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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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

                                    FORM 10-Q

 |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
     THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 2005

                                       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: 0-27188




                                 ACCELRYS, INC.
             (Exact Name of Registrant as Specified in Its Charter)


                 Delaware                             33-0557266
      (State or Other Jurisdiction of     (I.R.S. Employer Identification No.)
      Incorporation or Organization)

      10188 Telesis Court, Suite 100                         92121-4779
 (Address of Principal Executive Offices)                    (Zip Code)

                                 (858) 799-5000
               Registrant's Telephone Number, Including Area Code

                                                     Name of Each
            Title of Each Class              Exchange on Which Registered
 -----------------------------------------  -----------------------------------
 Common stock, par value $0.0001 per share      Nasdaq National Market

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

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.
Yes |X| No |_|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_| Indicate the number of
shares outstanding of each of the registrant's classes of common stock, as of
the latest practicable date.


                   Class                     Outstanding at September 30, 2005
------------------------------------------- ----------------------------------
 Common stock, par value $0.0001 per share              26,139,006
                                                 (Net of treasury shares)

-------------------------------------------------------------------------------
===============================================================================
<PAGE>

                                 ACCELRYS, INC.
                                    Form 10-Q
                    For The Quarter Ended September 30, 2005
<TABLE>
<CAPTION>

                                Table of Contents

<S>                                                                                                    <C>
PART I - FINANCIAL INFORMATION                                                                         2

Item 1. Consolidated Financial Statements                                                              2
         Consolidated Balance Sheets                                                                   2
         Consolidated Statements of Operations                                                         3
         Consolidated Statements of Cash Flows                                                         4
         Notes to Consolidated Financial Statements                                                    5

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS       11

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                  27

ITEM 4.   CONTROLS AND PROCEDURES                                                                     27

PART II - OTHER INFORMATION                                                                           27
         ITEM 1.     Legal Proceedings                                                                27
         ITEM 2.     Unregistered Sales of Equity Securities and Use of Proceeds                      27
         ITEM 3.     Defaults upon Senior Securities                                                  27
         ITEM 4.     Submission of Matters to a Vote of Security Holders                              27
         ITEM 5.     Other Information                                                                28
         ITEM 6.     Exhibits                                                                         28

SIGNATURE                                                                                             29
</TABLE>


<PAGE>




                         PART I -- FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements


<TABLE>
<CAPTION>
                                 Accelrys, Inc.
                           Consolidated Balance Sheets
                                 (in thousands)
                                                          September 30, 2005    March 31, 2005
                                                          --------------------  ---------------
ASSETS                                                        (unaudited)
Current assets:
<S>                                                                  <C>              <C>
    Cash and cash equivalents                                        $ 18,371        $  24,010
    Marketable securities                                              27,840           32,662
    Trade receivables, net of allowance for doubtful accounts
        of $390 and $315, respectively                                 12,053           20,006
    Prepaid expenses and other current assets                           3,320            5,835
                                                          --------------------  ---------------
        Total current assets                                           61,584           82,513

Restricted cash                                                         6,633            6,632
Property and equipment, net                                             9,012            9,043
Goodwill                                                               42,612           42,609
Other intangible assets, net of accumulated amortization
    of $2,033 and $1,131, respectively                                  9,467           10,369
Software development costs, net of accumulated amortization
    of $5,539 and $8,041, respectively                                  8,234            8,553
Other assets                                                              808              835
                                                          --------------------  ---------------
        Total assets                                                 $138,350        $ 160,554
                                                          ====================  ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                 $  1,296        $   1,821
    Accrued liabilities                                                 4,443            5,570
    Accrued compensation and benefits                                   6,241            8,874
    Accrued severance and lease abandonment, current portion            1,490            2,809
    Deferred revenue, current portion                                  25,883           35,005
                                                          --------------------  ---------------
        Total current liabilities                                      39,353           54,079

Deferred revenue, long-term                                             5,629            7,591
Accrued severance and lease abandonment, long-term                      1,347            1,784
Lease concessions and guarantee, long-term                              3,823            3,347

Stockholders' equity:
    Preferred stock, $0.0001 par value, 2,000 shares authorized,
        none issued and outstanding                                         -                -
    Common stock, $0.0001 par value, 40,000 shares authorized,
        26,783 and 26,643 shares issued and outstanding, respectively       2                2
    Additional paid-in capital                                        253,913          253,328
    Unearned compensation                                                (965)          (1,469)
    Lease guarantee                                                      (667)            (698)
    Treasury stock, 644 shares                                         (8,340)          (8,340)
    Accumulated deficit                                              (155,317)        (149,260)
    Accumulated comprehensive income (loss)                              (428)             190
                                                          --------------------  ---------------
        Total stockholders' equity                                     88,198           93,753
                                                          --------------------  ---------------
        Total liabilities and stockholders' equity                   $ 138,350       $ 160,554
                                                          ====================  ===============
</TABLE>


       See accompanying notes to these consolidated financial statements.


                                       2
<PAGE>

<TABLE>
<CAPTION>

                                 Accelrys, Inc.
                      Consolidated Statements of Operations
                      (in thousands, except per share data)


                                                                             Three Months Ended
                                                             ------------------------------------------------------
                                                               September 30, 2005            September 30, 2004
                                                             ------------------------  ----------------------------
                                                                  (unaudited)                    (unaudited)
<S>                                                                         <C>                           <C>
 Revenue                                                                    $ 18,592                       $14,277

 Cost of revenue                                                               5,400                         3,137
 Product development                                                           4,687                         4,382
 Sales and marketing                                                           7,388                         7,471
 General and administrative                                                    3,619                         3,680
 Write-off of in-process product development                                       -                           700
                                                             ------------------------  ----------------------------
       Total operating costs and expenses                                     21,094                        19,370
                                                             ------------------------  ----------------------------
 Operating loss from continuing operations                                    (2,502)                       (5,093)
 Interest and other income, net                                                  402                           489
                                                             ------------------------  ----------------------------
 Loss from continuing operations before taxes                                 (2,100)                       (4,604)
 Provision for income taxes                                                      241                           479
                                                             ------------------------  ----------------------------
 Loss from continuing operations                                              (2,341)                       (5,083)
 Loss from discontinued operations                                                 -                             -
                                                             ------------------------  ----------------------------
 Net loss                                                                    $(2,341)                      $ (5,083)
                                                             ========================  ============================
Per share amounts (basic and diluted):
 Loss from continuing operations                                             $ (0.09)                      $ (0.21)
 Loss from discontinued operations                                                 -                             -
                                                             ------------------------  ----------------------------
 Net loss                                                                    $ (0.09)                      $ (0.21)
                                                             ========================  ============================
 Weighted average shares of common stock outstanding
                        basic and diluted:                                    26,105                        24,463


                                                                                   Six Months Ended
                                                             -----------------------------------------------------------
                                                                   September 30, 2005             September 30, 2004
                                                             ----------------------------  -----------------------------
                                                                       (unaudited)                   (unaudited)
 Revenue                                                                        $ 37,146                       $ 28,458

 Cost of revenue                                                                  10,431                          6,923
 Product development                                                               9,617                          8,505
 Sales and marketing                                                              15,885                         15,240
 General and administrative                                                        7,688                          7,689
 Write-off of in-process product development                                           -                            700
                                                             ----------------------------  -----------------------------
       Total operating costs and expenses                                         43,621                         39,057
                                                             ----------------------------  -----------------------------
 Operating loss from continuing operations                                        (6,475)                       (10,599)
 Interest and other income, net                                                    1,100                          1,074
                                                             ----------------------------  -----------------------------
 Loss from continuing operations before taxes                                     (5,375)                        (9,525)
 Provision for income taxes                                                          682                            614
                                                             ----------------------------  -----------------------------
 Loss from continuing operations                                                  (6,057)                       (10,139)
 Loss from discontinued operations                                                     -                         (1,117)
                                                             ----------------------------  -----------------------------
 Net loss                                                                       $ (6,057)                      $(11,256)
                                                             ============================  =============================
Per share amounts (basic and diluted):
 Loss from continuing operations                                                $  (0.23)                      $  (0.42)
 Loss from discontinued operations                                                     -                          (0.05)
                                                             ----------------------------  -----------------------------
 Net loss                                                                       $  (0.23)                      $  (0.46)
                                                             ============================  =============================
 Weighted average shares of common stock outstanding
                        basic and diluted:                                        26,063                         24,393


</TABLE>


       See accompanying notes to these consolidated financial statements.

                                       3

<PAGE>


<TABLE>
<CAPTION>


                                 Accelrys, Inc.
                      Consolidated Statements of Cash Flows
                                 (in thousands)


                                                                                     Six Months Ended
                                                                  -------------------------------------------------------
                                                                     September 30, 2005           September 30, 2004
                                                                  --------------------------   --------------------------
                                                                         (unaudited)                  (unaudited)
OPERATING ACTIVITIES:
<S>                                                                                <C>                         <C>
    Net loss                                                                       $ (6,057)                   $ (11,256)
    Adjustments to reconcile net loss to net cash
      used in operating activities
    Depreciation                                                                      1,953                        2,221
    Amortization of capitalized software                                              1,906                        1,683
    Amortization of purchased intangibles                                               902                            -
    Amortization of unearned compensation                                               434                          179
    Write-off of in-process product development                                           -                          700
    Contribution of stock to 401(k) members                                             134                          292
    Non-cash rent expense                                                               695
    Changes in assets and liabilities:
             Trade receivables                                                        7,566                         (139)
             Prepaid expenses and other current assets                                2,028                       (1,730)
             Other assets                                                              (157)                         (14)
             Accounts payable                                                          (469)                      (4,468)
             Accrued liabilities                                                     (5,018)                        (950)
             Deferred revenue                                                       (10,243)                        (214)
             Discontinued operations                                                      -                          160
                                                                  --------------------------   --------------------------
                  Net cash used in operating activities                              (6,326)                     (13,536)
INVESTING ACTIVITIES:
    Capital expenditures, net                                                        (2,194)                      (1,818)
    Increase in capitalized software development costs                               (1,693)                      (1,716)
    Acquisition of business, net of cash acquired                                         -                      (10,471)
    Purchases of marketable securities                                               (5,418)                     (40,226)
    Proceeds from sales of marketable securities                                     10,279                       53,342
    Discontinued operations                                                               -                         (436)
                                                                  --------------------------   --------------------------
                 Net cash provided by (used in) investing activities                    974                       (1,325)
FINANCING ACTIVITIES:
     Proceeds from issuance of common stock                                             521                        1,326
     Cash remitted to PDD in spinoff                                                      -                       (5,961)
                                                                  --------------------------   --------------------------
                Net cash provided by financing activities                               521                        1,326
Exchange rate effect on cash and equivalents                                           (808)                        (273)
                                                                  --------------------------   --------------------------
Net decrease in cash and equivalents                                                 (5,639)                     (19,769)
Cash and cash equivalents, beginning of period                                       24,010                       39,704
                                                                  --------------------------   --------------------------
Cash and cash equivalents, end of period                                           $ 18,371                    $  19,935
                                                                  ==========================   ==========================


SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
     Interest expense                                                              $      1                    $       3
     Income tax expense                                                            $    435                    $     232

</TABLE>




       See accompanying notes to these consolidated financial statements.


