##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2009

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 incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|10188 Telesis Court, Suite 100, San Diego, California          |  | 92121-4779                          
|(Address of principal executive offices)                       |  | (Zip Code)                          

(858) 799-5000

(Registrants telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

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



|                           |  |                      |  |                                             |  |                             
|-------------------------- |  | -------------------- |  | ------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x |  | Non-accelerated filer   ̈                    |  | Smaller reporting company   ̈
|                           |  |                      |  | (Do not check if smaller reporting company) |  |                             

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

The number of outstanding shares of the registrants common stock, par value $0.0001 per share, as of October 19, 2009, was 27,561,323, net of
treasury shares.









---

##### Table of Contents

ACCELRYS, INC.

FORM 10-Q  QUARTERLY REPORT

For The Quarterly Period Ended September 30, 2009

Table of Contents



|                               |  |                                                                                                                                          |  |   
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION |  |                                                                                                                                         
|                               |  |                                                                                                                                         
|Item 1.                        |  | Condensed Consolidated Financial Statements                                                                                              |  | 3 
|                               |  |                                                                                                                                         
|                               |  | Condensed consolidated balance sheets as of September 30, 2009 (unaudited) and March 31,
2009                                            |  | 3 
|                               |  |                                                                                                                                         
|                               |  | Condensed consolidated statements of operations (unaudited) for the three-month and six-month periods ended
 September 30, 2009 and 2008 |  | 4 
|                               |  |                                                                                                                                         
|                               |  | Condensed consolidated statements of cash flows (unaudited) for the six-month period ended September 30, 2009
 and 2008                  |  | 5 
|                               |  |                                                                                                                                         
|                               |  | Notes to condensed consolidated financial statements (unaudited)                                                                         |  | 6 
|                               |  |                                                                                                                                         
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                                    |  | 16
|                               |  |                                                                                                                                         
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                                               |  | 22
|                               |  |                                                                                                                                         
|Item 4.                        |  | Controls and Procedures                                                                                                                  |  | 22
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                                                         
|                               |  |                                                                                                                                         
|Item 1.                        |  | Legal Proceedings                                                                                                                        |  | 22
|                               |  |                                                                                                                                         
|Item 1A.                       |  | Risk Factors                                                                                                                             |  | 22
|                               |  |                                                                                                                                         
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                                                      |  | 30
|                               |  |                                                                                                                                         
|Item 6.                        |  | Exhibits                                                                                                                                 |  | 30
|                               | 
|Signature                      |  | 31                                                                                                                                      



2



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



|Item 1. | Condensed Consolidated Financial Statements
|------- | -------------------------------------------

Accelrys, Inc.

Condensed Consolidated
Balance Sheets

(In thousands)



|                                                                                                                                                 |  |                   |          |   |               |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | -------- | - | ------------- | - | -------- | -
|                                                                                                                                                 |  | September 30,2009 |          |   | March 31,2009 |  
|                                                                                                                                                 |  | (Unaudited)       |          |   |               |  
|Assets                                                                                                                                           |  |                   |          |   |               |   |          |  
|Current assets:                                                                                                                                  |  |                   |          |   |               |   |          |  
|Cash and cash equivalents                                                                                                                        |  | $                 | 50,096   |   |               | $ | 40,595   |  
|Marketable securities                                                                                                                            |  |                   | 22,139   |   |               |   | 20,915   |  
|Trade receivables, net of allowance for doubtful accounts of $172 as of September 30, 2009 and March 31,
2009                                    |  |                   | 8,577    |   |               |   | 21,860   |  
|Prepaid expenses, deferred tax assets and other current assets                                                                                   |  |                   | 3,730    |   |               |   | 3,403    |  
|                                                                                                                                                 |  |                   |          |   |               |   |          |  
|Total current assets                                                                                                                             |  |                   | 84,542   |   |               |   | 86,773   |  
|Marketable securities, net of current portion                                                                                                    |  |                   |         |   |               |   | 12,703   |  
|Restricted cash                                                                                                                                  |  |                   | 7,748    |   |               |   | 7,556    |  
|Property and equipment, net                                                                                                                      |  |                   | 2,701    |   |               |   | 3,099    |  
|Goodwill                                                                                                                                         |  |                   | 42,663   |   |               |   | 42,663   |  
|Purchased intangible assets, net                                                                                                                 |  |                   | 4,676    |   |               |   | 5,627    |  
|Other assets                                                                                                                                     |  |                   | 2,149    |   |               |   | 2,193    |  
|                                                                                                                                                 |  |                   |          |   |               |   |          |  
|Total assets                                                                                                                                     |  | $                 | 144,479  |   |               | $ | 160,614  |  
|                                                                                                                                                 |  |                   |          |   |               |   |          |  
|Liabilities and stockholders equity                                                                                                             |  |                   |          |   |               |   |          |  
|Current liabilities:                                                                                                                             |  |                   |          |   |               |   |          |  
|Accounts payable                                                                                                                                 |  | $                 | 686      |   |               | $ | 1,411    |  
|Accrued liabilities                                                                                                                              |  |                   | 3,412    |   |               |   | 4,380    |  
|Accrued compensation and benefits                                                                                                                |  |                   | 6,324    |   |               |   | 9,308    |  
|Current portion of accrued restructuring charges                                                                                                 |  |                   | 239      |   |               |   | 328      |  
|Current portion of deferred revenue                                                                                                              |  |                   | 41,253   |   |               |   | 56,179   |  
|                                                                                                                                                 |  |                   |          |   |               |   |          |  
|Total current liabilities                                                                                                                        |  |                   | 51,914   |   |               |   | 71,606   |  
|Deferred revenue, net of current portion                                                                                                         |  |                   | 928      |   |               |   | 1,045    |  
|Deferred tax liability                                                                                                                           |  |                   | 2,077    |   |               |   | 1,723    |  
|Accrued restructuring charges, net of current portion                                                                                            |  |                   | 600      |   |               |   | 664      |  
|Lease-related liabilities, net of current portion                                                                                                |  |                   | 4,579    |   |               |   | 4,817    |  
|Stockholders equity:                                                                                                                            |  |                   |          |   |               |   |          |  
|Preferred stock, $.0001 par value; 2,000 shares authorized; no shares issued and outstanding                                                     |  |                   |         |   |               |   |         |  
|Common stock, $.0001 par value; 60,000 shares authorized; 28,203 and 27,871 shares issued at September 30, 2009 and
March 31, 2009, respectively |  |                   | 3        |   |               |   | 3        |  
|Additional paid-in capital                                                                                                                       |  |                   | 269,951  |   |               |   | 268,194  |  
|Lease guarantee                                                                                                                                  |  |                   | (415     | ) |               |   | (446     | )
|Treasury stock; 644 shares at each of September 30, 2009 and March 31, 2009                                                                      |  |                   | (8,340   | ) |               |   | (8,340   | )
|Accumulated deficit                                                                                                                              |  |                   | (177,970 | ) |               |   | (180,560 | )
|Accumulated other comprehensive income                                                                                                           |  |                   | 1,152    |   |               |   | 1,908    |  
|                                                                                                                                                 |  |                   |          |   |               |   |          |  
|Total stockholders equity                                                                                                                       |  |                   | 84,381   |   |               |   | 80,759   |  
|                                                                                                                                                 |  |                   |          |   |               |   |          |  
|Total liabilities and stockholders equity                                                                                                       |  | $                 | 144,479  |   |               | $ | 160,614  |  
|                                                                                                                                                 |  |                   |          |   |               |   |          |  

See accompanying notes to these condensed consolidated financial statements.



3



---

##### Table of Contents

Accelrys, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)



|                                                              |  |                                  |        |                                |   |        |  |   |        |   |  |   |       
|------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------ | - | ------ |  | - | ------ | - |  | - | ------
|                                                              |  | Three Months Ended September 30, |        | Six Months Ended September 30,
|                                                              |  | 2009                             |        | 2008                           |   | 2009   |  |   | 2008  
|Revenue                                                       |  | $                                | 19,988 |                                | $ | 20,112 |  | $ | 40,129 |   |  | $ | 40,412
|Cost of revenue                                               |  |                                  | 3,350  |                                |   | 3,545  |  |   | 6,800  |   |  |   | 7,005 
|                                                              |  |                                  |        |                                |   |        |  |   |        |   |  |   |       
|Gross margin                                                  |  |                                  | 16,638 |                                |   | 16,567 |  |   | 33,329 |   |  |   | 33,407
|Operating expenses:                                           |  |                                  |        |                                |   |        |  |   |        |   |  |   |       
|Product development                                           |  |                                  | 3,551  |                                |   | 3,832  |  |   | 7,454  |   |  |   | 8,110 
|Sales and marketing                                           |  |                                  | 7,812  |                                |   | 8,190  |  |   | 15,955 |   |  |   | 16,307
|General and administrative                                    |  |                                  | 3,412  |                                |   | 3,259  |  |   | 7,070  |   |  |   | 6,720 
|Restructuring charges (recoveries)                            |  |                                  | 17     |                                |   | 8      |  |   | (74    | ) |  |   | 850   
|                                                              |  |                                  |        |                                |   |        |  |   |        |   |  |   |       
|Total operating expenses                                      |  |                                  | 14,792 |                                |   | 15,289 |  |   | 30,405 |   |  |   | 31,987
|                                                              |  |                                  |        |                                |   |        |  |   |        |   |  |   |       
|Operating income                                              |  |                                  | 1,846  |                                |   | 1,278  |  |   | 2,924  |   |  |   | 1,420 
|Interest and other income, net                                |  |                                  | 273    |                                |   | 350    |  |   | 268    |   |  |   | 623   
|                                                              |  |                                  |        |                                |   |        |  |   |        |   |  |   |       
|Income before taxes                                           |  |                                  | 2,119  |                                |   | 1,628  |  |   | 3,192  |   |  |   | 2,043 
|Income tax expense                                            |  |                                  | 273    |                                |   | 401    |  |   | 602    |   |  |   | 730   
|                                                              |  |                                  |        |                                |   |        |  |   |        |   |  |   |       
|Net income                                                    |  | $                                | 1,846  |                                | $ | 1,227  |  | $ | 2,590  |   |  | $ | 1,313 
|                                                              |  |                                  |        |                                |   |        |  |   |        |   |  |   |       
|Net income per share amounts:                                 |  |                                  |        |                                |   |        |  |   |        |   |  |   |       
|Basic                                                         |  | $                                | 0.07   |                                | $ | 0.05   |  | $ | 0.09   |   |  | $ | 0.05  
|Diluted                                                       |  | $                                | 0.07   |                                | $ | 0.04   |  | $ | 0.09   |   |  | $ | 0.05  
|Weighted average shares used to compute net income per share: |  |                                  |        |                                |   |        |  |   |        |   |  |   |       
|Basic                                                         |  |                                  | 27,503 |                                |   | 27,094 |  |   | 27,403 |   |  |   | 26,992
|Diluted                                                       |  |                                  | 27,901 |                                |   | 27,367 |  |   | 27,662 |   |  |   | 27,177

See accompanying notes to these condensed consolidated financial statements.



