to Exhibit 99.1 filed with Registrant’s Registration
Statement on Form S-8 filed on August 8, 2008 (SEC File No.
333-152893).


(26)
Incorporated by reference to the same number exhibit filed with Registrant’s
Annual Report on Form 10-K for the period ended December 31, 2007.


(27)
Incorporated by reference to Item 5.02 of the Registrant’s Current Report on
Form 8-K filed on February 24, 2009.


(28)
Filed here within.