                                       4
<PAGE>




                                 Accelrys, Inc.
                   Notes to Consolidated Financial Statements

1.    Basis of Presentation

     In the opinion of management, the accompanying consolidated balance sheets
and related statements of operations and cash flows for Accelrys, Inc. (Accelrys
or the Company) include all adjustments, consisting only of normal recurring
items, necessary for their fair presentation in conformity with accounting
principles generally accepted in the United States (U.S. GAAP). Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses.
Examples include estimates of loss contingencies, product life cycles and stock
option forfeiture rates; and assumptions such as the elements comprising a
software arrangement, including the distinction between upgrades/enhancements
and new products; when technological feasibility is achieved for our products;
the potential tax consequences of events that have been recognized in our
financial statements or tax returns; and determining when investment impairments
are other-than-temporary. Actual results and outcomes may differ from
management's estimates and assumptions.

     Interim results are not necessarily indicative of results for a full year.
The information included in this quarterly report on Form 10-Q should be read in
conjunction with Management's Discussion and Analysis and financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 2005.

     Certain prior period amounts have been reclassified to conform to the
current period presentation.

2.    Income Taxes

     The Company accounts for income taxes using the liability method. Under the
liability method, deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial carrying amounts and the tax
basis of existing assets and liabilities. The provision for income taxes is
based on the Company's estimates of its aggregate taxable income taking into
account the various legal entities through which, and jurisdictions in which,
the Company operates. As such, income tax expense may vary from the customary
relationship between income tax expense and pre-tax accounting income (loss).

3.    Net Income (Loss) Per Share

     The Company computes net income (loss) per share pursuant to Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" (SFAS 128).
Under the provisions of SFAS 128, basic net income (loss) per share is computed
by dividing the net income (loss) available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed by dividing the net
income (loss) for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares,
composed of unvested restricted common shares and common shares issuable upon
the exercise of incrementally vesting stock options, are included in the
calculation of diluted net income (loss) per share to the extent these shares
are dilutive.


                                       5
<PAGE>

     The following table sets forth the computation of basic and diluted net
loss per share as follows (in thousands, except per share amounts):


<TABLE>
<CAPTION>
                                                          Three Months Ended
                                           ------------------------------------------------
                                           September 30, 2005         September 30, 2004
                                           ---------------------     ----------------------
                                               (Unaudited)                (Unaudited)
<S>                                                    <C>                        <C>
Net loss                                               $ (2,341)                  $ (5,083)
                                           =====================     ======================

Weighted average shares outstanding and
denominator for basic earning per share                  26,105                      24,463

Effect of dilutive securitites:
Employee stock options                                        -                          -
                                           ---------------------     ----------------------

Denominator for diluted earnings per share               26,105                     24,463
                                           =====================     ======================

Net loss per share, basic and diluted                   $ (0.09)                   $ (0.21)


                                                             Six Months Ended
                                             -------------------------------------------------
                                             September 30, 2005       September 30, 2004
                                             ---------------------    ----------------------
                                                (Unaudited)              (Unaudited)

Net loss                                                 $ (6,057)                $ (11,256)
                                             =====================    ======================

Weighted average shares outstanding and
denominator for basic earning per share                     26,063                    24,393

Effect of dilutive securitites:
Employee stock options                                          -                         -
                                             ---------------------    ----------------------

Denominator for diluted earnings per share                 26,063                    24,393
                                             =====================    ======================

Net loss per share, basic and diluted                    $  (0.23)                $   (0.46)

</TABLE>



     Dilutive common stock equivalents would normally include the dilutive
effects of common stock options and restricted stock that have not fully vested.
Potentially dilutive common stock equivalents totaled approximately 1.0 million
and 3.2 million for the three months ended September 30, 2005 and September 30,
2004, and approximately 2.8 million and 2.3 million for the six months ended
September 30, 2005 and September 30, 2004, respectively. All potentially
dilutive common stock equivalents were excluded from the diluted earnings per
share calculations for the three months ended September 30, 2005 and September
30, 2004, and the six months ended September 30, 2005 and September 30, 2004,
respectively because of their anti-dilutive effect.

4.    Comprehensive Income (Loss)

     The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting
comprehensive income (loss) and its components in financial statements.
Comprehensive income (loss) includes all changes in equity (net assets) during a
period from non-owner sources. According to SFAS 130, income (loss) and other
comprehensive income (loss), including foreign currency translation adjustments
and unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income (loss). The Company's net
income (loss) and total comprehensive income (loss) will be included in the
statement of stockholders' equity in the Company's annual report on Form 10-K.
Comprehensive income (loss) was $(2.6) million and $(4.6) million in the three
months ended September 30, 2005 and September 30, 2004, and $(6.7) million and
$(12.3) million in the six months ended September 30, 2005 and September 30,
2004, respectively. The primary decrease in comprehensive loss was due to a
decrease in net loss between periods.

5.    Stock-Based Compensation

     As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123), the Company elected to follow Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and its
related interpretations in accounting for its employee stock option plans. Under
APB 25, no compensation expense is recognized at the time of a stock option
grant if the exercise price of the option equals the fair market value of the
underlying stock on the date of grant.

     SFAS 123 requires pro forma information regarding net income (loss) and
earnings per share as if the Company had accounted for stock options granted
subsequent to December 31, 1994 and shares of common stock purchased by
employees in connection with the Company's Employee Stock Purchase Plan ("equity
awards") under the fair value method. The fair value of these equity awards was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for the periods below:


                                       6

<PAGE>



                                        Six Months Ended
                              -------------------------------------
                              September 30, 2005  September 30, 2004
                              ------------------- -----------------

Expected volatility                          68%               70%
Risk-free interest rate                     4.1%              3.8%
Expected option life (years)                4.0               3.4
Expected dividend yield                       -                 -





     For purposes of pro forma disclosures, the estimated fair value of the
equity awards would be amortized over the equity awards' vesting periods. The
Company's pro forma net loss and net loss per share information would be as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>

                                                              Three Months Ended                       Six Months Ended
                                                  ----------------------------------------    -------------------------------------
                                                  September 30, 2005     September 30, 2004   September 30, 2005  September 30, 2004
                                                  -----------------      -----------------    -----------------   -----------------
                                                    (Unaudited)            (Unaudited)          (Unaudited)         (Unaudited)
Net Loss:
<S>                                                       <C>                    <C>                  <C>                <C>
       As reported                                        $ (2,341)              $ (5,083)            $ (6,057)          $ (11,256)
       Plus:  Reported stock-based compensation                217                     36                  434                 179
       Less:  Fair value stock-based compensation           (1,230)                (1,788)              (2,935)             (4,140)
                                                  -----------------      -----------------    -----------------   -----------------
       Pro forma                                          $ (3,354)              $ (6,835)            $ (8,558)          $ (15,217)
                                                  =================      =================    =================   =================

Basic and diluted net loss per common share:
      As reported                                         $  (0.09)              $  (0.21)            $  (0.23)          $   (0.46)
      Pro forma                                              (0.13)                 (0.28)               (0.33)              (0.62)
</TABLE>




6.    Effect of New Accounting Standards

     In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS 123 (revised 2004), "Share-Based Payment". SFAS 123R requires all companies
to measure compensation costs for all share-based payments (including stock
options) at fair value. The Company is required to comply with SFAS 123R as of
the beginning of the first interim or annual reporting period of the Company's
first fiscal year beginning on or after June 15, 2005. Accordingly, we will be
required to apply SFAS 123R for our fiscal year beginning April 1, 2006. The
adoption of SFAS 123R will have a significant adverse impact on our reported
results of operations because our stock-based compensation expense will be
charged directly against our reported earnings.

7.    Segment Information

     The Company sells software and services worldwide through a direct sales
force, augmented by selective use of third-party distributors. In accordance
with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company's operations are aggregated into one reportable
segment given the similarities of economic characteristics between the
operations and the common nature of the products, services and customers.



                                       7
<PAGE>


     Summarized financial information concerning geographic revenues follows (in
thousands) where EMEA is defined as Europe, Middle East and Africa:

<TABLE>
<CAPTION>

                                        Three Months Ended
                    --------------------------------------------------------------------
                      September 30, 2005        %        September 30, 2004       %
                    ---------------------------------- ---------------------------------
                          (unaudited)                        (unaudited)
Revenues
<S>                                <C>            <C>                  <C>          <C>
  U.S.                             $ 10,946       59%                 $  7,017      49%
  EMEA                                4,166       22%                    3,934      28%
  Asia-Pacific                        3,480       19%                    3,326      23%
                    ------------------------           ------------------------
Total                              $ 18,592                           $ 14,277
                    ========================           ========================

</TABLE>

<TABLE>
<CAPTION>

                                            Six Months Ended
                     ---------------------------------------------------------------------
                       September 30, 2005        %        September 30, 2004        %
                     ---------------------------------- ----------------------------------
                           (unaudited)                        (unaudited)
Revenues
<S>                                 <C>            <C>                 <C>            <C>
  U.S.                              $ 21,236       57%                 $ 13,254       47%
  EMEA                                 8,424       23%                    7,585       27%
  Asia-Pacific                         7,486       20%                    7,619       26%
                     ------------------------           ------------------------
Total                               $ 37,146                           $ 28,458
                     ========================           ========================
</TABLE>


 The following table sets forth net assets by geographic region (in thousands):
<TABLE>
<CAPTION>

                    ---------------------------------- ---------------------------------
                      September 30, 2005        %          March 31, 2005         %
                    ---------------------------------- ---------------------------------
                          (unaudited)
Net assets
<S>                                 <C>           <C>                  <C>          <C>
  U.S.                              108,449       78%                  126,882      79%
  EMEA                               23,591       17%                   26,889      17%
  Asia-Pacific                        6,310        5%                    6,783       4%
                    ------------------------           ------------------------
Total                             $ 138,350                          $ 160,554
                    ========================           ========================
</TABLE>


8.    Contingencies

Guarantee of Lease Obligation of Others

     On April 30, 2004, in connection with our spin-off of Pharmacopeia Drug
Discovery (PDD), the landlords of the New Jersey facilities consented to the
assignment of the underlying leases to PDD. Despite the assignment, the
landlords required Accelrys to guarantee the remaining lease obligations, which
amount to approximately $25.8 million in future payments through April 2016. The
probability-weighted fair market value of this guarantee was calculated in
accordance with FASB Interpretation No. 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" and resulted in a liability and a charge to
stockholders' equity. The liability is being adjusted against stockholders'
equity to reflect the change in the fair market value of the obligation over the
lease term. At September 30, 2005, the liability was $0.7 million.


Litigation

     In the ordinary course of business, the Company may be subject to claims
and, from time to time, is named in various legal proceedings. The Company is
currently not involved in any material litigation.

Indemnification

     The Company has entered into indemnification agreements with its officers
and directors. The Company has not incurred any costs to defend lawsuits or
settle claims related to these indemnification provisions. As of September 30,
2005, the Company had not accrued a liability for this obligation, because
management believes that the likelihood of incurring a liability in connection
with this obligation is neither probable nor estimable.