4



---

##### Table of Contents

Accelrys, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                              |  |                                |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                              |  | Six Months Ended September 30, |        
|                                                                              |  | 2009                           |         |   | 2008 |  
|Cash flows from operating activities:                                         |  |                                |         |   |      |   |         |  
|Net income                                                                    |  | $                              | 2,590   |   |      | $ | 1,313   |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                 |  |                                | 1,766   |   |      |   | 1,926   |  
|Stock-based compensation                                                      |  |                                | 1,809   |   |      |   | 1,993   |  
|Other                                                                         |  |                                | (378    | ) |      |   | 59      |  
|Changes in operating assets and liabilities:                                  |  |                                |         |   |      |   |         |  
|Trade receivables                                                             |  |                                | 14,374  |   |      |   | 11,339  |  
|Prepaid expenses and other current assets                                     |  |                                | (142    | ) |      |   | 1,017   |  
|Other assets                                                                  |  |                                | (77     | ) |      |   | (367    | )
|Accounts payable                                                              |  |                                | (771    | ) |      |   | (508    | )
|Accrued liabilities                                                           |  |                                | (4,516  | ) |      |   | (3,072  | )
|Deferred revenue                                                              |  |                                | (17,876 | ) |      |   | (16,228 | )
|                                                                              |  |                                |         |   |      |   |         |  
|Net cash used in operating activities                                         |  |                                | (3,221  | ) |      |   | (2,528  | )
|Cash flows from investing activities:                                         |  |                                |         |   |      |   |         |  
|Purchases of property and equipment, net                                      |  |                                | (252    | ) |      |   | (500    | )
|Purchase of software license                                                  |  |                                |        |   |      |   | (1,885  | )
|Purchases of marketable securities                                            |  |                                | (19,192 | ) |      |   |        |  
|Proceeds from maturities of marketable securities                             |  |                                | 31,014  |   |      |   | 1,122   |  
|                                                                              |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                           |  |                                | 11,570  |   |      |   | (1,263  | )
|Cash flows from financing activities:                                         |  |                                |         |   |      |   |         |  
|Proceeds from issuance of common stock, net of shares tendered                |  |                                | (60     | ) |      |   | 466     |  
|                                                                              |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                           |  |                                | (60     | ) |      |   | 466     |  
|Effect of changes in exchange rates on cash and cash equivalents              |  |                                | 1,212   |   |      |   | (814    | )
|                                                                              |  |                                |         |   |      |   |         |  
|Increase (decrease) in cash and cash equivalents                              |  |                                | 9,501   |   |      |   | (4,139  | )
|Cash and cash equivalents at beginning of period                              |  |                                | 40,595  |   |      |   | 53,126  |  
|                                                                              |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                    |  | $                              | 50,096  |   |      | $ | 48,987  |  
|                                                                              |  |                                |         |   |      |   |         |  

See accompanying notes to these condensed consolidated financial statements.



5



---

##### Table of Contents

Accelrys, Inc.

Notes to Condensed Consolidated Financial Statements



|1. | Basis of Presentation and Significant Accounting Policies
|-- | ---------------------------------------------------------

Financial Statement Preparation

The condensed consolidated financial
statements of Accelrys, Inc. (we, our or us) as of September 30, 2009, and for the three and six months ended September 30, 2009 and 2008 are unaudited. We have condensed or omitted certain information
and disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States (GAAP). We believe the disclosures made are adequate to make the information presented
not misleading. However, you should read these condensed consolidated financial statements in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2009. We have evaluated subsequent events through November 6, 2009.

In the opinion of management, these
condensed consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of results for the interim periods presented.

Our business is subject to seasonal variations. Historically, we have received approximately two-thirds of our annual customer orders in the
second half of our fiscal year. In accordance with our revenue recognition policies, the revenue associated with these orders is generally recognized over the contractual license term. Therefore, because our policy is to accrue and expense sales
commissions and royalties upon the invoicing of customer orders, we have historically experienced an increase in operating costs and expenses and a decrease in income during the second half of our fiscal year. Additionally, our cash flows from
operations have historically been positive in the fiscal quarter ended March 31 as we collect the accounts receivable generated from customer orders received in the second half of our fiscal year, while we have historically experienced negative
cash flows from operations in the other three fiscal quarters. As a result of these and other seasonal variations, we believe that sequential quarter-to-quarter comparisons of our operating results are not a good indication of our future performance
and that the interim financial results for the periods presented in this quarterly report are not necessarily indicative of results for a full year or for any subsequent interim period.

Principles of Consolidation

These consolidated financial statements
include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to stock-based compensation, income taxes and the valuation of goodwill, intangibles and other long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual future results could differ from those estimates.

Revenue Recognition

We generate revenue from the following primary sources:



| |  |  | software licenses,
| | - |  | ------------------



| |  |  | post-contract customer support and maintenance services on licensed software, collectively referred to as PCS, and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | professional services.
| | - |  | ----------------------

Customer billings generated in connection with our revenue-generating activities are initially recorded as deferred revenue. We then recognize the revenue from these customer billings as set forth below
and when all of the following criteria are met:



| |  |  | a fully executed written contract and/or purchase order has been obtained from the customer (i.e., persuasive evidence of an arrangement exists),
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the contractual price of the product or services has been defined and agreed to in the contract (i.e., price is fixed or determinable),
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delivery of the product or service has occurred and no material uncertainties regarding customer acceptance of the delivered product or service exist,
and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



6



---

##### Table of Contents

| |  |  | collection of the purchase price from the customer is considered probable.
| | - |  | --------------------------------------------------------------------------

Software Licenses.We license software predominantly on a term basis. When sold perpetually, our standard perpetual software
licensing arrangements generally include twelve months of bundled PCS, while our standard term-based software licensing arrangements typically include PCS for the full duration of the term license. Because we do not have vendor specific objective
evidence of the fair value of these elements, we recognize as revenue the entire fee for such perpetual and term-based licenses ratably over the term of the bundled PCS.

Renewal of PCS under Perpetual Software Licenses.Our PCS includes the right to receive unspecified upgrades or enhancements and technical support. Fees from customer renewals of PCS related to
previously purchased perpetual licenses are recognized ratably over the term of the PCS.

Professional Services.We
provide certain services to our customers, including non-complex product training, installation, implementation and other professional services which are non-essential to the operation of the software. We also perform professional services for our
customers designed to enhance the value of our software products by creating extensions to functionality to address a clients specific business needs. When sold separately, revenue from these services is recorded under the proportional
performance or completed performance method.

Multi-Element Arrangements.For multi-element arrangements which include
software licenses, PCS and non-complex training, installation and implementation services which are non-essential to the operation of the software, the entire fee for such arrangements is recognized as revenue ratably over the term of the PCS or
delivery of the services, whichever is longer. For multi-element arrangements which also include services that are essential to the operation of the software, the fee for such arrangements is generally deferred until the services essential to the
operation of the software have been performed, at which point the entire fee for such arrangements is recognized as revenue ratably over the remaining term of the PCS or the delivery of the non-essential services, whichever is longer.

Software Development Costs

Costs incurred internally in the research and development of new software products and significant enhancements to existing software products for computer software to be sold are expensed as incurred until the technological feasibility of
the product has been established. Technological feasibility occurs shortly before our internally developed software products are available for general release. We have determined that the internal costs eligible for capitalization are not material.
Costs paid to third parties for products in which technological feasibility has been established are capitalized upon purchase of the software.

At September 30, 2009 and March 31, 2009, we had $1.9 million of capitalized software purchased from third parties. This amount is included in purchased intangible assets, net, in the
accompanying condensed consolidated balance sheet. These costs are being amortized to cost of revenue on a straight-line basis over their estimated useful life of five years. Amortization expense was approximately $0.1 million for each of the
quarters ended September 30, 2009 and 2008, and approximately $0.2 million for each of the six-month periods ended September 30, 2009 and 2008.

Share Based Compensation

We estimate the fair value of our share-based
awards on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of certain input variables, as follows:

Expected Volatility. Volatility is a measure of the amount the stock price will fluctuate during the expected life of an award. We determine volatility based on our historical stock price
volatility over the most recent period equivalent to the expected life of the award, giving consideration to company-specific events impacting historical volatility that are unlikely to occur in the future, as well as anticipated future events that
may impact volatility. We also consider the historical stock price volatilities of comparable publicly traded companies.

Risk-Free Interest Rate.Our assumption of the risk-free interest rate is based on the interest rates on U.S. constant rate treasury securities with contractual terms approximately equal to the expected life of the award.

Expected Dividend Yield.Because we have not paid any cash dividends since our inception and do not anticipate paying dividends in
the foreseeable future, we assume a dividend yield of zero.

Expected Award Life.We determine the expected life of an
award by considering various relevant factors, including the vesting period and contractual term of the award, our employees historical exercise patterns and length of service, the expected future volatility of our stock price and employee
characteristics. We also consider the expected terms of comparable publicly traded companies. For the 2005 Employee Stock Purchase Plan (the ESPP) purchase rights, the expected life is equal to the current offering period under the stock
purchase plan.



7



---

##### Table of Contents

We also estimate at grant the likelihood that the award will ultimately vest (the
pre-vesting forfeiture rate) and revise the estimate, if necessary, in future periods if the actual forfeiture rate differs. We determine the pre-vesting forfeiture rate of an award based on our historical pre-vesting award forfeiture
experience, giving consideration to company-specific events impacting our historical pre-vesting award forfeiture experience that are unlikely to occur in the future as well as anticipated future events that may impact forfeiture rates.

Income Taxes

Deferred
tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial carrying amounts and the tax basis of existing assets and liabilities by applying enacted statutory tax rates applicable to future
years. The provision for income taxes is based on our estimates for taxable income of the various legal entities and jurisdictions in which we operate. As such, income tax expense may vary from the customary relationship between income tax expense
and pre-tax income. We establish a valuation allowance against our net deferred tax assets to reduce deferred tax assets to the amount expected to be realized.

We determine whether the benefits of our tax positions are more-likely-than-not of being sustained upon audit based on the technical merits of the tax position. We recognize the impact of an uncertain
income tax position taken on our income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position is not recognized if it has less than a 50%
likelihood of being sustained. We have an unrecognized tax benefit of $12.3 million related to pre-acquisition net operating losses (NOLs) from acquisitions outside of the U.S. Upon realization of these pre-acquisition NOLs, we will
recognize the benefit as a credit to income. As of September 30, 2009, we have not realized the benefit of any of these pre-acquisition NOLs.

Interest and penalties related to income tax matters are recognized in income tax expense. During the three and six months ended September 30, 2009 we did not incur any expense related to interest or
penalties for income tax matters, and no such amounts were accrued as of September 30, 2009.



|2. | Net Income Per Share
|-- | --------------------

Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income per share
is computed by dividing the net income for the period by the weighted average number of common stock and common stock equivalents outstanding during the period. Potentially dilutive common share equivalents consist of common stock options and
unvested restricted stock units (RSUs).



|                                                             |  |                                          |        |                                |   |        |  |      |        |  |   |       
|------------------------------------------------------------ |  | ---------------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                             |  | Three Months Ended September 30,         |        | Six Months Ended September 30,
|                                                             |  | 2009                                     |        | 2008                           |   | 2009   |  | 2008
|                                                             |  | (In thousands, except per share amounts)
|Numerator:                                                   |  |                                          |        |                                |   |        |  |      |        |  |   |       
|Net income                                                   |  | $                                        | 1,846  |                                | $ | 1,227  |  | $    | 2,590  |  | $ | 1,313 
|Denominator:                                                 |  |                                          |        |                                |   |        |  |      |        |  |   |       
|Weighted average common shares outstanding                   |  |                                          | 27,503 |                                |   | 27,094 |  |      | 27,403 |  |   | 26,992
|Dilutive potential common stock equivalents                  |  |                                          | 398    |                                |   | 273    |  |      | 259    |  |   | 185   
|                                                             |  |                                          |        |                                |   |        |  |      |        |  |   |       
|Weighted average shares and dilutive potential common shares |  |                                          | 27,901 |                                |   | 27,367 |  |      | 27,662 |  |   | 27,177
|                                                             |  |                                          |        |                                |   |        |  |      |        |  |   |       
|Net income per share:                                        |  |                                          |        |                                |   |        |  |      |        |  |   |       
|Basic                                                        |  | $                                        | 0.07   |                                | $ | 0.05   |  | $    | 0.09   |  | $ | 0.05  
|Diluted                                                      |  | $                                        | 0.07   |                                | $ | 0.04   |  | $    | 0.09   |  | $ | 0.05  
|                                                             |  |                                          |        |                                |   |        |  |      |        |  |   |       

Potentially dilutive common share equivalents that were excluded from the diluted net
income per share calculations as their effect would be anti-dilutive totaled approximately 2.0 million shares and 2.7 million shares for the three and six months ended September 30, 2009, respectively, and 3.1 million shares and
3.0 million shares for the three and six months ended September 30, 2008, respectively.



|3. | Share-Based Payments
|-- | --------------------

Share-Based
Compensation Plans

On August 2, 2005, our stockholders approved the Amended and Restated 2004 Stock Incentive Plan
(the 2004 Plan). The 2004 Plan authorizes the grant of equity awards to purchase up to that number of shares of our common stock equal to the sum of (i) 1,900,000 shares and (ii) the number of shares of common stock underlying
any stock awards granted under certain prior share-



8



---

##### Table of Contents

based compensation plans that expire or are cancelled or forfeited without having been exercised in full or that are repurchased by us. Potential types of equity awards that may be granted under
the 2004 Plan to our officers, directors, employees and consultants include stock options, RSUs, restricted stock awards, common stock awards, stock appreciation rights, performance awards and deferred stock units. Pursuant to the 2004 Plan, any
shares of common stock that are awarded under the 2004 Plan as RSUs, restricted stock awards, common stock awards, performance awards or deferred stock units (but not as stock options or stock appreciation rights) are counted against the maximum
number of shares of common stock available for issuance under the 2004 Plan based on a 1.15-to-1 ratio. The terms and conditions of specific awards are set at the discretion of our board of directors although generally awards vest over not more than
four years, expire no later than ten years from the date of grant and do not have exercise prices less than the fair market value of the underlying common stock on the date of grant. At September 30, 2009, approximately 1,300,000 shares of our
common stock remained available for issuance pursuant to awards granted under the 2004 Plan.