9.    Severance and Lease Abandonment

Quarter Ended September 2002 Severance and Lease Abandonment

     During the quarter ended September 30, 2002, the Company announced that it
was undertaking various actions to improve its operations and overall financial
performance by reducing its workforce and abandoning two leased facilities. This
action resulted in a charge of $4.3 million, consisting of $2.3 million for
severance for 71 employees and $2.0 million related to lease abandonment.


                                       9
<PAGE>

     During 2003, the Company negotiated a termination of the lease for one of
the facilities and finalized certain remaining severance obligations which
resulted in a reduction of the liability by $0.4 million. Further, during the
quarter ended March 31, 2005, the Company was able to sublease the other leased
facility that was abandoned for a portion of the future lease payments,
resulting in a reduction to the abandoned lease liability of $0.2 million. The
following table summarizes the activity and balance of the severance and lease
abandonment liability (in thousands):


<TABLE>
<CAPTION>
                                      Severance Costs for
                                          Involuntary
                                            Employee            Costs to Exit Lease
                                          Terminations              Obligations         Total
                                     ----------------------------------------------------------------
<S>                                             <C>                    <C>                   <C>
Balance at inception                            $ 2,367                $ 1,973               $ 4,340
Utilization of Reserves:
   Cash payments                                (1,823)                   (242)               (2,065)
                                     ----------------------------------------------------------------
Balance at December 31, 2002                       544                   1,731                 2,275
Utilization of Reserves:
   Cash payments                                  (449)                   (281)                 (730)
   Reserve reduction                               (95)                   (289)                 (384)
                                     ----------------------------------------------------------------
Balance at December 31, 2003                        -                    1,161                 1,161
Utilization of Reserves:
   Cash payments for rent                           -                      (65)                  (65)
                                     ----------------------------------------------------------------
Balance at March 31, 2004                           -                    1,096                 1,096
Utilization of Reserves:
   Cash payments for rent                           -                     (333)                 (333)
   Expected sublease income                         -                     (167)                 (167)
   Effect of foreign exchange                       -                      (17)                  (17)
                                     ----------------------------------------------------------------
Balance at March 31, 2005                           -                      579                   579
Utilization of Reserves:
   Cash payments for rent                           -                      (36)                  (36)
   Effect of foreign exchange                       -                      (13)                  (13)
                                     ----------------------------------------------------------------
Balance at June 30, 2005                            -                      530                   530
Utilization of Reserves:
   Cash payments for rent                           -                       (7)                   (7)
   Effect of foreign exchange                       -                      (15)                  (15)
                                     ----------------------------------------------------------------
Balance at September 30, 2005                   $   -                  $   508               $   508
                                     ----------------------------------------------------------------
</TABLE>



Quarter Ended December 2004 Lease Abandonment

     During the quarter ended December 31, 2004, the Company recorded a lease
abandonment charge of $3.6 million related to the relocation of its corporate
headquarters. This charge represents the future rent and rent-related
obligations relating to the former headquarters, net of subtenant lease income.
Under the terms of a sublease agreement, Accelrys will receive from the
subtenant monthly rental payments and reimbursement of certain operating
expenses related to the facility.


                                       9
<PAGE>

     The following table summarizes the activity and balance of the lease
abandonment liability (in thousands):

                                   Costs to Exit
                                       Lease
                                    Obligations
                                  -----------------
 Balance at inception                     $ 3,612
  Utilization of reserves:
  Cash payments                            (1,009)
                                  -----------------
 Balance at March 31, 2005                  2,603
 Utilization of reserves:
   Cash payments                             (376)
                                  -----------------
 Balance at June 30, 2005                   2,227
 Utilization of reserves:
   Cash payments                             (299)
   Accrual adjustment                         (30)
                                  -----------------
 Balance at September 30, 2005            $ 1,898
                                  -----------------



Quarter Ended March 2005 Severance and Lease Abandonment

     During the quarter ended March 31, 2005, the Company incurred a severance
charge in connection with making the sales department more efficient, reducing
duplicative general and administrative personnel, and discontinuing our
Mat-Informatics product line. As a result of the reduction in force in our sales
department, the Company incurred a lease abandonment charge for the costs to
close the Company's office in Germany.

     The following table summarizes the activity and balance of the severance
and lease abandonment liability (in thousands):


<TABLE>
<CAPTION>

                                     Severance Costs for
                                         Involuntary
                                          Employee         Costs to Exit Lease
                                         Terminations           Obligations        Total
                                     ----------------------------------------------------------
<S>                                            <C>                   <C>               <C>
     Balance at inception                      $ 1,358               $ 344             $ 1,702
     Utilization of Reserves:
       Cash payments                              (291)                -                  (291)
                                     ----------------------------------------------------------
     Balance at March 31, 2005                   1,067                 344               1,411
     Utilization of Reserves:
       Cash payments                              (736)                (65)               (801)
       Effect of foreign exchange                   (7)                 (6)                (13)
                                     ----------------------------------------------------------
     Balance at June 30, 2005                      324                 273                 597
     Utilization of Reserves:
       Cash payments                              (132)                (20)               (152)
       Effect of foreign exchange                   (6)                 (8)                (14)
                                     ----------------------------------------------------------
     Balance at September 30, 2005             $   186               $ 245             $   431
                                     ===========================================================
</TABLE>


10.   Restricted Cash

     During the quarter ended June 30, 2004, the Company entered into a
nine-year lease agreement for corporate facilities in San Diego, California.
Under the terms of the lease, the Company was required to place $6.6 million in
a restricted cash account, consisting entirely of marketable securities, to
ensure performance under the lease agreement. The cash restriction periodically
decreases and cash is periodically released to the Company over the term of the
lease.

                                       10
<PAGE>

11.   Variable Interest Entity

     In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46
was effective immediately for any variable interest entity (VIE) created after
January 31, 2003. The provisions of FIN 46, as revised, were adopted as of
December 31, 2003, for the Company's interest in all VIEs. In October 2004, the
FASB revised FIN 46 to include rabbi trusts as VIEs. The Company established a
rabbi trust in March 2000 for the benefit of directors and officers of the
Company under its deferred compensation plan. Since the rabbi trust's inception,
the assets of the rabbi trust have been consolidated in the Company's other
current assets and the liabilities have been consolidated in the Company's
accrued compensation and benefits. As of September 30, 2005, both the asset and
liabilities were $0.5 million. Changes in values of assets held by the rabbi
trust accrue to the Company's directors and officers and not to the Company.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Examples of such forward-looking statements include, but are not limited to,
statements about:

      o    our quarterly financial performance;

      o    our capital requirements and resources;

      o    our strategy to increase revenue;

      o    development of new products;

      o    our intent to develop and sell products and services to companies
           in the nanotechnology industry;

      o    technological change and uncertainty of new and
           emerging technologies;

      o    potential competitors or products;

      o    future employment of our key employees;

      o    development of strategic relationships;

      o    our ability to add revenue, expand distribution channels,
           maximize research and development resources, improve our
           competitive position and increase market awareness and
           acceptance of our products;

      o    acquiring complementary businesses, products or technologies and
           our ability to integrate those businesses, products or
           technologies, if any;

      o    compliance with the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley);

      o    international exposure for a significant percentage of
           future overall revenue;

      o    our development center in India;

      o    statements about potential future dividends;

      o    statements about protection of our intellectual property; and

      o    possible changes in legislation.

     Although forward-looking statements in this report reflect the good-faith
judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties (including, without limitation,
the risks discussed in the "Certain Risks Related to Our Business" section of
this report) and actual results and outcomes may differ materially from the
results and outcomes discussed in or anticipated by the forward-looking
statements. We undertake no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this report. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report.

                                       11

<PAGE>

     The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with consolidated financial
statements and related note disclosures included elsewhere in this report.

     In the section entitled "Certain Risks Related to Our Business", this
report describes certain risk factors and uncertainties that may cause actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements.

BUSINESS OVERVIEW

     We design, develop, market and support software and related services that
facilitate the discovery and development of new and improved products and
processes in the pharmaceutical, biotechnology, chemical, petrochemical and
materials industries. Using our products, researchers may increase the speed and
efficiency of the research and development cycle, thereby reducing product
development costs and shortening the time to market for new product
introductions and process improvements. Our customers include leading
commercial, government and academic organizations. Many of the largest
pharmaceutical, biotechnology, chemical and petroleum companies worldwide use
our products. We market our products and services worldwide, principally through
our global direct sales force and the selective use of third-party distributors.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2005 and 2004 (in thousands)

<TABLE>
<CAPTION>
                                                       Three Months Ended
                                          -------------------------------------------- -----------------
                                           September 30,  **       September 30,  **          Percent
                                                 2005                  2004                   Change
                                          --------------------  ----------------------- ----------------
                                             (unaudited)             (unaudited)
 Revenue                                     $  18,592    100%        $  14,277     100%             30%
<S>                                          <C>         <C>         <C>         <C>              <C>
 Cost of revenue                                 5,400     29%            3,137      22%             72%
 Product development                             4,687     25%            4,382      31%             7%
 Sales and marketing                             7,388     40%            7,471      52%            -1%
 General and administrative                      3,619     19%            3,680      26%            -2%
 Write-off of in-process product development         -      0%              700       5%          -100%
                                             ------------------ -----------------------  --------------
   Total operating costs and expenses           21,094    113%           19,370     136%             9%
                                             ------------------ -----------------------  --------------
 Operating loss from continuing operations      (2,502)   -13%           (5,093)    -36%            -51%
 Interest and other income, net                    402      2%              489       3%            -18%
                                             ------------------ -----------------------  --------------
 Loss from continuing operations before taxes   (2,100)   -11%           (4,604)    -32%            -54%
  Provision for income taxes                       241      1%              479       3%            -50%
                                             ------------------ -----------------------  --------------
 Loss from continuing operations                (2,341)   -13%           (5,083)    -36%            -54%
                                             ------------------ -----------------------  --------------
 Net loss                                    $  (2,341)   -13%        $  (5,083)    -36%            -54%
                                             ================== =======================  ==============
</TABLE>


**    Line items expressed as a percent of revenue in the respective periods.

     Revenue increased 30% to $18.6 million for the three months ended September
30, 2005 compared to $14.3 million for the three months ended September 30,
2004. The increase in revenue is attributed to recognizing more revenue from
deferrals as a result of our transition to subscription accounting for annual
and multi-year licenses and to the addition of revenue from our acquisition of
SciTegic, Inc. (SciTegic) in September 2004.

     Cost of revenue was 72% higher at $5.4 million for the three months ended
September 30, 2005 compared to $3.1 million for the three months ended September
30, 2004. The increase in cost of revenue was due to a $0.8 million increase in
client services costs due to increased staffing levels, a $0.3 million increase
in royalty costs due to new royalty agreements executed during the fiscal year,
a $0.1 million increase in documentation and shipping costs due to more product
releases in the current quarter compared to the year ago quarter, a $0.5 million
increase in outsourced contract work due to costs incurred related to
revenue-generating contracts, a $0.2 million increase in capitalized software
costs due to an increase in the number of product releases in the current
quarter compared to the year ago quarter, and a $0.4 million increase in
amortization of purchased intangibles as a result of the SciTegic acquisition.


                                       12
<PAGE>

     Product development expenses were 7% higher at $4.7 million for the three
months ended September 30, 2005 compared to $4.4 million for the three months
ended September 30, 2004. The increase in product development expenses was due
to the increase in product development workforce as a result of the SciTegic
acquisition.

     Product development expenses consist primarily of the employment-related
costs of personnel associated with developing new products, enhancing existing
products, testing and developing product documentation. Certain software
development costs are capitalized in accordance with SFAS No. 86, "Accounting
for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed"
(SFAS 86). Capitalized software development costs consist primarily of the
employment-related costs and consulting fees paid to consultants in relation to
the development of products that have not yet been released.

     The following table shows software development costs and the amounts of
capitalized software development for the periods indicated (in thousands):

<TABLE>
<CAPTION>

                                                       Three Months Ended
                                           --------------------------------------------   Percent
                                            September 30, 2005     September 30, 2004     Change
                                           ---------------------------------------------------------
                                               (unaudited)            (unaudited)
        Product development:
<S>                                               <C>                   <C>                 <C>
        Gross software development costs          $ 5,630               $ 5,123             10%
        Capitalized software development costs       (943)                 (741)            27%
                                            --------------------------------------------------------
        Total product development costs           $ 4,687               $ 4,382              7%
                                            ==================   ====================== =============
</TABLE>


     Sales and marketing expenses were 1% lower at $7.4 million for the three
months ended September 30, 2005 compared to $7.5 million for the three months
ended September 30, 2004. The decrease in expenses was due to the reduction in
force in March 2005, partially offset by an increase in sales and marketing
costs as a result of the SciTegic acquisition.

     General and administrative expenses were 2% lower at $3.6 million for the
three months ended September 30, 2005 compared to $3.7 million for the three
months ended September 30, 2004. The decrease in general and administrative
costs was primarily due to a decrease in headcount following the reduction in
force during the quarter ended March 31, 2005.

     Interest and other income, net was 18% lower at $0.4 million for the three
months ended September 30, 2005 compared to $0.5 million for the three months
ended September 30, 2004. The decrease was primarily due to lower interest
income resulting from lower average cash balances during the current quarter as
compared to the quarter ended September 30, 2004.

     Provision for income taxes was 50% lower at $0.2 million for the three
months ended September 30, 2005 compared to $0.5 million for the three months
ended September 30, 2004. The decrease in the tax provision was due to lower
income tax incurred in foreign jurisdictions.

     Net loss was 54% lower at $(2.3) million or $(0.09) per share for the three
months ended September 30, 2005 compared to $(5.1) million or $(0.21) per share
for the three months ended September 30, 2004.


                                       13
<PAGE>





Six Months Ended September 30, 2005 and 2004 (in thousands)

<TABLE>
<CAPTION>

                                                        Six Months Ended
                                         ---------------------------------------------- ------------
                                           September 30,  **       September 30,  **       Percent
                                                2005                    2004                Change
                                         --------------------- -----------------------  ------------
                                             (unaudited)           (unaudited)
Revenue                                        $ 37,146   100%       $    28,458    100%          31%
<S>                                              <C>       <C>             <C>       <C>          <C>
Cost of revenue                                  10,431    28%             6,923     24%          51%
Product development                               9,617    26%             8,505     30%          13%
  Sales and marketing                            15,885    43%            15,240     54%           4%
General and administrative                        7,688    21%             7,689     27%           0%
Write-off of in-process product
  development                                         -     0%               700      2%        -100%
                                         ---------------------  ------------------------- -----------
   Total operating costs and expenses            43,621    117%           39,057    137%          12%
                                         ---------------------  ------------------------  -----------
Operating loss from continuing operations        (6,475)  -17%         (10,599)     -37%         -39%
Interest and other income, net                    1,100    3%             1,074       4%           2%
                                         ---------------------  -------------------------------------
Loss from continuing operations before           (5,375)  -14%          (9,525)     -33%         -44%
taxes
Provision for income taxes                          682    2%               614       2%          11%
                                         ---------------------  ------------------------  -----------
Loss from continuing operations                  (6,057)  -16%         (10,139)     -36%         -40%
Loss from discontinued operations                     -    0%           (1,117)      -4%        -100%
                                         ---------------------  ------------------------- -----------
Net loss                                       $ (6,057)  -16%       $ (11,256)     -40%         -46%
                                         =====================  ========================= ===========
</TABLE>



     **   Line items expressed as a percent of revenue in the respective
          periods.

     Revenue increased 31% to $37.1 million for the six months ended September
30, 2005 compared to $28.5 million for the six months ended September 30, 2004.
The increase in revenue is attributed to our ability to recognize more revenue
from deferrals as a result of our transition to subscription accounting for
annual and multi-year licenses and to the addition of revenue from our
acquisition of SciTegic, Inc. in September 2004.

     Cost of revenue was 51% higher at $10.4 million for the six months ended
September 30, 2005 compared to $6.9 million for the six months ended September
30, 2004. The increase in cost of revenue was due to a $1.1 million increase in
client services costs due to increased staffing levels, a $0.5 million increase
in royalty costs due to new royalty agreements executed during the fiscal year,
a $0.2 million increase in documentation and shipping costs due to more product
releases in the current period compared to the year ago period, a $0.5 million
increase in outsourced contract work due to costs incurred related to
revenue-generating contracts, a $0.2 million increase in capitalized software
costs due to an increase in the number of product releases in the current period
compared to the year ago period, and a $0.9 million increase in amortization of
purchased intangibles as a result of the SciTegic acquisition.

     Product development expenses were 13% higher at $9.6 million for the six
months ended September 30, 2005 compared to $8.5 million for the six months
ended September 30, 2004. The increase in product development expenses was due
to the increase in product development workforce as a result of the SciTegic
acquisition.

     Product development expenses consist primarily of the employment-related
costs of personnel associated with developing new products, enhancing existing
products, testing and developing product documentation. Certain software
development costs are capitalized in accordance with SFAS No. 86, "Accounting
for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed"
(SFAS 86). Capitalized software development costs consist primarily of the
employment-related costs and consulting fees paid to consultants in relation to
the development of products that have not yet been released.


                                       14
<PAGE>


     The following table shows software development costs and the amounts of
capitalized software development for the periods indicated (in thousands):




<TABLE>
<CAPTION>
                                                       Three Months Ended
                                           --------------------------------------------   Percent
                                            September 30, 2005     September 30, 2004     Change
                                           --------------------------------------------  -----------
                                               (unaudited)            (unaudited)
        Product development:
<S>                                               <C>                   <C>                 <C>
        Gross software development costs          $ 11,558            $10,178                 14%
        Capitalized software development costs      (1,941)            (1,673)                16%
                                            -------------------------------------------  -----------
        Total product development costs           $  9,617            $ 8,505                 13%
                                            ==================   ======================  ===========
</TABLE>



     Sales and marketing expenses were 4% higher at $15.9 million for the six
months ended September 30, 2005 compared to $15.2 million for the six months
ended September 30, 2004. The increase in expenses was due to a $2.0 million
increase in sales and marketing costs as a result of the SciTegic acquisition,
partially offset by the reduction in force in the quarter ended March 31, 2005.

     General and administrative expenses were consistent at $7.7 million for
both the six months ended September 30, 2005 and the six months ended September
30, 2004.

     Interest and other income, net was consistent at $1.1 million for both the
six months ended September 30, 2005 and the six months ended September 30, 2004.

     Provision for income taxes was 11% higher at $0.7 million for the six
months ended September 30, 2005 compared to $0.6 million for the six months
ended September 30, 2004. The increase in the tax provision was due to higher
income tax incurred in foreign jurisdictions.

     Loss from discontinued operations was $(1.1) million or $(0.05) per share
for the six months ended September 30, 2004, which consisted of $1.3 million in
revenue and $2.4 million in expenses. There was no revenue or costs associated
with discontinued operations in the six months ended September 30, 2005.

     Net loss was 46% lower at $(6.1) million or $(0.23) per share for the six
months ended September 30, 2005 compared to $(11.3) million or $(0.46) per share
for the six moths ended September 30, 2004.



Liquidity and Capital Resources

     In recent years we have funded our activities primarily through the sales
of software licenses and software maintenance services. Historically, we have
obtained funds for our activities through public markets. We had cash, cash
equivalents, restricted cash and marketable securities of $52.8 million as of
September 30, 2005 compared to $63.3 million as of March 31, 2005, representing
a decrease of $10.5 million. Significant components of this decrease are cash
used in operations of $6.3 million, cash used for software development costs of
$1.7 million and capital expenditures of $2.2 million.

     We anticipate that our capital requirements may increase in future periods
as a result of cyclical sales trends, additional product development activities
and the acquisition of additional capital equipment. Our capital requirements
may also increase in future periods as we seek to expand our technology platform
through investments, licensing arrangements, technology alliances or
acquisitions.

     We anticipate that our existing capital resources will be adequate to fund
our operations for at least the next 12 months. However, there can be no
assurance that changes will not occur that would consume available capital
resources before that time. Our capital requirements depend on numerous factors,
including our ability to continue to generate software sales, competing
technological and market developments, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights and
the outcome of related litigation, the purchase of additional capital equipment
and acquisitions of other businesses or technologies. There can be no assurance
that additional funding, if necessary, will be available to us on favorable
terms, if at all. Our forecast for the period of time through which our
financial resources will be adequate to support our operations is
forward-looking information, and actual results could vary.

                                       15
<PAGE>

Off-Balance Sheet Arrangements

     As of September 30, 2005 and March 31, 2005, we did not have any
relationships with unconsolidated entities or financial partners, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. As such,
we are not exposed to any financing, liquidity, market or credit risk that could
arise if we had engaged in such relationships.

Critical Accounting Policies

     The preparation of our consolidated financial statements and disclosures
involves the use of judgments and estimates. We believe the following critical
accounting policies involve the more significant judgments and estimates used.

     Revenue Recognition--Revenues are recognized in accordance with the
American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 97-2, "Software Revenue Recognition" as amended by SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition" and Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements" and SAB No. 104, "Revenue Recognition" and Emerging
Issues Task Force, Issue 00-21 (EITF 00-21), "Multiple Deliverable Revenue
Arrangements".

     We generate revenue from the following sources:

     o    the licensing of software,
     o    provision of support and maintenance services on licensed software
          (referred to as Post-contract Customer Support or PCS in SOP 97-2),
     o    providing scientific and solutions consulting services,
     o    membership fees from hosting consortia arrangements, and
     o    the licensing of intellectual property.

     Our customers may purchase any combination of the above service offerings
from us. The sales price is allocated, based on fair value, to each of the
products or services sold, in accordance with SOP 97-2 and EITF 00-21.

     The Company licenses software either perpetually or on a term basis. Our
standard perpetual licenses include 12 months of PCS. Under a term license, PCS
is included for the full duration of the term license. For example, a 12-month
license includes 12 months of PCS.

     The Company's standard payment terms range between "net 30" to "net 120"
days. However, in no event does the Company grant payment terms that extend
beyond the expiration of the license term. Customer payments received in
connection with our revenue-generating activities are recorded as deferred
revenue until such time as all of the following criteria are met:

     o    no significant obligations remain deliverable to the customer,
     o    we have a fully executed contract with the customer,
     o    the sales contract fee is fixed or determinable,
     o    collection of fees from the customer is deemed probable, and
     o    no material uncertainties regarding customer acceptance exist.