On August 2, 2005, our
stockholders also approved the ESPP, under which we have reserved 1,000,000 shares of our common stock for issuance. Under the ESPP, employees may defer up to 10% of their base salary to purchase shares of our common stock, up to a maximum of
1,000 shares per offering period. The purchase price of the common stock is equal to 85% of the lower of the fair market value per share of our common stock on the commencement date of the applicable offering period or the applicable
purchase date. To date, we have issued approximately 427,000 shares under the ESPP and approximately 573,000 shares remained available for future issuance under the ESPP as of September 30, 2009.

We also maintain certain other share-based compensation plans, pursuant to which we did not grant awards during fiscal year 2010 and do not
intend to grant any further awards in the future. Notwithstanding the foregoing, we also entered into a Stock Option Agreement, dated June 15, 2009 (the Carnecchia Option Agreement), with Max Carnecchia, our new President and Chief
Executive Officer. Pursuant to the Carnecchia Option Agreement, we granted Mr. Carnecchia an option to purchase up to 800,000 shares of our common stock, at an exercise price equal to the fair market value of the stock as of the date of the
grant. Subject to certain acceleration provisions in the event of a change of control or Mr. Carnecchias death or disability, the option will vest over four years with 200,000 shares vesting on the first anniversary of the grant date, and
the remaining 600,000 shares vesting in equal monthly installments over the three-year period thereafter. The option represented by the Carnecchia Option Agreement was granted without stockholder approval as an inducement award pursuant to Rule
5635(c)(4) of the NASDAQ Listing Rules, and was not granted pursuant to any of our existing stock plans.

Share-Based Award Activity

Our stock options generally vest over four years and have a contractual term of 10 years. A summary of stock option activity
under our share-based compensation plans is as follows:



|                                  |  |                                          |   |  |                              |      |                         |     |                                         |     
|--------------------------------- |  | ---------------------------------------- | - |  | ---------------------------- | ---- | ----------------------- | --- | --------------------------------------- | ----
|                                  |  | Number ofShares                          |   |  | WeightedAverageExercisePrice |      | AggregateIntrinsicValue |     | WeightedAverageRemainingContractualLife
|                                  |  | (In thousands, except per share amounts)
|Outstanding at April 1, 2009      |  | 2,935                                    |   |  | $                            | 7.15 |                         |     |                                         |     
|Granted                           |  | 1,551                                    |   |  |                              | 5.70 |                         |     |                                         |     
|Exercised                         |  | (46                                      | ) |  |                              | 4.44 |                         |     |                                         |     
|Expired/Forfeited                 |  | (883                                     | ) |  |                              | 7.52 |                         |     |                                         |     
|                                  |  |                                          |   |  |                              |      |                         |     |                                         |     
|Outstanding at September 30, 2009 |  | 3,557                                    |   |  |                              | 6.46 |                         | 778 |                                         | 7.44
|                                  |  |                                          |   |  |                              |      |                         |     |                                         |     
|Exercisable at September 30, 2009 |  | 1,622                                    |   |  |                              | 7.26 |                         | 270 |                                         | 5.07
|                                  |  |                                          |   |  |                              |      |                         |     |                                         |     

RSUs granted under the 2004 Plan generally vest annually over three years and, once
vested, do not expire. Upon vesting of an RSU, employees are generally issued an equivalent number of shares of our common stock. A summary of RSU activity under our share-based compensation plans is as follows:



9



---

##### Table of Contents

|                               |  |                                          |   |  |                                              |     
|------------------------------ |  | ---------------------------------------- | - |  | -------------------------------------------- | ----
|                               |  | Number ofShares                          |   |  | WeightedAverageGrant DateFair Value PerShare
|                               |  | (In thousands, except per share amounts)
|Unvested at April 1, 2009      |  | 1,055                                    |   |  | $                                            | 5.72
|Granted                        |  | 350                                      |   |  |                                              | 5.93
|Vested                         |  | (291                                     | ) |  |                                              | 5.43
|Forfeited                      |  | (170                                     | ) |  |                                              | 5.52
|                               |  |                                          |   |  |                                              |     
|Unvested at September 30, 2009 |  | 944                                      |   |  | $                                            | 5.92
|                               |  |                                          |   |  |                                              |     

Included in the vested shares for the period are approximately 88,000 shares tendered
to us by employees for payment of minimum income tax obligations upon vesting of RSUs.

Share-Based Compensation Expense

The estimated fair value of our share-based awards is recognized as a charge against income on a straight-line basis over the requisite
service period, which is generally the vesting period of the award. Total stock-based compensation expense recognized in our condensed consolidated statements of operations for the three and six months ended September 30, 2009 and 2008 was as
follows:



|                                       |  |                                  |       |                                |   |       |  |      |       |  |   |      
|-------------------------------------- |  | -------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                       |  | Three Months Ended September 30, |       | Six Months Ended September 30,
|                                       |  | 2009                             |       | 2008                           |   | 2009  |  | 2008
|                                       |  | (In thousands)                  
|Cost of revenue                        |  | $                                | 49    |                                | $ | 106   |  | $    | 112   |  | $ | 204  
|Product development                    |  |                                  | 229   |                                |   | 253   |  |      | 451   |  |   | 476  
|Sales and marketing                    |  |                                  | 292   |                                |   | 312   |  |      | 458   |  |   | 468  
|General and administrative             |  |                                  | 451   |                                |   | 443   |  |      | 788   |  |   | 845  
|                                       |  |                                  |       |                                |   |       |  |      |       |  |   |      
|Total stock-based compensation expense |  | $                                | 1,021 |                                | $ | 1,114 |  | $    | 1,809 |  | $ | 1,993
|                                       |  |                                  |       |                                |   |       |  |      |       |  |   |      

No stock-based compensation expense was capitalized in the periods presented. At
September 30, 2009, the gross amount of unrecognized stock-based compensation expense relating to unvested share-based awards was approximately $9.9 million, which we anticipate recognizing as a charge against income over a weighted average
period of 2.8 years.



|4. | Comprehensive Income
|-- | --------------------

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period, except those
changes resulting from investments by stockholders (changes in paid in capital) and distributions to stockholders (i.e., dividends). For the three and six months ended September 30, 2009 and 2008, comprehensive income consists of the following:



|                                                |  |                                  |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                |  | Three Months Ended September 30, |       |   | Six Months Ended September 30, |  
|                                                |  | 2009                             |       |   | 2008                           |   |       | 2009 |  |   | 2008  |  
|                                                |  | (In thousands)                   |      
|Net income                                      |  | $                                | 1,846 |   |                                | $ | 1,227 |      |  | $ | 2,590 |   |  | $ | 1,313 |  
|Foreign currency translation adjustment         |  |                                  | (116  | ) |                                |   | 241   |      |  |   | (774  | ) |  |   | 348   |  
|Unrealized gain (loss) on marketable securities |  |                                  | 14    |   |                                |   | (375  | )    |  |   | 18    |   |  |   | (621  | )
|                                                |  |                                  |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Total comprehensive income                      |  | $                                | 1,744 |   |                                | $ | 1,093 |      |  | $ | 1,834 |   |  | $ | 1,040 |  
|                                                |  |                                  |       |   |                                |   |       |      |  |   |       |   |  |   |       |  



10



---

##### Table of Contents

|5. | Marketable Securities
|-- | ---------------------

Our marketable securities consist of debt securities with original maturities of greater than three months and include certificates of deposits and auction rate securities (ARS). With the exception of our ARS, our marketable
securities have been classified as available-for-sale and are recorded at their estimated fair value. Unrealized losses which are not considered other than temporary and unrealized gains are included in accumulated other comprehensive loss in
stockholders equity. Unrealized losses which are determined to be other than temporary are recorded as a charge against income. During the third quarter of fiscal year 2009, we reclassified our ARS from available-for-sale to trading
securities. Trading securities are reported at fair value, with gains and losses resulting from changes in fair value recognized in other income (expense), net, in our condensed consolidated statements of operations. The cost of marketable
securities sold is determined based on the specific identification method.

Marketable securities consist of the following:



|                        |  |                |        |                      |   |                       |  |   |            |   |  |   |       
|----------------------- |  | -------------- | ------ | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ------
|                        |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|                        |  | (In thousands)
|September 30, 2009:     |  |                |        |                      |   |                       |  |   |            |   |  |   |       
|Certificates of deposit |  | $              | 10,563 |                      | $ |                      |  | $ | (7         | ) |  | $ | 10,556
|Auction rate securities |  |                | 11,583 |                      |   |                      |  |   |           |   |  |   | 11,583
|                        |  |                |        |                      |   |                       |  |   |            |   |  |   |       
|                        |  | $              | 22,146 |                      | $ |                      |  | $ | (7         | ) |  | $ | 22,139
|                        |  |                |        |                      |   |                       |  |   |            |   |  |   |       



|                        |  |                |        |                      |   |                       |  |   |            |   |  |   |       
|----------------------- |  | -------------- | ------ | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ------
|                        |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|                        |  | (In thousands)
|March 31, 2009:         |  |                |        |                      |   |                       |  |   |            |   |  |   |       
|Certificates of deposit |  | $              | 20,940 |                      | $ |                      |  | $ | (25        | ) |  | $ | 20,915
|Auction rate securities |  |                | 12,703 |                      |   |                      |  |   |           |   |  |   | 12,703
|                        |  |                |        |                      |   |                       |  |   |            |   |  |   |       
|                        |  | $              | 33,643 |                      | $ |                      |  | $ | (25        | ) |  | $ | 33,618
|                        |  |                |        |                      |   |                       |  |   |            |   |  |   |       

The contractual maturities of our marketable securities at September 30, 2009
are as follows (in thousands):



|                         |  |   |       
|------------------------ |  | - | ------
|Due within one year      |  | $ | 10,556
|Due in one to five years |  |   |      
|Due in five to ten years |  |   |      
|Due after ten years      |  |   | 11,583
|                         |  |   |       
|                         |  | $ | 22,139
|                         |  |   |       

ARS have been included in the above contractual maturities table based on the stated
maturity date of the bond.

We review the fair value of our marketable securities at least quarterly to determine if declines
in the fair value of individual securities are other-than-temporary in nature. If we believe the decline in the fair value of an individual security is other-than-temporary, we write-down the carrying value of the security to its estimated fair
value, with a corresponding charge against income. To determine if a decline in the fair value of an investment is other-than-temporary, we consider several factors including, among others, the period of time and extent to which the estimated fair
value has been less than cost, overall market conditions, the historical and projected future financial condition of the issuer of the security and our ability and intent to hold the security for a period of time sufficient to allow for a recovery
of the market value.

As of September 30, 2009, we held $13.2 million in ARS at face value, which are collateralized by
student loans, most of which were originated under the Federal Family Education Loan Program and are guaranteed by the United States Federal Department of Education. All of our ARS are AAA rated (or equivalent) by one or more of the major credit
rating agencies. During the quarter, ARS with a par value of $1.4 million were called by the issuer at par.

Through February
2008, the par value of our ARS had approximated fair value due to the frequent auction periods, generally every 7 to 28 days, which provided liquidity to these investments. However, since February 2008, all auctions for the ARS we hold have failed
as the amount of ARS submitted for sale has exceeded the amount of purchase orders. The result of a failed auction is that



11



---

##### Table of Contents

these ARS continue to pay interest at contractually stated rates at each respective auction date; however, the liquidity of the ARS is limited until there is a successful auction, the issuer
redeems the ARS, the ARS mature or until such time as other markets for these ARS develop. We have concluded that the estimated fair value of the ARS no longer approximates the par value due to the lack of liquidity. The ARS have been classified
within Level 3 in accordance with fair value accounting guidance. Their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the ARS.

We estimated the fair value of our ARS as of September 30, 2009 utilizing a discounted cash flow analysis. The analysis considered,
among other items, the collateralization underlying the security investments, the creditworthiness of the issuer, expected future cash flows, and the estimated weighted average life of the contractual maturity of the underlying assets. Due to
entering into an agreement whereby one of our investment firms will repurchase our ARS at par value, as discussed further below, we intend to sell the impaired securities prior to maturity and have determined that the decline in value of our ARS as
of September 30, 2009 is other-than-temporary. Accordingly, in fiscal year 2009 we reversed prior unrealized losses on our ARS from accumulated other comprehensive income and recorded the losses as a charge to income during the same period. The
total loss recognized in fiscal year 2009 on these ARS was $1.9 million. There was no gain or loss recognized during the quarter ended September 30, 2009 related to the ARS. During the quarter ended June 30, 2009, as a result of our
analysis of fair value as described above, we recognized a gain on the ARS of $0.2 million.

On November 11, 2008 (the
Acceptance Date), we entered into an agreement (the ARS Agreement) with one of our investment securities firms (the Investment Firm) pursuant to which the Investment Firm has agreed to repurchase all of our ARS at
par value. By accepting the ARS Agreement, we (1) received the right to sell our ARS at par value to the Investment Firm between June 30, 2010 and July 2, 2012 (the Put Option) and (2) gave the Investment Firm the
right to purchase the ARS from us any time after the Acceptance Date as long as we receive par value.

The ARS Agreement
covers ARS with a par value of $13.2 million and a fair value of $11.6 million as of September 30, 2009. We have accounted for the Put Option as a freestanding financial instrument and have elected to record the Put Option at fair value. This
resulted in our recording a $1.7 million asset in fiscal year 2009 with a corresponding credit to income for the value of the Put Option. There was no gain or loss recognized during the quarter ended September 30, 2009 related to the Put
Option. During the quarter ended June 30, 2009, the value of the Put Option increased $28,000 with a corresponding credit to income of the same amount.

The gain on the ARS and Put Option of $0.2 million for the six months ended September 30, 2009 is recorded in the interest and other income, net line in the accompanying condensed consolidated
statement of operations. As we have the right to put our ARS to the Investment Firm beginning June 30, 2010 and we intend to do so, the ARS and the Put Option are classified as current assets on our condensed consolidated balance sheet as of
September 30, 2009.

The following table summarizes the gross unrealized losses and fair value of our marketable
securities with unrealized losses that are not considered to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities that have been in a continuous unrealized loss position, at
September 30, 2009:



|                        |  |                     |        |                  |                      |    |            |  |                  |   |            |   |                  |  |   |        |  |   |    |  
|----------------------- |  | ------------------- | ------ | ---------------- | -------------------- | -- | ---------- |  | ---------------- | - | ---------- | - | ---------------- |  | - | ------ |  | - | -- | -
|                        |  | Less Than 12 Months |        |                  | 12 Months or Greater |    | Total      | 
|                        |  | Fair Value          |        | UnrealizedLosses |                      |    | Fair Value |  | UnrealizedLosses |   | Fair Value |   | UnrealizedLosses | 
|                        |  | (In thousands)      |       
|Certificates of deposit |  | $                   | 10,556 |                  | $                    | (7 | )          |  | $                |  |            | $ |                 |  | $ | 10,556 |  | $ | (7 | )
|                        |  |                     |        |                  |                      |    |            |  |                  |   |            |   |                  |  |   |        |  |   |    |  
|                        |  | $                   | 10,556 |                  | $                    | (7 | )          |  | $                |  |            | $ |                 |  | $ | 10,556 |  | $ | (7 | )
|                        |  |                     |        |                  |                      |    |            |  |                  |   |            |   |                  |  |   |        |  |   |    |  

The unrealized losses on the certificates of deposit were primarily caused by
fluctuations in market interest rates, and not the credit quality of the issuer, and we have the ability and intent to hold these securities until a recovery of fair value, which may be at maturity. As a result, we do not believe these securities to
be other-than-temporarily impaired as of September 30, 2009.



|6. | Fair Value
|-- | ----------

We carry our
cash equivalents and marketable securities at market value. The carrying amount of accounts receivable, accounts payable and accrued liabilities are considered to be representative of their respective fair values due to their short-term nature.

We adopted fair value accounting guidance as of April 1, 2008 as required for financial assets and liabilities. Fair
value accounting provides a definition of fair value establishes acceptable methods of measuring fair value and expands disclosures for



12



---

##### Table of Contents

fair value measurements. The principles apply under accounting pronouncements which require measurement of fair value and do not require any new fair value measurements in accounting
pronouncements where fair value is the relevant measurement attribute. Fair value accounting also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market
data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.

In accordance with fair value accounting, fair value measurements are classified under the following hierarchy:

Level 1  Quoted prices for identical instruments in active markets.

Level 2  Quoted prices for similar
instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

Level 3  Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the
valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable. The following table summarizes our assets and liabilities that require fair value measurements on a
recurring basis and their respective input levels based on the fair value hierarchy:



|                                   |  |                                    |        |                                                   |   |                                             |  |                                        |  |   |       
|---------------------------------- |  | ---------------------------------- | ------ | ------------------------------------------------- | - | ------------------------------------------- |  | -------------------------------------- |  | - | ------
|                                   |  | Carrying Value atSeptember 30,2009 |        | Quoted Market Pricesfor Identical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|                                   |  | (In thousands)                    
|September 30, 2009:                |  |                                    |        |                                                   |   |                                             |  |                                        |  |   |       
|Auction rate securities            |  | $                                  | 11,583 |                                                   |   |                                            |  |                                       |  | $ | 11,583
|Auction rate securities put option |  |                                    | 1,567  |                                                   |   |                                            |  |                                       |  | $ | 1,567 
|Certificates of deposit            |  |                                    | 10,556 |                                                   |   | 10,556                                      |  |                                       |  |   |      
|                                   |  |                                    |        |                                                   |   |                                             |  |                                        |  |   |       
|Total                              |  | $                                  | 23,706 |                                                   | $ | 10,556                                      |  |                                       |  | $ | 13,150

The following table summarizes the assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3):



|                                                                |  |                                                                                           |        |  
|--------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | ------ | -
|                                                                |  | Fair Value MeasurementsUsing SignificantUnobservable Level 3InputsAuction Rate Securities |       
|                                                                |  | (In thousands)                                                                            |       
|Balance at April 1, 2009                                        |  | $                                                                                         | 14,353 |  
|Redemption of auction rate securities                           |  |                                                                                           | (1,450 | )
|Auction rate securities put option                              |  |                                                                                           | 28     |  
|Realized gain on auction rate securities included in net income |  |                                                                                           | 219    |  
|                                                                |  |                                                                                           |        |  
|Balance at September 30, 2009                                   |  |                                                                                           | 13,150 |  



|7. | Segment Information
|-- | -------------------

Our
operations have been aggregated into one reportable segment given the similarities of economic characteristics between the operations and the common nature of the products, services and customers.



13



---

##### Table of Contents

|8. | Guarantees
|-- | ----------

Guarantee of Lease
Obligation of Others

On April 30, 2004, we spun-off our drug discovery subsidiary, Pharmacopeia Drug
Discovery, Inc. (PDD), into an independent, separately traded, publicly held company through the distribution to our stockholders of a dividend of one share of PDD common stock for every two shares of our common stock. The landlords
of our New Jersey facilities, which were used by our PDD operations, consented to the assignment of the leases to PDD. Despite the assignment, the landlords required us to guarantee the remaining lease obligations, which totaled approximately $16.0
million as of September 30, 2009. In the event that PDD defaults on their lease commitment, we are permitted under the guarantee to sublease the facility in order to mitigate our lease obligation. In fiscal year 2005, we recognized a liability
and corresponding charge to stockholders equity for the probability-weighted fair market value of the guarantee. Changes to the fair market value of the liability are recognized in stockholders equity. The liability for our guarantee of
the lease obligation was $0.4 million at September 30, 2009 and March 31, 2009, respectively.

Other Guarantees and
Indemnifications

We provide indemnifications of varying scope and size to certain customers against claims of intellectual
property infringement made by third parties arising from the use of our products. We have also entered into indemnification agreements with our officers and directors. Although the maximum potential amount of future payments we could be required to
make under these indemnifications is unlimited, to date we have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. Additionally, we have insurance policies that, in most cases, would limit
our exposure and enable us to recover a portion of any amounts paid. Therefore, we believe the estimated fair value of these agreements is minimal and likelihood of incurring an obligation is remote. Accordingly, we have not accrued any liabilities
in connection with these indemnification obligations as of September 30, 2009.



|9. | Restructuring Activities
|-- | ------------------------

The following summarizes the changes in our accrued restructuring charges liability:



|                                                                       |  |                            |      |   |                                               |   |       |       |  |   |        |  
|---------------------------------------------------------------------- |  | -------------------------- | ---- | - | --------------------------------------------- | - | ----- | ----- |  | - | ------ | -
|                                                                       |  | Severance andRelated Costs |      |   | LeaseObligation Exitand FacilityClosure Costs |   |       | Total | 
|                                                                       |  | (In thousands)             |     
|Balance at March 31, 2008                                              |  | $                          | 137  |   |                                               | $ | 1,397 |       |  | $ | 1,534  |  
|Additional severance and lease abandonment charges                     |  |                            | 896  |   |                                               |   |      |       |  |   | 896    |  
|Adjustments to liability                                               |  |                            |     |   |                                               |   | 78    |       |  |   | 78     |  
|Cash payments                                                          |  |                            | (835 | ) |                                               |   | (302  | )     |  |   | (1,137 | )
|Effect of foreign exchange                                             |  |                            | (23  | ) |                                               |   | (356  | )     |  |   | (379   | )
|                                                                       |  |                            |      |   |                                               |   |       |       |  |   |        |  
|Balance at March 31, 2009                                              |  |                            | 175  |   |                                               |   | 817   |       |  |   | 992    |  
|Severance and lease abandonment recoveries (net of additional charges) |  |                            | (74  | ) |                                               |   |      |       |  |   | (74    | )
|Adjustments to liability                                               |  |                            | (61  | ) |                                               |   | 99    |       |  |   | 38     |  
|Cash payments                                                          |  |                            | (43  | ) |                                               |   | (178  | )     |  |   | (221   | )
|Effect of foreign exchange                                             |  |                            | 3    |   |                                               |   | 101   |       |  |   | 104    |  
|                                                                       |  |                            |      |   |                                               |   |       |       |  |   |        |  
|Balance at September 30, 2009                                          |  | $                          |     |   |                                               | $ | 839   |       |  | $ | 839    |  
|                                                                       |  |                            |      |   |                                               |   |       |       |  |   |        |  

In periods prior to fiscal year 2006, we implemented various actions designed to
improve our operations and overall financial performance through workforce reductions and the abandonment of leased facilities. All severance benefits related to these workforce reductions have been fully paid. Our remaining obligations under the
lease obligations terminated during the quarter ended June 30, 2009.