     Licensing of Software:

     Perpetual software revenue bundled with PCS is unbundled and recognized as
revenue when the above criteria are satisfied. Generally, perpetual software
licenses with 12 months of PCS result in 85% of the sale being recorded to
revenue in the quarter in which the contract is executed and the remaining 15%
being amortized into revenue over the PCS term.

     In January 2004, we changed our license contracts with terms less than
perpetual. The change was to allow our customers to swap software modules during
the term of the license period. This contract modification results in the annual
license revenue, including PCS, to be recognized ratably over the license term.
This contrasts with our former annual license offering, in which we recognized
64% of the license revenue in the quarter during which the license was executed
and amortized 36% of the revenue over the remaining PCS term based on the fair
value of the multiple elements in the sale.

<PAGE>

     PCS:

     The Company's PCS includes telephone and email technical support and
unspecified upgrades or enhancements. PCS revenue bundled with perpetual
software license agreements is unbundled and deferred based on objective,
vendor-specific evidence. PCS revenue is recognized pro-rata over the related
service period, which is generally one year. When included with term licenses,
PCS is not unbundled as the entire term license is recognized ratably over the
license term.

     Scientific and Solutions Consulting Services:

     We define our Scientific Services to include such offerings as; contract
research whereby we are engaged to perform computational research for clients,
training services on our various product offerings, implementation services of
our products, data migration services whereby we extract customers' existing
data and transfer such data into our product(s) for data analysis and
manipulation and customizations to meet a specific business need for a client.
We also perform Solutions Consulting Services, focused on driving efficiencies
by automating the flow of information in clients' discovery and design process
using Pipeline Pilot. Revenues from Scientific and Solutions Consulting Services
are recognized as the services are delivered, according to the contractual
terms. Amounts billed but not yet recognized as revenue, and other payments
received prior to recognition of revenue, are recorded as deferred revenue.

     Consortia:

     The intent of our consortia arrangements is to develop new software that we
can commercially sell. Such arrangements are based on a best efforts basis such
that we are not required to develop or maintain the new software products.
Consortia agreements are generally one to three years in length and require an
annual membership fee. In addition, customers are required to license an initial
software library from us to participate in the consortia. The initial software
library for consortia members, which is distinct from any potential products
developed by the consortia, consists entirely of existing commercially available
software products within the Company's current product offerings, and is
licensed pursuant to the Company's standard license agreements. Consortia
members may already have such software and in any event may use the software
independently of any consortia activities. The revenue associated with the
initial software library is recognized in accordance with our standard license
and PCS revenue, described above. The consortium membership is recognized
ratably over the term of the agreement. We are not required to deliver specified
products under the agreements, and the consortium fees are generally
non-refundable. If we are successful in developing new software under a
consortia agreement, members usually have such new software for a brief
exclusivity period and they typically receive a non-transferable license of such
new software at the conclusion of the consortium.

     License of Intellectual Property:

     The Company receives royalty payment on the license of our intellectual
property. Revenue for such royalty payments are recognized when reported to us.
It is important to note that these royalty payments have not been and are not
expected to be material to the Company's overall revenues.

     As described above, recognition of software license, service and other
revenue is dependent, in part, on management judgment, and thus, changes in our
estimates or assumptions could impact revenue recognition in the future.

     Product Development Costs--We capitalize product development costs in
accordance with SFAS No. 86, "Accounting for the Cost of Computer Software to be
Sold, Leased or Otherwise Marketed" (SFAS 86). Such costs are stated at the
lower of cost or net realizable value. Capitalized software costs are comprised
of costs incurred in the development of new products and enhancements to
existing products after technological feasibility has been established. We
amortize capitalized costs over the estimated product life, not to exceed three
years from the date on which the product is available for general release. The
estimated product life may be reduced based on obsolescence or other factors,
which could affect the carrying value of capitalized software and result in
charges to operating results. These estimates are based on management's
judgment, and thus, any change in our estimates could impact operating results
in the future.

     Goodwill--The Company's goodwill resulted from acquisitions made in 2000,
2001 and fiscal year 2005. We assess goodwill for impairment in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Under SFAS 142,
goodwill and intangible assets with indefinite lives are not amortized but are
assessed annually (or more frequently if impairment indicators arise) for
impairment by comparing fair market value of the net assets to the carrying
value. In making this annual assessment, which we do in the fourth quarter of
each fiscal year, we rely on a number of factors including operating results,
business plans, economic projections, anticipated future cash flows and market
place data. There are inherent uncertainties related to these factors and
management's judgment in applying them to the analysis of goodwill impairment.
We completed our annual intangible asset impairment test during the quarter
ended March 31, 2005, and concluded that the carrying value of our goodwill was
not impaired. Continued economic weakness, unexpected significant declines in
operating results of reporting units, and additional non-temporary market
capitalization declines may be indicative of goodwill impairment and cause us to
perform additional valuation analyses for our reporting units prior to the next
required annual assessment. These types of events and the resulting analyses
could result in charges for goodwill expense in the future.


                                       17
<PAGE>

     Deferred Taxes--Income tax expense is based on pre-tax financial accounting
income under the liability method. Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. We must then assess the
likelihood that the resulting deferred tax assets will be realized. To the
extent we believe that realization is not more likely than not, we establish a
valuation allowance. To date, the Company has provided a full valuation
allowance for all net deferred tax assets.

     Impairment of Long-Lived Assets--We review long-lived assets, including
purchased intangibles, leasehold improvements, property and equipment, and
capitalized software development costs for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may
not be fully recoverable. This review requires us to estimate future cash flows
related to these assets. Actual results could differ from these estimates, which
may affect the carrying amount of assets and the actual amortization expense.
The Company has identified no such impairment losses as of September 30, 2005.

New Accounting Standards

     In December 2004, the FASB issued SFAS 123R. SFAS 123R requires all
companies to measure compensation costs for all share-based payments (including
stock options) at fair value. The Company is required to comply with SFAS 123R
effective as of the beginning of the first interim or annual reporting period of
the Company's first fiscal year beginning on or after June 15, 2005.
Accordingly, we will be required to apply SFAS 123R for our fiscal year
beginning April 1, 2006. The adoption of SFAS 123R will have a significant
adverse impact on our reported results of operations because our stock-based
compensation expense will be charged directly against our reported earnings.

CERTAIN RISKS RELATED TO OUR BUSINESS

     You should carefully consider the risks described below before investing in
our securities. The risks described below are not the only ones we face. Our
business is also subject to the risks that affect many other companies, such as
competition, technological obsolescence, labor relations, general economic
conditions, geopolitical changes and international operations.

     Additional risks not currently known to us or that we currently believe are
immaterial also may impair our business operations or our liquidity.

     Our quarterly operating results could vary significantly. We have
historically experienced stronger financial performance in the quarter ending
December 31of each year followed by a comparative decline in the other quarters.
In the twelve months ended March 31, 2005 and the twelve months ended December
31, 2003, the Company recognized 32% and 37% of its revenue for these fiscal
years in the quarter ended December 31 of each such fiscal year. Quarterly
operating results may continue to fluctuate as a result of a number of factors,
including lengthy sales cycles, market acceptance of new products and upgrades,
timing of new product introductions, changes in pricing policies, changes in
general economic and competitive conditions, and the timing and integration of
acquisitions. Additionally, fluctuations in revenue recognition may result as
the mix of contracts continues to shift from perpetual licenses to subscription
licenses. We also expect to continue to experience fluctuations in quarterly
operating results due to general and industry-specific economic conditions that
may affect the research and development expenditures of pharmaceutical and
biotechnology companies. Due to the possibility of fluctuations in our revenue
and expenses, we believe that quarter-to-quarter comparisons of our operating
results are not a good indication of our future performance.

     Changes in the accounting treatment of stock options will adversely affect
our results of operations. In December 2004, the FASB issued SFAS 123R. SFAS
123R requires all share-based payments to employees, including grants of stock
options, to be recognized in the financial statements based on their fair values
and does not permit pro forma disclosure as an alternative to financial
statement recognition. The adoption of the SFAS 123R fair value method will have
a significant adverse impact on our reported results of operations because the
stock-based compensation expense will be charged directly against our reported
earnings. The impact of our adoption of SFAS 123R cannot be predicted at this
time because it will depend on the future fair values and the number of
share-based payments granted in the future. However, had we adopted SFAS 123 in
prior periods, the magnitude of the impact of that standard would have
approximated the impact of SFAS 123, assuming the application of the
Black-Scholes model as described in the disclosure of pro forma net loss and pro
forma net loss per share in our notes to consolidated financial statements set
forth in this quarterly report.

                                       18
<PAGE>

     Our future profitability is uncertain. We generated net losses in the three
months and six months ended September 30, 2005 and September 30, 2004.
Continuing net losses may limit our ability to fund our operations, and we may
not generate income from operations in the future. Our future profitability
depends upon many factors, including several that are beyond our control. These
factors include without limitation:

     o    changes in the demand for our products and services;

     o    the introduction of competitive software;

     o    our ability to license desirable technologies;

     o    the rate of adoption by our customers of our new subscription license
          option;

     o    changes in the research and development budgets of our customers and
          potential customers; and

     o    our ability to successfully, cost effectively and timely develop,
          introduce and market new products, services and product enhancements.

     We face strong competition in the scientific software sector. The market
for our products is intensely competitive, subject to rapid change and
significantly affected by new product introductions, pricing strategies and
other market activities of industry participants. We currently face competition
from the following principal sources:

     o    other simulation software packages and software for simulation and
          analysis of chemical and biological data;

     o    desktop software applications, including chemical drawing, molecular
          modeling and analytical data simulation applications;

     o    consulting and outsourcing services;

     o    firms supplying databases, such as chemical or genomic information
          databases, database management systems and information technology; and

     o    academic and government sponsored institutions focused on scientific
          research.

     In addition, some of our software licenses grant the right to sublicense
our software. As a result, our software customers and third-party licensees
could develop specific simulation applications using our software developer's
kit and compete with us by distributing these programs to our potential
customers. Customers or licensees could also develop their own simulation
technology or informatics software and cease using our products and services.
Some of our competitors and potential competitors in this sector have longer
operating histories than us and have greater financial, technical, marketing,
research and development and other resources. Many of our competitors offer
products and services directed at more specific markets than those we target,
enabling these competitors to focus a greater proportion of their efforts and
resources on these markets. Some offerings that compete with our products are
developed by governmental organizations and academic institutions. These
entities may be able to devote substantial resources to product development and
also offer their products to users for little or no charge. Finally, we also
face competition from open-source software initiatives, in which developers
provide software and intellectual property free over the Internet.

     We are subject to pricing pressures in the markets we serve. We operate in
an intensely competitive marketplace which has led to significant pricing
pressures and declines in average selling price over the past several years. In
response to competition and general adverse economic conditions in the markets
we serve, we may be required to modify our pricing practices. This development
may adversely affect our revenue and earnings. We generally license our products
and services on a "right to use" basis pursuant to perpetual or term-based
licenses. Changes in our pricing model or any other future broadly-based changes
to our prices and pricing policies could lead to a decline or delay in revenue
as our sales force and customers adjust to the new pricing policies.

     Our investments in sales and business development efforts may not result in
additional sales of our products and services. Our products and services involve
lengthy sales and business development cycles, often requiring us to expend
considerable financial and personnel resources without any assurance that
revenue will be recognized. These sales and business development cycles
typically are long for a number of reasons. For instance, sales cycles are
impacted by the time and resources required to educate potential customer
organizations as to the value and comparative advantages of our products. As a
result, we may expend substantial funds in an effort to negotiate agreements for
collaborative relationships, services and products, but may ultimately be unable
to consummate the related transaction. Under such circumstances, our results of
operations and ability to achieve profitability will be adversely affected.

                                       19
<PAGE>

     If we consume cash more quickly than expected, we may be unable to raise
additional capital and we may be forced to curtail operations. We anticipate
that our existing capital resources will be adequate to fund our operations for
at least the next twelve months. However, changes may occur that would consume
available capital resources before that time. Our capital requirements will
depend on numerous factors, including:

     o    costs associated with software development and sales;

     o    the purchase of additional capital equipment;

     o    demand for our products; and

     o    acquisitions of other businesses or technologies.

     If we determine that we must raise additional capital, we may attempt to do
so through public or private financings involving debt or equity. However,
additional capital may not be available on favorable terms, or at all. If
adequate funds are not available, we may be required to curtail operations
significantly or to obtain funds by entering into arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, products or potential markets that we would not
otherwise relinquish.

     Our ability to increase our revenue may depend upon increased market
acceptance of our products and services. Our products are currently used
primarily by molecular modeling and simulation specialists. Our strategy is to
expand usage of our products and services by marketing and distributing our
software to a broader, more diversified group of biologists, chemists and
engineers. If we cannot expand our customer base, we may not be able to increase
our revenue, or such revenue may decline. In general, increased market
acceptance and greater market penetration of our products depend upon several
factors, including:

     o    overall product performance;

     o    timely introduction of new products and services;

     o    ease of implementation and use;

     o    accuracy of simulation;

     o    breadth and integration of product offerings;

     o    the extent to which users achieve the intended research and
          development benefits from their use of the products and services; and

     o    willingness and ability of customers to pay for such use.

     Our products and services may not achieve market acceptance or penetration
in their target industries or other industries. Failure to increase market
acceptance or penetration of our products and services may restrict
substantially the future growth of our business and may have a material adverse
effect on our company as a whole.

     We may be unable to develop and market new products and services that are
necessary to sustain and increase revenue. The success of our business plan
depends heavily upon increases in revenue. Our strategy is to increase revenue
in a number of ways, including:

     o    adding more computational modeling, simulation and analysis tools to
          our current portfolio of tools for scientists, including chemists,
          biologists and materials scientists;

     o    offering more informatics solutions that capture and manage the data
          created by customers' drug discovery and chemical development
          activities, including the data created by the use of computational
          modeling, simulation and analysis software;

     o    creating and marketing genomic, biological and/or chemical data
          content for use in conjunction with the software offered to support
          customers' drug discovery activities;

     o    developing strategic relationships with larger technology companies;

     o    developing more knowledge-management workflow software to automate the
          flow of genomic, biological and chemical data and information and
          project status between and among workgroups and the enterprise;

     o    developing enhanced modeling and informatics tools to address the
          needs of companies engaged in scientific research; and

     o    developing software products for new and emerging markets such as the
          nanotechnology market.

                                       20
<PAGE>

     We do not have sufficient historical or comparative sales data to rely upon
to indicate that our new products or data content services will achieve the
desired level of commercial success. As a result, we may not be able to sustain
or increase revenue.

     Delays in release of new or enhanced products or services may result in
increased cost to us, delayed market acceptance of our products or services and
delayed or lost revenue. To achieve market acceptance, new or enhanced products
or services can require long development and testing periods, which may result
in delays in scheduled introduction. Any delays in the release schedule for new
or enhanced products or services may delay market acceptance of these products
or services and may result in delays in customer orders for these new or
enhanced products or services or the loss of customer orders.

     If we are unable to license software to, or to collect receivables from,
our early stage biotechnology customers or other customers, our operating
results may be adversely affected. Although the majority of our current
customers are well-established large pharmaceutical customers and universities,
some of our licensees are small, development-stage biotechnology companies. We
use third-party credit rating agencies and historical payment experience in
extending credit. Often small, development-stage biotechnology customers have
limited or no operating history and require considerable funding to launch their
businesses. As we have experienced in recent years, they often significantly
scale back, or altogether cease, operations. Therefore, there is considerable
risk in counting on such customers for revenue growth, because transactions with
these customers carry financial risk. Such customers are especially vulnerable
to, and may be adversely impacted by, the tightening of available credit and
capital during periods of contraction affecting the United States and our other
key markets. As a result of these conditions, these customers may be unable to
license or, if under a license, may be unable to pay for, Accelrys products. If
we are not able to collect such payments, we may be required to write-off
significant accounts receivable and recognize bad debt expense which could
materially and adversely affect our operating results. As a result of these
types of exposures and other potential exposures, we have maintained an
allowance for doubtful accounts as follows (in thousands):

                                 September 30, 2005       March 31, 2005
                                 ---------------------  -------------------
                                    (Unaudited)
 Allowance for Doubtful Accounts        $ 390                  $ 315


     Defects or malfunctions in our products, or in the products of our software
technology partners, could hurt our reputation among customers and expose us to
liability. Our business and the level of customer acceptance of our products
depend upon the continuous, effective and reliable operation of our software and
related tools and functions. Defects could occur in our current or future
products. To the extent that our software malfunctions and our customers' use of
our products is interrupted, our reputation and business could suffer. We may
also be subject to liability for the defects and malfunctions of third-party
technology partners and others with whom our products and services are
integrated.

     Pharmaceutical, biotechnology and industrial chemical companies may
discontinue or decrease their use of our products. Pharmaceutical,
biotechnology, and industrial chemical companies comprise the principal market
for our modeling, simulation, data analysis and related products and services.
In addition, these companies have frequently utilized outside software vendors
for key tools used in drug discovery and chemical development, rather than
developing needed information and analysis tools internally. Our revenue depends
to a large extent on research and development expenditures by the
pharmaceutical, biotechnology and chemical industries, particularly companies in
these industries adding new and improved technologies to accelerate their drug
discovery and chemical development initiatives. The willingness and ability of
these companies to expand or continue is dependent on the benefits of new
software tools versus their costs of licensing and on their ability to purchase
or license our products and services. Because a large proportion of our software
customers license our products on an annual basis or buy maintenance contracts
from us annually, our revenue may be impacted if their spending priorities
shift. Also, general economic downturns in our customers' industries or any
decrease in customers' research and development expenditures could harm our
operations.

                                       21
<PAGE>

     Our sales forecast and/or revenue projections may not be accurate. As is
common practice in our industry, we use a "pipeline" system to forecast sales
and trends in our business. Our sales personnel monitor the status of proposals,
including the date when we estimate a customer will make a purchase decision and
the potential size of the order. We aggregate these estimates on a quarterly
basis in order to generate a sales pipeline. While the pipeline process provides
us with some guidance in business planning and forecasting, it is based on
estimates only and is therefore subject to risks and uncertainties. Any
variation in the conversion of the estimated pipeline into actual revenue could
cause us to improperly plan or budget and thereby adversely affect our business,
results of operations and financial condition.

      We operate in business lines that change rapidly and in unexpected ways.
Rapid technological change and uncertainty due to new and emerging technologies
characterize the software, drug discovery and chemical development industries.
We may be unable to develop, integrate and market, on a timely basis, the new
and enhanced products and services necessary to keep pace with competitors. Our
products and services may be rendered obsolete by the offerings of our
competitors. Failure to anticipate or to respond to changing technologies, or
significant delays in the development or introduction of products or services,
could cause customers to delay or decide against purchasing our products or
services.

      Failure to attract and retain skilled personnel could have a material
adverse effect on us. Our success depends in part on the continued service of
key scientific, software, sales, business development, engineering and
management personnel and our ability to identify, hire and retain additional
personnel. There is intense competition for qualified personnel. Immigration
laws may further restrict our ability to attract or hire qualified personnel.
Given these factors, we may not be able to continue to attract and retain the
personnel necessary for the development of our business. Failure to attract and
retain key personnel could have a material adverse effect on our business,
financial condition and results of operations. Further, we are highly dependent
on the principal members of our scientific and management staff. One or more of
these key employees could retire or otherwise leave our employ within the
foreseeable future, and the loss of any of these people could have a material
adverse effect on our business, financial condition and results of operations.
We do not currently maintain, nor do we intend to maintain, key person life
insurance on the life of any employee.

      If we choose to acquire new and complementary businesses, products or
technologies instead of developing them ourselves, we may be unable to complete
these acquisitions or to successfully integrate an acquired business or
technology in a cost-effective and non-disruptive manner. From time to time, we
may choose to acquire businesses, products or technologies instead of developing
them ourselves. We do not know if we will be able to complete any acquisitions,
or whether we will be able to successfully integrate any acquired businesses,
operate them profitably or retain their key employees. Integrating any business,
product or technology we acquire could be expensive and time-consuming, disrupt
our ongoing business and distract company management. In addition, in order to
finance any acquisition, we might need to raise additional funds through public
or private equity or debt financings. In that event, we could be forced to
obtain financing on less than favorable terms which, in the case of equity
financing, may result in dilution to our stockholders. If we are unable to
integrate any acquired entities, products or technologies effectively, our
business will suffer. In addition, under certain circumstances, amortization of
assets or charges resulting from the costs of acquisitions could harm our
business and operating results.

      There can be no assurance as to the effect of the SciTegic acquisition on
our business or operating results. In September 2004, we acquired SciTegic. The
acquisition involved numerous risks, including, among other things: potentially
higher than estimated acquisition expenses; difficulties in successfully
assimilating the operations, technologies and personnel of SciTegic; diversion
of management's attention from other business concerns; risks of entering
markets in which we have no or limited direct prior experience; and the
potential loss of key employees and customers as a result of the acquisition.
Though to date we believe these risks have not materialized, there can be no
assurance as to the continuing effect of the SciTegic acquisition or future
acquisitions on our business or operating results.

      Enacted and proposed changes in securities laws and regulations are likely
to increase our costs. Sarbanes-Oxley required changes in some of our corporate
governance and securities disclosure or compliance practices. The SEC has
promulgated new rules on a variety of subjects and the NASDAQ National Market
(NASDAQ) on which our commons stock is listed has issued revisions to its
requirements for companies that are listed. In June 2003, the SEC adopted
certain rules as directed by Section 404 of Sarbanes-Oxley. These rules require
that publicly held companies, including us, include in their report to
shareholders a report of management on our internal controls over financial
reporting. Our independent auditors are required to attest to management's
assessment of internal controls over financial reporting. We are obligated to
comply with this requirement, and with further related requirements and
interpretations, in our annual reports. If our financial reporting controls are
not deemed effective, there will be an adverse impact on our reputation that
could negatively impact our stock price.