14



---

##### Table of Contents

In March 2006, we implemented various actions designed to realign our resources with our
portfolio of products and services, eliminate redundancies in our workforce and streamline our operations through workforce reductions and abandoning two leased facilities in the United Kingdom. As a result of the implementation of these actions, we
recognized a charge of $3.2 million, consisting of $1.8 million in severance benefits from the termination of approximately 50 employees and $1.4 million for our future lease obligations related to the abandoned facility, net of estimated
future sublease income. In fiscal year 2007, we recognized a charge of $0.3 million for estimated additional severance benefits to be paid to certain employees terminated under the original restructuring plan and associated legal expenses. The
final severance benefits were paid in the quarter ended June 30, 2009. Additionally, in fiscal year 2007 we recorded an additional lease abandonment charge of $0.3 million. In the second quarter of fiscal year 2010, we received a $0.2 million
payment on a claim made to our insurance company for reimbursement of the amounts paid to an employee terminated as part of a prior workforce reduction. The lease obligations for the abandoned facilities terminate in fiscal years 2013 and 2022.

All amounts incurred in connection with the above activities are recorded in restructuring charges in the accompanying
condensed consolidated statements of operations.



|10. | Legal Proceedings
|--- | -----------------

We are
subject to various claims and legal actions arising in the ordinary course of business. The ultimate disposition of these matters is not expected to have a material effect on our business or financial condition. However, there can be no assurance
that the disposition of such matters will not have a material effect on our results of operations in any particular period.



|11. | Recent Accounting Pronouncements
|--- | --------------------------------

In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance is effective
for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the impact this guidance may have on our results of operations, financial
position and cash flows.

In September 2009, the FASB issued new accounting guidance related to certain revenue arrangements
that include software elements. Previously, companies that sold tangible products with more than incidental software were required to apply software revenue recognition guidance. This guidance often delayed revenue recognition for the
delivery of the tangible product. Under the new guidance, tangible products that have software components that are essential to the functionality of the tangible product will be excluded from the software revenue recognition guidance.
The new guidance will include factors to help companies determine what is essential to the functionality. Software-enabled products will now be subject to other revenue guidance and will likely follow the guidance for multiple
deliverable arrangements issued by the FASB in September 2009. The new guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are
currently evaluating the impact this guidance may have on our results of operations, financial position and cash flows.

During the quarter ended September 30, 2009, we adopted the new Accounting Standards Codification (ASC) as issued by the FASB. The ASC has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. The ASC is not intended to change or alter existing GAAP. The adoption of this guidance did not have a material impact on our results of operations, financial position or cash flows.

During the quarter ended June 30, 2009, we adopted new accounting guidance as issued by the FASB related to subsequent events,
which establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of this guidance did not
have a material impact on our results of operations, financial position or cash flows.

During the quarter ended June 30,
2009, we adopted new accounting guidance as issued by the FASB which requires disclosures about fair value of financial instruments in interim reporting periods, provides additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased, provides guidance when a transaction is not deemed an orderly transaction, and provides guidance related to the determination of other-than-temporary impairments to include the intent
and ability of the holder as an indicator in the determination of whether an other-than-temporary impairment exists. The adoption of this guidance did not have a material impact on our results of operations, financial position or cash flows.



15



---

##### Table of Contents

During the quarter ended June 30, 2009, we adopted new accounting guidance for the
determination of the useful life of intangible assets as issued by the FASB. The new guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible
asset. The intent of this pronouncement is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under other GAAP. The adoption of this
guidance did not have a material impact on our results of operations, financial position or cash flows.

During the quarter
ended June 30, 2009, we adopted new accounting guidance as issued by the FASB which delayed the effective date of fair value accounting for all non-financial assets and non-financial liabilities by one year, except those recognized or disclosed
at fair value in the financial statements on a recurring basis. The adoption of this guidance did not have a material impact on our results of operations, financial position or cash flows.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

When used anywhere in this Quarterly Report on Form 10-Q (this Report), the words expect, believe,
anticipate, estimate, intend, plan and similar expressions are intended to identify forward-looking statements. These forward-looking statements may include statements addressing our future financial
and operating results. We have based these forward-looking statements on our current expectations about future events. Such statements are subject to certain risks and uncertainties including those related to execution upon our strategic plans, the
successful release and acceptance of new products, the demand for new and existing products, additional competition, changes in economic conditions and those described in documents we have filed with the Securities and Exchange Commission (the
SEC), including this Report in the sections titled Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors, and in our subsequent reports on Form 10-Q and Form
10-K. All forward-looking statements in this Report are qualified entirely by the cautionary statements included in this Report and such other filings. These risks and uncertainties could cause actual results to differ materially from results
expressed or implied by forward-looking statements contained in this Report. These forward-looking statements speak only as of the date of this Report. We disclaim any undertaking to publicly update or revise any forward-looking statements contained
herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto
included elsewhere in this Report.

Overview

Our Business

We develop and commercialize scientific business
intelligence software and solutions that enable our customers to accelerate the discovery and development of new drugs and materials. Our customers include pharmaceutical, biotechnology and other life science companies, as well as companies that are
in the energy, chemicals, aerospace and consumer packaged goods markets. Our software and service solutions are used by our customers scientists, biologists, chemists and information technology professionals in order to aggregate, mine,
integrate, analyze, simulate, manage and interactively report scientific data. Our customers include leading commercial, government and academic organizations. Many of the largest pharmaceutical, biotechnology, chemical, energy, aerospace and
consumer packaged goods companies worldwide use our software. We market our products and services worldwide, principally through our direct sales force, augmented by the use of third-party distributors.

Our Marketplace

Historically, we have primarily sold molecular modeling and simulation software. The market for molecular modeling and simulation products in the pharmaceutical and biotechnology industries is challenging due to the maturity of the market,
industry consolidation, reduction in the level of discovery research activity, and increased competition, including competition from open source software. We also sell modeling and simulation products to the energy, aerospace, chemical, and consumer
packaged goods industries. We believe these industries are in the early stages of adoption of these technologies. Thus we believe the market for our products within these industries is nascent. Following our acquisition of SciTegic, Inc., we began
to offer data-pipelining and workflow software. This technology is widely applicable within our target industries and represents a significant growth opportunity in all industries which our computer aided design modeling and simulation and
cheminformatics products currently serve. There is currently limited competition with this technology in our targeted industries.

Our
Strategy

We believe the combination of our scientific operating platform and our computer aided design modeling and
simulation software and service solutions enables our customers to better utilize their scientific data in order to solve critical business issues



16



---

##### Table of Contents

throughout their organizations. Our strategy is to continue to increase the use of our scientific operating platform so that it remains the de facto standard scientific operating platform in the
industries we serve. In order to increase the use of our platform we continue to develop advanced analysis and reporting component collections which operate with our scientific operating platform in order to extend its capabilities and value to our
customers. Our scientific operating platform is also the basis of many of our service offerings, including offerings which integrate and enhance our customers software, thereby further increasing the use and value of our platform. Because our
scientific operating platform is the underlying operating platform for many products in our broad portfolio of computer aided design modeling and simulation software and service solutions, we expect the usage of these products to increase as the
usage of our scientific operating platform increases, thus further increasing our sales and value to our customers. We also intend to market and distribute our solutions to a broader group of users, including scientists, engineers and information
technology professionals within our existing customer base, as well as to new customers in other industries. We also partner with other companies who provide scientific software and services in order to ensure that their software and service
solutions operate with our scientific operating platform, further proliferating its use and value to our customers.

Critical Accounting
Policies

The critical accounting policies and estimates used in the preparation of our condensed consolidated financial
statements are described in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009. There have been no
significant changes in our critical accounting policies and estimates from March 31, 2009.

Results of Operations

Historically, we have received approximately two-thirds of our annual customer orders in the second half of our fiscal year. In accordance
with our revenue recognition policies, the revenue associated with these orders is generally recognized over the contractual license term. Therefore, because our policy is to accrue and expense sales commissions and royalties upon the invoicing of
customer orders, we have historically experienced an increase in operating costs and expenses and a decrease in income during the second half of our fiscal year. As a result of these and other seasonal variations, we believe that sequential
quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and that the interim financial results for the periods presented in this Report are not necessarily indicative of results for a full year or
for any subsequent interim period.

Comparison of the Three Months Ended September 30, 2009 and 2008

The following table summarizes our results of operations as a percentage of revenue for the respective periods:



|                                           |  |                                 |   |  |      |  
|------------------------------------------ |  | ------------------------------- | - |  | ---- | -
|                                           |  | Three Months EndedSeptember
30, |  
|                                           |  | 2009                            |   |  | 2008 |  
|Revenue                                    |  | 100                             | % |  | 100  | %
|Cost of revenue                            |  | 17                              | % |  | 18   | %
|                                           |  |                                 |   |  |      |  
|Gross profit                               |  | 83                              | % |  | 82   | %
|Operating expenses:                        |  |                                 |   |  |      |  
|Product development                        |  | 18                              | % |  | 19   | %
|Sales and marketing                        |  | 39                              | % |  | 41   | %
|General and administrative                 |  | 17                              | % |  | 16   | %
|Restructuring charges                      |  |                                | % |  |     | %
|                                           |  |                                 |   |  |      |  
|Total operating expenses                   |  | 74                              | % |  | 76   | %
|                                           |  |                                 |   |  |      |  
|Operating income                           |  | 9                               | % |  | 6    | %
|Interest and other income and expense, net |  | 1                               | % |  | 2    | %
|                                           |  |                                 |   |  |      |  
|Income before income taxes                 |  | 9                               | % |  | 8    | %
|Income tax expense                         |  | 1                               | % |  | 2    | %
|                                           |  |                                 |   |  |      |  
|Net income                                 |  | 9                               | % |  | 6    | %
|                                           |  |                                 |   |  |      |  



17



---

##### Table of Contents

Revenue

Revenue decreased 1% to $20.0 million for the three months ended September 30, 2009, as compared to $20.1 million for the three months ended September 30, 2008. Revenues during the quarter ended
September 30, 2009 were favorably impacted by an increase in software revenues of $0.5 million, offset by a decrease in services revenue of $0.4 million and maintenance and other revenue of $0.2 million.

Cost of Revenue

Cost of revenue decreased 6% to $3.4 million for the three months ended September 30, 2009, as compared to $3.5 million for the three months ended September 30, 2008. As a percentage of revenue, cost of revenue was 17% for the
three months ended September 30, 2009 as compared to 18% for the three months ended September 30, 2008. The decrease in cost of revenue was due to lower personnel costs of approximately $0.2 million and favorable foreign currency
fluctuations of $0.1 million, partially offset by an increase in consulting costs of approximately $0.1 million.

Operating Expenses

Product Development Expenses.Product development expenses decreased 7% to $3.6 million for the three months
ended September 30, 2009, as compared to $3.8 million for the three months ended September 30, 2008. As a percentage of revenue, product development expenses decreased to 18% for the three months ended September 30, 2009, as
compared to 19% for the three months ended September 30, 2008. The decrease in product development expenses was primarily attributable to favorable foreign currency fluctuations.

Sales and Marketing Expenses.Sales and marketing expenses decreased 5% to $7.8 million for the three months ended September 30,
2009, as compared to $8.2 million for the three months ended September 30, 2008. As a percentage of revenue, sales and marketing expenses decreased to 39% for the three months ended September 30, 2009, as compared to 41% for the three
months ended September 30, 2008. The decrease in sales and marketing expense is primarily attributable to a decrease in personnel and related costs of approximately $0.6 million, partially offset by an increase in marketing related expenses of
approximately $0.3 million.

General and Administrative Expenses.General and administrative expenses increased 5% to
$3.4 million for the three months ended September 30, 2009, as compared to $3.3 million for the three months ended September 30, 2008. As a percentage of revenue, general and administrative expenses increased to 17% for the three
months ended September 30, 2009, as compared to 16% for the three months ended September 30, 2008. The increase was primarily attributable to an increase in professional services fees of $0.2 million, partially offset by overhead cost
savings of $0.1 million.

Restructuring Charges.Restructuring charges for the three months ended September 30,
2009 and 2008 related to the settlement of employee termination obligations.