                                       22
<PAGE>

      We also expect continued compliance with Sarbanes-Oxley to increase our
corporate governance, legal and accounting costs. Further, Sarbanes-Oxley and
the related SEC and NASDAQ compliance rules may make it more difficult and
expensive for us to obtain director and officer liability insurance, and we may
be required to accept reduced coverage or incur substantially higher costs to
obtain coverage. These laws and regulations could make it more difficult for us
to attract and retain qualified members of our board of directors, or qualified
executive officers. We continually evaluate and monitor regulatory developments
but, at any given time, cannot estimate the timing or magnitude of additional
costs we may incur as a result.

      We are subject to risks associated with the operation of an international
business. We anticipate that international revenue will continue to account for
a significant percentage of our future revenue. We believe that twelve-month
periods are more indicative of the sale activities for each region given certain
budgeting cycles and other local customs in the countries in which we sell
products.

The following table depicts our region-specific revenue as a percent of total
revenue for each period:




                       Six Months Ended
                  ----------------------------
                  Sept 30,       Sept 30,
Region               2005          2004
---------------   ----------------------------
US                    57%           47%
EMEA                  23%           27%
Asia Pacific          20%           26%







     Some of our functions, such as software development, sales and customer
support, are also being performed outside the United States.

     Our non-U.S. operations are subject to risks inherent in the conduct of
international business, including:

      o    unexpected changes in regulatory requirements;

      o    longer payment cycles;

      o    currency exchange rate fluctuations;

      o    import and export license requirements;

      o    tariffs and other barriers;

      o    political unrest, terrorism and economic instability;

      o    disruption of our operations due to local labor conditions;

      o    limited intellectual property protection;

      o    difficulties in collecting trade receivables;

      o    difficulties in managing distributors or representatives;

      o    difficulties in managing an organization spread over
           various countries;

      o    difficulties in staffing foreign subsidiary or joint venture
           operations; and

      o    potentially adverse tax consequences.

      Our success depends, in part, on our ability to anticipate and address
these risks. There can be no assurance that we would do so effectively, or that
these or other factors will not adversely affect our business or operating
results.
                                       23

<PAGE>

      Revenue from our international operations is subject to currency
fluctuation risks. Our international sales generally are denominated in local
currencies. Fluctuations in the value of currencies in which we conduct business
relative to the United States dollar result in currency transaction gains and
losses, and the impact of future exchange rate fluctuations cannot be accurately
predicted. Future fluctuations in currency exchange rates may have a material
adverse impact on revenue from international sales, and thus on our business,
financial condition and results of operations. When deemed appropriate, we may
engage in currency exchange rate hedging transactions in an attempt to mitigate
the impact of adverse exchange rate fluctuations. However, these currency
hedging policies may not be successful, and they may increase the negative
impact of exchange rate fluctuations.

      Consolidation within the pharmaceutical and biotechnology industries may
lead to fewer potential customers for our products and services. A significant
portion of our customer base consists of pharmaceutical and biotechnology
companies. Continued consolidation within the pharmaceutical and biotechnology
industries may result in fewer customers for our products and services. If one
of the parties to a consolidation uses the products or services of our
competitors, we may lose existing customers as a result of such consolidation.

      We expect that our stock price will fluctuate significantly, and you may
not be able to resell your shares at or above your investment price. The stock
market, especially in recent years, has experienced significant volatility
particularly with technology company stocks. The volatility of technology
company stock prices often does not relate to the operating performance of the
companies represented by the stock. We could experience volatility in the price
of our common stock as a result of:

      o    actual and anticipated fluctuations in our quarterly
           financial and operating results;

      o    market conditions in the technology and software sectors;

      o    issuance of new or changed securities analysts'
           reports or recommendations;

      o    developments or disputes concerning our intellectual
           property or other proprietary rights;

      o    introduction of technological innovations or new commercial
           products by us or our competitors;

      o    market acceptance of our products and services; and

      o    additions or departures of key personnel.

      These and other external factors may cause the market price and demand for
our common stock to fluctuate substantially, which may limit or prevent
investors from readily selling their shares of our common stock and may
otherwise negatively affect the liquidity of our common stock. In addition, in
the past, when the market price of a stock has been volatile, holders of that
stock have occasionally instituted securities class action litigation against
the company that issued the stock. If any of our stockholders were to bring a
lawsuit against us, we could incur substantial costs defending the lawsuit. Such
a lawsuit could also divert the time and attention of our management.

      As institutions hold the majority of our common stock in large blocks,
substantial sales by these stockholders could depress the market price for our
shares. As of September 30, 2005, the top ten institutional holders of our
common stock held approximately 54% of our outstanding common stock. As a
result, if one or more of these major stockholders were to sell all or a portion
of their holdings, or if the market were to perceive that such sale or sales may
occur, the market price of our common stock may fall significantly.

      Because we do not intend to pay dividends, our stockholders will benefit
from an investment in our common stock only if our stock price appreciates in
value. We have never declared or paid any cash dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance the expansion
of our business and do not expect to pay any cash dividends in the foreseeable
future. As a result, the success of your investment in our common stock will
depend entirely upon any future appreciation in its value. There is no guarantee
that our common stock will appreciate in value or even maintain the price at
which you purchased your shares.

      Anti-takeover provisions under the Delaware General Corporation Law,
provisions in our certificate of incorporation and bylaws, and our adoption of a
stockholder rights plan may render more difficult the accomplishment of mergers,
the assumption of control by a principal stockholder, and the removal of
management. Certain provisions of the Delaware General Corporation Law may delay
or deter attempts to secure control of our company without the consent of our
management. Also, our governing documents provide for a staggered board of
directors, which will make it more difficult for a potential acquirer to gain
control of our board of directors. In 2002, we adopted a stockholder rights
plan, which is triggered upon commencement or announcement of a hostile tender
offer or when any one person or group acquires 15% or more of our common stock.
The rights plan, once triggered, enables our stockholders (other than the
stockholder responsible for triggering the rights plan) to purchase our common
stock at reduced prices. These provisions of our governing documents and
stockholder rights plan, and of Delaware law, could have the effect of delaying,
deferring or preventing a change of control, including without limitation a
proxy contest, making more difficult the acquisition of a substantial block of
our common stock. The provisions could also limit the price that investors might
be willing to pay in the future for shares of our common stock. Further, the
existence of these anti-takeover measures may cause potential bidders to look
elsewhere, rather than initiating acquisition discussions with us.


                                       24
<PAGE>

      Our operations may be interrupted by the occurrence of a natural disaster
or other catastrophic event at our primary facilities. Our research and
development operations and administrative functions are primarily conducted at
our facilities in San Diego, California, Cambridge, United Kingdom, and
Bangalore, India. Although we have contingency plans in effect for natural
disasters or other catastrophic events, catastrophic events could still disrupt
our operations. Even though we carry business interruption insurance policies,
we may suffer losses as a result of business interruptions that exceed the
coverage available under our insurance policies. Any natural disaster or other
catastrophic event in our facilities or the areas in which they are located
could have a significant negative impact on our operations.

      Our insurance coverage may not be sufficient to avoid material impact on
our financial position or results of operations resulting from claims or
liabilities against us, and we may not be able to obtain insurance coverage in
the future. We maintain insurance coverage for protection against many types of
liability. The extent of our insurance coverage is under continuous review and
is modified as we deem it necessary. Despite this insurance, it is possible that
claims or liabilities against us may have a material adverse impact on our
financial position or results of operations. We may not be able to obtain any
insurance coverage, or adequate insurance coverage, when our existing insurance
coverage expires.

CERTAIN RISKS RELATED TO INTELLECTUAL PROPERTY

      Patent rights offer limited protection for our intellectual property. The
patent positions of software and biotechnology companies are uncertain and
involve complex legal and factual questions. The coverage claimed in a patent
application can be significantly reduced before the patent is issued. There is a
significant risk that the scope of a patent may not be sufficient to prevent
third parties from marketing other products or technologies with the same
functionality of our products and technologies. Consequently, some or all of our
patent applications may not issue into patents, and any issued patents may
provide ineffective remedies or be challenged or circumvented. In addition, to
date, we have not invested significant funds or resources in obtaining patent
protection.

      Third parties may have filed patent applications of which we may or may
not have knowledge and which may adversely affect our business. Patent
applications in the U.S. are maintained in secrecy for 18 months from filing or
until a patent is issued. Under certain circumstances, patent applications are
never published but remain in secrecy until issuance. As a result, others may
have filed patent applications for products or technologies covered by one or
more pending patent applications upon which we are relying. There may be
third-party patents, patent applications and other intellectual property or
information relevant to our software and other technologies which are not known
to us and that block or compete with our software or other technologies or that
limit the scope of patent protection available to us. Moreover, from time to
time, patents may issue which block or compete with our software or other
technologies, or limit the scope of patent protection available to us.
Litigation may be necessary to enforce patents issued to us or to determine the
scope and validity of the intellectual property rights of third parties.

      We may not be able to protect adequately the trade secrets and
confidential information that we disclose to our employees. We rely upon trade
secrets, technical know-how and continuing technological innovation to develop
and maintain our competitive position. Competitors through their independent
discovery (or improper means, such as unauthorized disclosure or industrial
espionage) may come to know our proprietary information. We generally require
employees and consultants to execute confidentiality and
assignment-of-inventions agreements. These agreements typically provide that all
materials and confidential information developed by or made known to the
employee or consultant during his, her or its relationship with us are to be
kept confidential, and that all inventions arising out of the employee's or
consultant's relationship with us are our exclusive property. Our employees and
consultants may breach these agreements, and in we may not have an adequate
remedy. Additionally, in some instances, we may have failed to require that
employees and consultants execute confidentiality and assignment-of-inventions
agreements.


                                       25
<PAGE>

      Foreign laws may not afford us sufficient protections for our intellectual
property, and we may not seek patent protection outside the United States. The
laws of some foreign countries may not be as comprehensive as those of the
United States and may not be sufficient to protect our proprietary rights
abroad. In addition, we generally do not pursue patent protection outside the
United States because of cost and confidentiality concerns. Accordingly, our
international competitors could obtain foreign patent protection for, and market
overseas, products and technologies for which we are seeking patent protection
in the United States.

      We may not be able to adequately defend our intellectual property from
third party infringement, and third party challenges to our intellectual
property may adversely affect our rights and be costly and time consuming. Some
of our competitors have, or are affiliated with companies having, substantially
greater resources than we have, and those competitors may be able to sustain the
costs of complex patent litigation to a greater degree and for longer periods of
time than we can. Uncertainties resulting from the initiation and continuation
of any patent or related litigation could have a material adverse effect on our
ability to compete in the marketplace pending resolution of the disputed
matters. If our competitors prepare and file patent applications in the United
States that claim technology also claimed by us, we may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office to
determine the priority of invention, which could result in substantial costs to
us, even if the outcome is favorable to us. Similarly, opposition proceedings
may occur overseas, which may result in the loss or narrowing of the scope of
claims or legal rights. Such proceedings will at least result in delay in the
issuance of enforceable claims. An adverse outcome could subject us to
significant liabilities to third parties and require us to license disputed
rights from third parties or cease using the technology. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that we regard as proprietary.
In limited instances, we have licensed source codes of certain products to
customers or collaborators. For these reasons, policing unauthorized use of our
products may be difficult.