Net Interest and Other Income

Net interest and other income was $0.3 million for the three months ended September 30, 2009, as compared to $0.4 million for the three
months ended September 30, 2008. The decrease in net interest and other income was primarily attributable to lower interest income of approximately $0.3 million due to a decrease in interest rates obtained on our cash and marketable securities
balances during the quarter ended September 30, 2009, partially offset by foreign currency exchange gains of $0.3 million.

Income
Tax Expense

Income tax expense was $0.3 million for the three months ended September 30, 2009 as compared to $0.4
million for the three months ended September 30, 2008. The decrease in income tax expense was primarily attributable to fluctuations in taxable income in our foreign subsidiaries. Additionally, we generated additional income in the U.S. during
the three months ended September 30, 2009 as compared to the three months ended September 30, 2008, which does not impact income tax expense as we do not generate taxable income in the U.S.



18



---

##### Table of Contents

Comparison of the Six Months Ended September 30, 2009 and 2008

The following table summarizes our results of operations as a percentage of revenue for the respective periods:



|                                   |  |                               |    |  |      |  
|---------------------------------- |  | ----------------------------- | -- |  | ---- | -
|                                   |  | Six Months EndedSeptember
30, |   
|                                   |  | 2009                          |    |  | 2008 |  
|Revenue                            |  | 100                           | %  |  | 100  | %
|Cost of revenue                    |  | 17                            | %  |  | 17   | %
|                                   |  |                               |    |  |      |  
|Gross profit                       |  | 83                            | %  |  | 83   | %
|Operating expenses:                |  |                               |    |  |      |  
|Product development                |  | 19                            | %  |  | 20   | %
|Sales and marketing                |  | 40                            | %  |  | 40   | %
|General and administrative         |  | 17                            | %  |  | 17   | %
|Restructuring charges (recoveries) |  | (0                            | )% |  | 2    | %
|                                   |  |                               |    |  |      |  
|Total operating expenses           |  | 76                            | %  |  | 79   | %
|                                   |  |                               |    |  |      |  
|Operating income                   |  | 7                             | %  |  | 4    | %
|Interest and other income, net     |  | 1                             | %  |  | 1    | %
|                                   |  |                               |    |  |      |  
|Income before income taxes         |  | 8                             | %  |  | 5    | %
|Income tax expense                 |  | 2                             | %  |  | 2    | %
|                                   |  |                               |    |  |      |  
|Net income                         |  | 6                             | %  |  | 3    | %
|                                   |  |                               |    |  |      |  

Revenue

Revenue decreased 1% to $40.1 million for the six months ended September 30, 2009, as compared to $40.4 million for the six months ended September 30, 2008. The decrease was primarily
attributable to a decrease in maintenance and other revenue of approximately $0.7 million and a decrease in services revenue of $0.4 million, partially offset by an increase in software revenue of approximately $0.9 million.

Cost of Revenue

Cost of revenue decreased 3% to $6.8 million for the six months ended September 30, 2009, as compared to $7.0 million for the six months ended September 30, 2008. As a percentage of revenue, cost of revenue was consistent at
17% for each of the six months ended September 30, 2009 and 2008. The decrease in cost of revenues was due to favorable foreign currency fluctuations of approximately $0.4 million, offset by an increase in personnel and consulting costs of
approximately $0.1 million and software royalties and distributor commissions of approximately $0.1 million.

Operating Expenses

Product Development Expenses.Product development expenses decreased 8% to $7.5 million for the six months
ended September 30, 2009, as compared to $8.1 million for the six months ended September 30, 2008. As a percentage of revenue, product development expenses decreased to 19% for the six months ended September 30, 2009, as compared
to 20% for the six months ended September 30, 2008. The decrease in product development expenses was primarily attributable to favorable foreign currency fluctuations.

Sales and Marketing Expenses.Sales and marketing expenses decreased 2% to $16.0 million for the six months ended
September 30, 2009, as compared to $16.3 million for the six months ended September 30, 2008. As a percentage of revenue, sales and marketing expenses were consistent at 40% for each of the six months ended September 30, 2009 and
2008. The decrease in sales and marketing expenses is primarily attributable to favorable foreign currency fluctuations of approximately $0.4 million, as well as a decrease in personnel and related costs of $0.4 million. These items were partially
offset by an increase in consulting and marketing related expenses of approximately $0.4 million.

General and
Administrative Expenses.General and administrative expenses increased 5% to $7.1 million for the six months ended September 30, 2009, as compared to $6.7 million for the six months ended September 30, 2008. As a percentage
of revenue, general and administrative expenses was consistent at 17% for each of the six months ended September 30, 2009 and 2008. The increase was primarily attributable to an increase in relocation expenses of $0.3 million as well as an
increase in professional services fees of $0.4 million. These amounts were partially offset by overhead cost savings of $0.1 million and favorable foreign currency fluctuations of $0.1 million.



19



---

##### Table of Contents

Restructuring Charges (Recoveries).Restructuring charges for the six months ended
September 30, 2009 related to the receipt of payment on a claim made to our insurance company for reimbursement of the amounts paid to an employee terminated as part of a prior workforce reduction, as well as the settlement of employee
termination obligations. Restructuring charges for the six months ended September 30, 2008 related to our plan completed in the quarter ended June 30, 2008 to realign our workforce in order to support our growth products.

Net Interest and Other Income

Net interest and other income was $0.3 million for the six months ended September 30, 2009, as compared to $0.6 million for the six months ended September 30, 2008. The decrease in net
interest and other income was primarily attributable to lower interest income of approximately $0.7 million due to a decrease in interest rates obtained on our cash and marketable securities balances during the six months ended September 30,
2009, partially offset by a gain of $0.2 million related to our auction rate securities (ARS) portfolio as well as favorable foreign currency fluctuations of $0.1 million.

Income Tax Expense

Income tax expense was $0.6 million for the six
months ended September 30, 2009, as compared to $0.7 million for the six months ended September 30, 2008. The decrease in income tax expense was primarily attributable to fluctuations in taxable income in our foreign subsidiaries.
Additionally, we generated additional income in the U.S. during the six months ended September 30, 2009 as compared to the six months ended September 30, 2008, which does not impact income tax expense as we do not generate taxable income
in the U.S.

Liquidity and Capital Resources

We had cash, cash equivalents, marketable securities, and restricted cash of $80.0 million as of September 30, 2009, as compared to $81.8 million as of March 31, 2009, a decrease of $1.8
million. The decrease in cash, cash equivalents, marketable securities and restricted cash during the six months ended September 30, 2009 was primarily attributable to cash used in operations of $3.2 million, partially offset by favorable
foreign currency fluctuations of $1.2 million. Our quarterly operating cash flows are significantly impacted by changes in accounts receivable balances. Due to the seasonality of our business, accounts receivable balances have historically increased
significantly in the third quarter of each fiscal year as a result of higher order intake. The collection of these accounts receivable balances has generally resulted in positive cash flows from operations in the fourth quarter of each fiscal year,
while we have historically experienced negative cash flows from operations in the other three fiscal quarters.

Net cash used
in operating activities was $3.2 million for the six months ended September 30, 2009, as compared to $2.5 million for the six months ended September 30, 2008. The increase in cash used in operating activities was primarily attributable to
fluctuations in our accounts receivable and deferred revenue balances, partially offset by an increase in net income for the six months ended September 30, 2009.

Net cash provided by investing activities was $11.6 million for the six months ended September 30, 2009, as compared to net cash used in investing activities of $1.3 million for the six months ended
September 30, 2008. Significant components of cash flows from investing activities for the six months ended September 30, 2009 included net purchases of property and equipment of $0.3 million, and a net decrease in our marketable
securities portfolio of $11.8 million. Significant components of cash flows from investing activities for the six months ended September 30, 2008 included net purchases of property and equipment of $0.5 million, purchases of software licenses
of $1.9 million, and a net decrease in our marketable securities portfolio of $1.1 million.

Net cash used in financing
activities was $0.1 million for the six months ended September 30, 2009 as compared to net cash provided by financing activities of $0.5 million for the three months ended September 30, 2008. Cash flows from financing activities for both
periods consisted solely of proceeds from the issuance of our common stock under employee stock plans, reduced by payments made to taxing authorities on behalf of our employees when tendering stock to us for settlement of minimum income tax
liability upon vesting of restricted stock units.

As of September 30, 2009, we held $13.2 million in ARS at face value,
which are collateralized by student loans, most of which were originated under the Federal Family Education Loan Program and are guaranteed by the United States Federal Department of Education. All of our ARS are AAA rated (or equivalent) by one or
more of the major credit rating agencies. During the quarter, ARS with a par value of $1.4 million were called by the issuer at par.

Through February 2008, the face value of our ARS has approximated fair value due to the frequent auction periods, generally every 7 to 28 days, which provided liquidity to these investments. However, since February 2008, all auctions for
the ARS we hold have failed as the amount of ARS submitted for sale has exceeded the amount of purchase orders. The result of a failed auction is that these ARS continue to pay interest at contractually stated rates at each respective auction date;
however, the liquidity of the ARS will be limited until there is a successful auction, the issuer redeems the securities, the securities mature or until such time as other



20



---

##### Table of Contents

markets for these ARS develop. We have concluded that the estimated fair value of the ARS no longer approximates the face value due to the lack of liquidity. The ARS have been classified within
Level 3 under fair value accounting. Their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the ARS.

We estimated the fair value of our ARS as of September 30, 2009 utilizing a discounted cash flow analysis. The analysis considered,
among other items, the collateralization underlying the security investments, the creditworthiness of the issuer, expected future cash flows, and the estimated weighted average life of the contractual maturity of the underlying assets. Due to
entering into an agreement whereby one of our investment firms will repurchase our ARS at par value, as discussed further below, we intend to sell the impaired securities prior to maturity and have determined that the decline in value of our ARS as
of September 30, 2009 is other-than-temporary. Accordingly, in fiscal year 2009 we reversed prior unrealized losses on our ARS from accumulated other comprehensive income and recorded the losses as a charge to income during the same period. The
total loss recognized in fiscal year 2009 on these ARS was $1.9 million. There was no gain or loss recognized during the quarter ended September 30, 2009 related to the ARS. During the quarter ended June 30, 2009, as a result of our
analysis of fair value as described above, we recognized a gain on the ARS of $0.2 million.

On November 11, 2008 (the
Acceptance Date), we entered into an agreement (the ARS Agreement) with one of our investment securities firms (the Investment Firm) pursuant to which the Investment Firm has agreed to repurchase all of our ARS at
par value. By accepting the ARS Agreement, we (1) received the right to sell our ARS at par value to the Investment Firm between June 30, 2010 and July 2, 2012 (the Put Option) and (2) gave the Investment Firm the
right to purchase the ARS from us any time after the Acceptance Date as long as we receive par value.

The ARS Agreement
covers ARS with a par value of $13.2 million and a fair value of $11.6 million as of September 30, 2009. We have accounted for the Put Option as a freestanding financial instrument and have elected to record the Put Option at fair value. This
resulted in our recording a $1.7 million asset in fiscal year 2009 with a corresponding credit to income for the value of the Put Option. There was no gain or loss recognized during the quarter ended September 30, 2009 related to the Put
Option. During the quarter ended June 30, 2009, the value of the Put Option increased $28,000 with a corresponding credit to income of the same amount.

The gain on the ARS and Put Option of $0.2 million for the six months ended September 30, 2009 is recorded in the interest and other income, net line in the accompanying condensed consolidated
statement of operations. As we have the right to put our ARS to the Investment Firm beginning June 30, 2010 and we intend to do so, the ARS and the Put Option are classified as current assets on our condensed consolidated balance sheet as of
September 30, 2009.

On January 5, 2009, Mr. Mark Emkjer resigned as our President, Chief Executive Officer and
as a member of the Board of Directors (the Board). In connection with Mr. Emkjers resignation, on January 6, 2009, we entered into a Separation Agreement and Release (the Separation Agreement). Pursuant to the
Separation Agreement: (i) Mr. Emkjer remained employed by us through January 31, 2009 to assist with transitioning his duties; (ii) through September 30, 2009 we paid Mr. Emkjer $1,435,000, less applicable withholdings;
(iii) each month for a period of 4 months following September 30, 2009, we will pay Mr. Emkjer the amount of $140,000, less applicable withholdings; and (vi) we will pay Mr. Emkjers COBRA benefits for a maximum of 24
months following the date of the termination of Mr. Emkjers employment. Our obligations to Mr. Emkjer pursuant to the Separation Agreement are contingent upon Mr. Emkjers abiding by certain non-competition,
non-solicitation and non-disparagement obligations for a period of 24 months following the date of the termination of his employment, all as set forth in the Separation Agreement

We have funded our activities to date primarily through the sales of software licenses and related services and the issuance of equity
securities.

We anticipate that our capital requirements may increase in future periods as a result of seasonal sales trends,
additional product development activities, and the acquisition of additional 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 twelve months. However, there can be no assurance that changes will not occur that would consume available capital resources before then. Our capital requirements depend on numerous factors, including our ability to continue to
generate software sales, 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.



21



---

##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

The information called for by this item is provided in Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009. Our exposures to market risk have not changed materially since March 31, 2009.



|Item 4. | Controls and Procedures
|------- | -----------------------

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls
and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), that are designed to provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to
our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures.

As of the end of the period covered by this Report, we conducted an evaluation, under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this
evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2009.

Changes in Internal Control Over Financial Reporting

There were no changes
in our internal control over financial reporting during the three months ended September 30, 2009 that materially affected, or are reasonably likely to materially affect, those controls.

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

We are subject to various claims and legal actions arising in the ordinary course of business. The ultimate disposition of these matters is not expected to have a material effect on our business or
financial condition. However, there can be no assurance that the disposition of such matters will not have a material effect on our results of operations in any particular period.



|Item 1A. | Risk Factors
|-------- | ------------

You should carefully consider the risks described below before investing in our publicly-traded securities. The risks described below are not the only ones facing us. 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 and our liquidity. The risks described below could cause our actual results to differ materially from those contained in the forward-looking statements we have made in this
Report, the information incorporated herein by reference and those forward-looking statements we may make from time to time.

Certain
Risks Related to Our Marketplace and Environment

Our revenue from the sale of computer aided design modeling and
simulation software to the life science discovery research marketplace, which has historically constituted a significant portion of our overall revenue, has been declining over the past several years and may continue to decline in future
years.Historically we have derived a significant portion of our revenue from the sale of computer aided design modeling and simulation software to the discovery research departments in pharmaceutical and biotechnology
companies. Based on recurring analyses of incoming orders typically conducted by our sales and marketing departments, we estimate that orders for our computer aided design modeling and simulation software declined approximately 20% between fiscal
year 2006 and fiscal year 2007, approximately 10% between fiscal year 2007 and 2008, and approximately 14% between fiscal year 2008 and 2009. While there is not a linear correlation between product orders and resulting revenue, we believe that our
estimates of decreased product orders ultimately reflect a decline in revenue attributable to sales of our computer aided design modeling and simulation software products. We believe this decline is due to several factors, including industry
consolidation, a general reduction in the level of discovery research activity by our customers, increased competition, including competition from open source software, and reductions in profit and related information technology spending by our
customers. If such declines continue and we do not increase the revenue we derive from our other product and service offerings, our business could be adversely impacted.



22



---

##### Table of Contents

Our ability to sustain or increase revenues will depend upon our success in entering
new markets and in deriving additional revenues from our existing customers. Our products are currently used primarily by molecular modeling and simulation specialists in discovery research organizations. One component of our overall
business strategy is to derive more revenues from our existing customers by expanding their usage of our products and services. Such strategy would have our customers utilize our scientific operating platform and our tools and components to leverage
vast amounts of information stored in both corporate databases and public data sources in order to make informed scientific and business decisions during the research and development process. In addition, we seek to expand into new markets and new
areas within our existing markets by attracting and retaining personnel knowledgeable in these markets, identifying the needs of these markets and developing marketing programs to address these needs. If successfully implemented, these strategies
would increase the usage of our software and services by biologists, chemists, engineers and informaticians operating within our existing pharmaceutical and biotechnology customers, as well as by new customers in other industries. However, if our
strategies are not successfully implemented, our products and services may not achieve market acceptance or penetration in targeted new departments within our existing customers or in new industries. As a result, we may incur additional costs and
expend additional resources without being able to sustain or increase revenue.

Our focus on offering scientific
business intelligence solutions to both existing and new customers and markets may make it more difficult for us to sustain our revenue from the sale of computer aided design modeling and simulation products to the life science discovery research
marketplace. Our strategy involves transforming our product and service offerings by utilizing our scientific operating platform and our tools and components in order to enable our customers to more effectively utilize the vast amounts of
information stored in both their databases and public data sources in order to make informed scientific and business decisions during the research and development process. This strategy is intended to lead us to new and different markets and
customers, as well as increase the usage of our offerings by existing customers. Executing this strategy will require significant management focus and utilization of resources. Though we intend to continue to dedicate sufficient resources and
management focus to our life science computer aided design modeling and simulation products, it is possible that the strategy will result in loss of management focus and resources relating to these existing products and markets, thereby resulting in
decreasing revenues from these markets. If these revenues are not offset by increasing revenues from new markets and/or customers, our overall revenues will suffer.

We may be unable to develop strategic relationships with our customers.Our overall business strategy is to expand usage of our products and services by expanding our current customers
usage of our products and by marketing and distributing our solutions to a broader, more diversified group of biologists, chemists, engineers and informaticians operating throughout our customers research and development organizations. A key
component of this strategy is to become a preferred provider of scientific software and solutions. Becoming a preferred vendor will require substantial re-training and new skills development within our sales and service personnel and deployment of a
successful account-management sales model. We believe that developing strategic relationships with our customers may lead to additional revenue opportunities. However, executing this strategy may require significant expense, and there can be no
assurance that any such relationships will develop or that such relationships will produce additional revenue or profit opportunities.

Consolidation within the pharmaceutical and biotechnology industries may continue to 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.

Increasing competition and increasing
costs within the pharmaceutical and biotechnology industries may affect the demand for our products and services, which may affect our results of operations and financial condition. Our pharmaceutical and biotechnology customers
demand for our products is impacted by continued demand for their products and by our customers research and development costs. Demand for our customers products could decline, and prices charged by our customers for their products may
decline, as a result of increasing competition, including competition from companies manufacturing generic drugs. In addition, our customers expenses could continue to increase as a result of increasing costs of complying with government
regulations and other factors. A decrease in demand for our customers products, pricing pressures associated with the sales of these products, and additional costs associated with product development could cause our customers to reduce
research and development expenditures. Because our products and services depend on such research and development expenditures, our revenues may be significantly reduced.

Health care reform and restrictions on reimbursement may affect the pharmaceutical, biotechnology and industrial chemical companies that purchase or license our products or services, which may
affect our results of operations and financial condition. The continuing efforts of government and third-party payers in the markets we serve to contain or reduce the cost of health care may reduce the profitability of pharmaceutical,
biotechnology and industrial chemical companies causing them to reduce research and



23



---

##### Table of Contents

development expenditures. Because our products and services depend on such research and development expenditures, our revenues may be significantly reduced. We cannot predict what actions
federal, state or private payers for health care goods and services may take in response to any health care reform proposals or legislation.

We face strong competition in the life science market for computer aided design modeling and simulation software and for cheminformatics products. The market for our computer aided design
modeling and simulation software products for the life science market is intensely competitive. We currently face competition from other scientific software providers, larger technology and solutions companies, in-house development by our customers,
as well as academic and government institutions and the open source community.

Some of our competitors and potential
competitors in this sector have longer operating histories than we do and could 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 and made available at lower cost by government
organizations and academic institutions, and these entities may be able to devote substantial resources to product development and also offer their products to users for little or no charge. We also face competition from open source software
initiatives, in which developers provide software and intellectual property free over the Internet. In addition, many of our customers spend significant internal resources in order to develop their own software. Moreover, we intend to leverage our
scientific operating platform in order to enable our customers to more effectively utilize the vast amounts of information stored in both their databases and public data sources in order to make informed scientific and business decisions during the
research and development process. This strategy could lead to competition from much larger companies which provide general data storage and management software.

There can be no assurance that our current or potential competitors will not develop products, services or technologies that are comparable to, superior to, or render obsolete, the products, services and
technologies we offer. There can be no assurance that our competitors will not adapt more quickly than us to technological advances and customer demands, thereby increasing such competitors market share relative to ours. Any material decrease
in demand for our technologies or services may have a material adverse effect on our business, financial condition and results of operations.

We are subject to pricing pressures in some of the markets we serve.The market for computer aided design modeling and simulation products for the life science industry is intensely
competitive, which has led to significant pricing pressure and declines in average selling price over the past several years. Based on recurring analyses of incoming orders typically conducted by our sales and marketing departments, we estimate that
the average sales price of our computer aided design modeling and simulation products for the life science industry declined approximately 7% between fiscal year 2007 and fiscal year 2008 and approximately 8% between fiscal year 2008 and fiscal year
2009. While there is not a linear correlation between our product pricing and competition in the marketplace, we believe that our estimates of decreased prices ultimately reflect increased competition that has led and may continue to lead to pricing
pressure with respect to sales of these products. In response to such increased competition and general adverse economic conditions in this market, we may be required to further modify our pricing practices. Changes in our pricing model could
adversely affect our revenue and earnings.

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, and Cambridge, United Kingdom. We also conduct sales
and customer support activities at our facilities in Burlington, Massachusetts, Paris, France, and Tokyo, Japan. Although we have contingency plans in effect for natural disasters or other catastrophic events, the occurrence of such events could
still disrupt our operations. For example, our San Diego and Tokyo facilities are located in areas that are particularly susceptible to earthquakes. Any natural disaster or 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
risks 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. In addition, we may not be able to obtain any insurance coverage, or adequate insurance coverage, when our existing insurance coverage expires. For example, we do not carry earthquake insurance for our
facilities in Tokyo, Japan or San Diego, California, because we do not believe the costs of such insurance are reasonable in relation to the potential risk.

Certain Risks Related to Our Operations

Defects or malfunctions in
our products could hurt our reputation among our customers, result in delayed or lost revenue 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. To the extent that defects cause our software to malfunction and our customers use of our products is interrupted, our reputation could suffer and our revenue could decline or be
delayed while such defects are remedied. 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.



24



---

##### Table of Contents

Delays in the release of new or enhanced products or services or undetected errors in
our products or services may result in increased cost to us, delayed market acceptance of our products 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 new customer orders for
these new or enhanced products or services or the loss of customer orders. In addition, new or enhanced products or services may contain a number of undetected errors or bugs when they are first released. Although we test each new or
enhanced software product or service before it is released to the market, there can be no assurance that significant errors will not be found in existing or future releases. As a result, in the months following the introduction of certain releases,
we may need to devote significant resources to correct these errors. There can be no assurance, however, that all of these errors can be corrected.