      We may be subject to claims of infringement by third parties. Third
parties may claim infringement by us of their intellectual property rights From
time to time, we have received letters claiming or suggesting that our products
or activities may infringe third party patents or other intellectual property
rights. Our products may infringe patent or other intellectual property rights
of third parties. A number of patents may have been issued or may be issued in
the future that could cover certain aspects of our technology and that could
prevent us from using technology that we use or expect to use. We may be
required to seek licenses for, or otherwise acquire rights to, technology as a
result of claims of infringement. We may not possess proper ownership or access
rights to the intellectual property we use. We expect that software product
developers will be subject to more infringement claims as the number of products
and competitors in our industry segments grows and the functionality of products
in different industry segments overlaps. Any claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into royalty or licensing agreements. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us, if at
all. In the event of a successful claim of product infringement against us, our
failure or inability to license or design around the infringed technology could
have a material adverse effect on our business, financial condition and results
of operations. In addition, we use third party code in our products, either
licensed from third parties or pursuant to open source licenses. These licenses,
especially in the case of open source code, may limit our ability to distribute
or charge for our products. In addition, to the extent our employees are
involved in research areas similar to those areas in which they were involved at
their former employers, we may be subject to claims that one of our employees,
or we, have inadvertently or otherwise used or disclosed the alleged trade
secrets or other proprietary information of a former employer.

CERTAIN RISKS RELATED TO THE SPIN-OFF OF PDD

      There can be no assurance that Accelrys will be successful on a
stand-alone basis. We have separated the Accelrys and PDD businesses through the
spin-off to our stockholders of 100% of the outstanding shares of common stock
of PDD on April 30, 2004. The transaction resulted in PDD being an independent,
publicly-traded company. Previously, we operated our businesses as part of a
broader corporate organization rather than as a stand-alone company.
Historically, certain corporate functions had been centralized for PDD and
Accelrys. Following the spin-off, we have not been able to rely on the financial
and other resources and the cash flows generated from the combined Accelrys and
PDD operations.

      We may be required to indemnify PDD or may not be able to collect on
indemnification rights from PDD. As part of the spin-off, we and PDD have agreed
to indemnify one another with respect to the indebtedness, liabilities and
obligations that will be retained by our respective companies. One such
obligation includes a guarantee by us to the landlord of PDD's obligations under
the existing New Jersey laboratory and headquarters leases, with respect to
which PDD has agreed to indemnify us should we be required to make any payment
under the guarantee. These indemnification obligations could be significant as
the future minimum lease payments as of September 30, 2005 was approximately
$25.8 million. PDD's ability to satisfy any such indemnification obligations
(including, without limitation, PDD's commitment to indemnify us in the event
that we are required to make any payment under our guarantee of its leases) will
depend upon PDD's future financial strength. We cannot be sure that, if PDD
becomes obligated to indemnify us for any substantial obligations, PDD will have
the ability to do so. There also can be no assurance that we will be able to
satisfy any indemnification obligations to PDD. Any required payment by PDD or
us could have a material adverse effect on our business, and any failure by PDD
or us to satisfy our respective obligations could have a material adverse effect
on the other company's business.

                                       26
<PAGE>

      SHOULD ONE OR MORE OF THE ABOVE-DESCRIBED RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, OUR ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Our foreign currency exchange rate risk is greatest for Dollar/Sterling,
Dollar/Euro and Dollar/Yen fluctuations. When deemed appropriate, we engage in
exchange rate-hedging transactions in an attempt to mitigate the impact of
adverse exchange rate fluctuations. At September 30, 2005, we had no hedging
transactions in effect.

      Our exposure to market risks associated with changes in interest rates
relates primarily to the increase or decrease in the amount of interest income
earned on our investment portfolio, since we have no debt. We seek to ensure the
safety and preservation of invested funds by limiting default risks, market risk
and reinvestment risk. We mitigate default risk by investing in investment grade
securities. A hypothetical 100 basis point adverse move in interest rates along
the entire interest rate yield curve would not have materially affected the fair
value of our interest sensitive financial instruments as of September 30, 2005.

ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

      Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended. Based on this evaluation, our principal
executive officer and our principal financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report. There were no changes in our internal control over
financial reporting during the quarter ended September 30, 2005 that have
materially effected, or are reasonably likely to materially affect, our internal
control over financial reporting.

                           PART II - OTHER INFORMATION

ITEM 1.         LEGAL PROCEEDINGS
                NONE

ITEM 2.         UNREGISTERED SALES OF EQUIY SECURITIES AND USE OF PROCEEDS
                NONE

ITEM 3.         DEFAULTS UPON SENIOR SECURITIES
                NONE

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

               Accelrys held its Annual Meeting of Stockholders (the Annual
               Meeting) on August 2, 2005. Of the 6,116,780 shares of common
               stock entitled to vote at such meeting, there were present in
               person or by roxy 23,703,753 shares. At the Annual Meeting, the
               stockholders of Accelrys approved the following matters:


               Proposal One: Election of Director
               This proposal involved the election of Gary E. Costley, Ph.D as
               director for a term of three years or Pntil his successor is
               elected. The vote was as follows: 20,542,088 votes for and
               3,161,665 votes withheld.

                                       27
<PAGE>


               Proposal Two: 2005 Employee Stock Purchase Plan
               This proposal involved the approval of the Company's 2005
               Employee Stock Purchase Plan and the reservation of 1,000,000
               shares of common stock for issuance thereunder. The vote was as
               follows: 14,188,934 votes Tor, 1,062,825 votes against, 72,738
               votes abstained and 8,379,256 broker non-votes.

               Proposal Three: The Exchange Program
               This proposal involved the approval of a stock option exchange
               program approved by the board of directors Providing for the
               cancellation of certain stock options having an as-adjusted
               exercise price greater than $9.00 per share in exchange for
               restricted shares of common stock. The vote was as follows:
               9,384,276 votes for, 5,857,891 votes against, 82,330 votes
               abstained and 8,379,256 broker non-votes.

               Proposal Four: Amended 2004 Plan
               This proposal involved the approval of the amendment and
               restatement of the 2004 Plan (to be referred to Ps the "Amended
               2004 Plan") to, among other things, increase the number of shares
               available for issuance under the plan. The vote was as follows:
               9,661,574 votes for, 5,562,433 votes against, 100,490 votes
               abstained and 8,379,256 broker non-votes.

               Proposal Five: Ratification of Selection of Independent
               Registered Public Accounting Firm This proposal involved the
               ratification of the appointment of Ernst & Young, LLP as the
               Company's independent registered public accounting firm for the
               fiscal year ending March 31, 2006. The vote was as follows:
               23,617,195 votes for, 61,824 votes against, and 24,733 votes
               abstained.



ITEM 5.         OTHER INFORMATION

                On August 2, 2005, our Board of Directors approved an increase
                in the annual retainers for the Company's directors. The annual
                retainer for the Company's lead director has been increased from
                $50,000 to $75,000. The annual retainer for the Company's other
                directors has been increased from $20,000 to $25,000. The
                retainers will be payable in arrears in equal quarterly
                installments.

                On August 2, 2005, the Human Resources Committee of our Board of
                Directors approved a management incentive plan for fiscal year
                2006 (the "Bonus Plan"), pursuant to which management-level
                employees of the Company and its subsidiaries are eligible to
                receive cash bonuses based on the Company's achievement of
                certain corporate goals specified in the Bonus Plan. These
                bonuses are designed to attract, motivate, retain and reward the
                Company's management-level employees. Under the Bonus Plan, the
                Chief Executive Officer has an annual bonus target equal to 85%
                of base salary and Vice Presidents have an annual bonus target
                equal to 40% of base salary. Payouts under the Bonus Plan will
                vary dependant upon the level of achievement of the specified
                corporate goals, and will range from zero to two times the
                targeted bonus amount. The Human Resources Committee will make
                all final determinations regarding the achievement of goals and
                the payment of bonuses pursuant to the Bonus Plan. Likewise, the
                Human Resources Committee has the ability to modify, suspend or
                terminate the Bonus Plan at any time.

ITEM 6.         EXHIBITS
                See Exhibit Index attached

                                       28

<PAGE>

                                   SIGNATURE

      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.


                            ACCELRYS, INC.

                            By:   /s/ DAVID M. SANKARAN
                                  ---------------------------------------------
                                  David M. Sankaran
                                  Senior Vice President and Chief Financial
                                  Officer (Duly Authorized Officer and Chief
                                  Financial Officer)

                            Date: November 4, 2005

                                       29
                                                            Accelrys, Inc.
<PAGE>
<TABLE>
<CAPTION>

                                  Exhibit Index

                                                                                                                   Page No.
                                                                                                                   --------
<S>       <C>                                                                                                       <C>

     3.1    Restated Certificate of Incorporation of Pharmacopeia, Inc.
            (incorporated by reference to Exhibit 3.1 to the Company's Annual
            Report on Form 10-K for the fiscal year ended December 31, 1996).

     3.2    Certificate of Amendment of the Restated Certificate of Incorporation
            of Pharmacopeia, Inc. (incorporated by reference to Exhibit 3.1 to the
            Company's Annual Report on Form 10-K for the fiscal year ended March
            31, 2005.

     3.3    Amended and Restated Bylaws of Accelrys, Inc. as amended on June
            9, 2005. (incorporated by reference to Exhibit 3.2 to Company's
            Annual Report on Form 10-K for the fiscal year ended March 31,
            2005)

     4.1    Rights Agreement, dated as of September 6, 2002, between Pharmacopeia,
            Inc. and American Stock Transfer & Trust Company, as Rights Agent,
            which includes as Exhibit A thereto the Certificate of Designation,
            Preferences and Rights of Series A Junior Participating Preferred
            Stock and Exhibit B thereto the Form of Right Certificate
            (incorporated by reference to Exhibit 4.1 to the Company's Report on
            Form 8-K dated September 4, 2002).

     10.0#  FY06 Management Incentive Plan Form (incorporated by reference to
            Exhibit 10.26 of the Company's Report on Form 10-Q for the quarter
            ended June 31, 2005).

     10.1#  Separation Agreement with Mahesh Krishnamurthy (incorporated by
            reference to Exhibit 1.011 of the Sompany's Report on Form 8-K dated
            October 7, 2005).

     10.2#  Employment Agreement with Richard Murphy (incorporated by reference
            to Exhibit 99.1 of the Company's Eeport on Form 8-K dated October 18,
            2005).

     10.3*# Revised Terms and Conditions of Revised Relocation Package of David
            Sankaran, dated as of July 13, 2005 Rerms of Continuing Employment of
            Mathew Hahn, dated as of August 12, 2005

     10.4*# Terms of continuing employment of Mathew Hahn, dated as of August
            12, 2005

     31.1*  Section 302 Certification of the Principal Executive Officer                                               31

     31.2*  Section 302 Certification of the Principal Financial Officer                                               32

     32.1*  Section 906 Certification of the Chief Executive Officer and Chief
            Financial Officer                                                                                          33

---------------
*                Filed herewith
#                Represents a management contract or compensatory plan or arrangement

</TABLE>

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