We are subject to risks associated with the operation of a global business. We derive a significant portion of our total revenue from our operations in international markets. In 2009, 2008
and 2007, 52%, 51% and 46%, respectively, of our total revenue was derived from our international operations. Our global business may be affected by local economic conditions, including inflation, recession and currency exchange rate fluctuations.
In addition, political and economic changes throughout the world may interfere with our or our customers activities in particular locations and result in a material adverse effect on our business, financial condition and operating results. We
anticipate that revenue from operations in international markets will continue to account for a significant percentage of future revenue. The following table depicts our region-specific revenue as a percent of total revenue for each of the last
three fiscal years:



|             |  |               |   |  |               |   |  |               |  
|------------ |  | ------------- | - |  | ------------- | - |  | ------------- | -
|             |  | Years Ended   |  
|Region       |  | March 31,2009 |   |  | March 31,2008 |   |  | March 31,2007 |  
|U.S.         |  | 48            | % |  | 49            | % |  | 54            | %
|Europe       |  | 28            | % |  | 29            | % |  | 26            | %
|Asia-Pacific |  | 24            | % |  | 22            | % |  | 20            | %

Other potential risks inherent in our international business include:



| |  |  | unexpected changes in regulatory requirements;
| | - |  | ----------------------------------------------



| |  |  | longer payment cycles;
| | - |  | ----------------------



| |  |  | currency exchange rate fluctuations;
| | - |  | ------------------------------------



| |  |  | import and export license requirements;
| | - |  | ---------------------------------------



| |  |  | tariffs and other barriers;
| | - |  | ---------------------------



| |  |  | political unrest, terrorism and economic instability;
| | - |  | -----------------------------------------------------



| |  |  | disruption of our operations due to local labor conditions;
| | - |  | -----------------------------------------------------------



| |  |  | limited intellectual property protection;
| | - |  | -----------------------------------------



| |  |  | difficulties in collecting trade receivables;
| | - |  | ---------------------------------------------



| |  |  | difficulties in managing distributors or representatives;
| | - |  | ---------------------------------------------------------



| |  |  | difficulties in managing an organization spread over various countries;
| | - |  | -----------------------------------------------------------------------



| |  |  | difficulties in staffing foreign subsidiary or joint venture operations; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | 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 will do so effectively, or that these or other factors relating to our international
operations will not adversely affect our business or operating results.

In order to improve our financial position, we
have reduced our headcount, which could negatively impact our business. We have undergone several reductions-in-force over the past several years, and our workforce has declined approximately 25% since March 31, 2006. We do not believe
that these reductions have had a material adverse effect on our operations or our ability to generate revenue to date. However, while we believe we have sufficient staff to operate our business, we do not have duplicative or redundant resources in
many of our functions or operations. As a result, there can be no assurance that further attrition will not impact our ability to operate our business, or adversely impact our revenues.



25



---

##### Table of Contents

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, sales, business development, marketing, engineering, management and accounting 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. 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 technical, 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 or results
of operations. We do not intend to maintain key person life insurance on the life of any employee.

On June 15, 2009, the
Board appointed Max Carnecchia as our president and chief executive officer. Todd Johnson, our former interim president and chief executive officer was appointed as our senior vice president of marketing and operations on July 15, 2009.
Leadership transitions can be inherently difficult to manage and may cause a disruption to our business or further turnover in key personnel. During this period of transition, there may be operational inefficiencies as our new president and chief
executive officer becomes familiar with our business and operations.

Continued turmoil in the worldwide financial
markets may negatively impact our business, results of operations, and financial condition. As widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent months, including,
among other things, extreme volatility in security prices, declining valuations of certain investments, severely diminished liquidity and credit availability, the failure or sale of various financial institutions and an unprecedented level of
government intervention. Many economists believe that the United States economy, and possibly the global economy, is in the midst of a prolonged recession. This protracted downturn may hurt our business in a number of ways, including through general
decreases in spending and the adverse impact on our customers ability to obtain financing, which may lead to delays or failures in our signing customer agreements or signing customer agreements at reduced purchase levels. While we are unable
to predict the likely duration and severity of the current disruption in the financial markets and the adverse economic conditions in the U.S. and other countries, any of the circumstances mentioned above could have a material adverse effect on our
revenues, financial condition and results of operations

If we choose to acquire 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 may
utilize our existing funds, thereby lowering the amount of funds we currently have, or might need to raise additional funds through public or private equity or debt financings. Prolonged tightening of the financial markets may impact our ability to
obtain financing to fund future acquisitions and we could be forced to obtain financing on less than favorable terms. Additionally, equity financings may result in dilution to our stockholders. If we are unable to integrate any acquired entities,
products or technologies effectively, our business could suffer. In addition, under certain circumstances, amortization of assets or charges resulting from the costs of acquisitions could harm our business, financial condition, or operating results.

Certain Risks Related To Our Financial Performance

We have a history of losses and our future profitability is uncertain. We generated net losses for the years ended March 31, 2007 and 2006. Although we generated net income for the
years ended March 31, 2009 and 2008, we may experience future net losses which 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:



| |  |  | changes in the demand for our products and services;
| | - |  | ----------------------------------------------------



| |  |  | the introduction of competitive software;
| | - |  | -----------------------------------------



| |  |  | our ability to license desirable technologies;
| | - |  | ----------------------------------------------



| |  |  | changes in the research and development budgets of our customers and potential customers;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | our ability to successfully, cost effectively and timely develop, introduce and market new products, services and product enhancements; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the acquisition of any new entities or businesses which may have a dilutive effect upon our earnings.
| | - |  | -----------------------------------------------------------------------------------------------------

Our sales forecast and/or revenue projections may not be accurate. We use a pipeline system, a common industry
practice, to forecast sales and trends in our business. Our sales personnel monitor the status of proposals, including the date when they estimate a customer will make a purchase decision and the potential size of the order. We aggregate these
estimates on a quarterly basis in



26



---

##### Table of Contents

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 pipeline into revenue or the pipeline itself could cause us to improperly plan or budget and thereby adversely affect our business, results of operations and financial condition.

If we are unable to license software to, or collect receivables from our customers our operating results may be adversely
affected. While the majority of our current customers are well-established, large pharmaceutical customers and universities, we also provide products and services to smaller biotechnology companies. We have not experienced significant
customer defaults during the past three fiscal years. Our financial success depends upon the creditworthiness and ultimate collection of amounts due from our customers, including our smaller customers with fewer financial resources. If we are not
able to collect from our customers, we may be required to write-off significant accounts receivable and recognize bad debt expenses which could materially and adversely affect our operating results.

Our quarterly operating results, particularly our quarterly cash flows, may fluctuate. Quarterly operating results may
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. We may also 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. In particular, historically we have received approximately two-thirds of our annual customer orders in the second half of our fiscal year. In accordance with our revenue recognition policies, the revenue associated with
these orders is generally recognized over the contractual license term. Therefore, because we accrue sales commissions and royalties upon the receipt of customer orders, we generally experience an increase in operating costs and expenses during the
second half of our fiscal year with only a minimal corresponding incremental increase in revenue. Additionally, our cash flows from operations have historically been positive in the fiscal quarter ended March 31 as we collect the accounts
receivable generated from these customer orders, while we have historically experienced negative cash flows from operations in the other three fiscal quarters. As a result of these seasonal variations, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance and that our interim financial results are not necessarily indicative of results for a full year or for any subsequent interim period.

We may be required to indemnify PDD, or may not be able to collect on indemnification rights from PDD. On April 30, 2004,
we spun-off our drug discovery subsidiary, PDD, into an independent, separately traded, publicly held company through the distribution to our stockholders of a dividend of one share of PDD common stock for every two shares of our common stock. As
part of the spin-off, we agreed to indemnify the indebtedness, liabilities and obligations of PDD. One such obligation includes a guarantee by us to the landlord of PDDs obligations under certain facility leases, with respect to which PDD will
indemnify us should we be required to make any payment under the guarantee. These indemnification obligations could be as significant as the remaining future minimum lease payments, which totaled approximately $16.0 million as of September 30,
2009. PDDs ability to satisfy any such indemnification obligations (including, without limitation, PDDs commitment to indemnify us in the event of our payment under our guarantee of its leases) will depend upon PDDs future
financial strength. We cannot assure you 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 failure by PDD to satisfy its obligations and any required payment by us could have a material adverse effect on our business.

Enacted and proposed changes in securities laws and regulations have increased our costs and may continue to increase our costs in the future. The Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley) required changes in some of our corporate governance and securities disclosure and compliance practices. Under Sarbanes-Oxley, publicly-held companies, including us, are required to, among other things, furnish
independent annual audit reports regarding the existence and reliability of their internal control over financial reporting and have their chief executive officer and chief financial officer certify as to the accuracy and completeness of their
financial reports.

We expect continued compliance with Sarbanes-Oxley to remain costly. Further, Sarbanes-Oxley and the
related SEC and NASDAQ compliance rules may make it more difficult and expensive for us to maintain 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 also make it more difficult for us to attract and retain qualified members of the Board, or qualified executive officers. We continually evaluate and monitor regulatory developments and cannot estimate the
timing or magnitude of additional costs we may incur as a result.

Our business, financial condition and results of
operations may be adversely impacted by fluctuations in foreign currency exchange rates. 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, currency hedging policies may not be successful, and they may increase the negative impact of exchange rate fluctuations.



27



---

##### Table of Contents

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, our capital requirements will depend on many factors,
including the potential acquisition 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.

Negative conditions in the global credit markets may materially impair the value or reduce the liquidity of a portion of our investment portfolio.Recent U.S. sub-prime mortgage defaults have had a significant impact across
various sectors of the financial markets, causing global credit and liquidity issues. The short-term funding markets experienced credit issues from the second half of calendar 2007 and through the fourth quarter of calendar 2008, which led to
liquidity issues and failed auctions in the ARS market. If the global credit market continues to deteriorate, the liquidity of our investment portfolio may continue to be impacted.

Included in our marketable securities portfolio at September 30, 2009 were ARS that we purchased for $13.2 million. Under the terms of
the ARS Agreement, we have the right to sell our ARS at par value to the Investment Firm between June 30, 2010 and July 2, 2012 and the Investment Firm has the right to purchase the ARS from us any time after the Acceptance Date as long as
we receive par value. If the ARS Agreement expires or is otherwise terminated prior to the purchase or sale of the ARS under the terms of the ARS Agreement, or if the Investment Firm is unable to fulfill its obligations under the ARS Agreement, we
may have no recourse beyond recovering or retaining the ARS for sale at future auctions. If such future auctions fail and the credit ratings of these investments deteriorate, the fair value of these ARS may decline further and we may incur
additional impairment charges in connection with these securities, which would negatively affect our reported earnings, cash flows and financial condition.

Certain Risks Related to Owning Our Stock

We expect that our stock
price will fluctuate significantly, and as a result, our stockholders may not be able to resell their shares at or above their original investment price. The stock market, historically and 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. Factors that could cause volatility in the price
of our common stock include without limitation:



| |  |  | actual and anticipated fluctuations in our quarterly financial and operating results;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | market conditions in the technology and software sectors;
| | - |  | ---------------------------------------------------------



| |  |  | issuance of new or changed securities analysts reports or recommendations;
| | - |  | ---------------------------------------------------------------------------



| |  |  | developments or disputes concerning our intellectual property or other proprietary rights or other legal claims;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | introduction of technological innovations or new commercial products by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | market acceptance of our products and services;
| | - |  | -----------------------------------------------



| |  |  | additions or departures of key personnel; and
| | - |  | ---------------------------------------------



| |  |  | the acquisition of new businesses or technologies
| | - |  | -------------------------------------------------

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 common
stock and may otherwise negatively affect the liquidity of our common stock.

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 October 19, 2009, the top ten institutional holders of our common stock held approximately 47% 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 an 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 it was purchased.



28



---

##### Table of Contents

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 make the accomplishment of mergers or the assumption of control by a principal stockholder more difficult, thereby making the removal of management more
difficult. 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 the Board. 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 the acquisition of a substantial block of
our common stock more difficult. 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.

Certain Risks Related to Intellectual Property

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 some instances 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.

Foreign laws may not afford us sufficient protections for our
intellectual property, and we may not seek patent protection outside the United States. We believe that our success depends, in part, upon our ability to obtain international protection for our intellectual property. However, 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.

A patent issued to us may not be sufficiently broad to protect adequately our rights in intellectual property to which the patent
relates. Due to cost and other considerations, we generally do not rely on patent protection to enforce our intellectual property rights, and have filed only a limited number of patent applications. Even if patents are issued to us, these
patents may not sufficiently protect our interest in our software or other technologies because the scope of protection provided by any patents issued to or licensed by us are subject to the uncertainty inherent in patent law. Third parties may be
able to design around these patents or develop unique products providing effects similar to our products. In addition, others may discover uses for our software or technologies other than those uses covered in our patents, and these other uses may
be separately patentable. A number of pharmaceutical and biotechnology companies, software organizations and research and academic institutions, have developed technologies, filed patent applications or received patents on various technologies that
may be related to our business. Some of these technologies, patent applications or patents may conflict with our technologies, patent applications or patents. These conflicts could also limit the scope of patents, if any, that we may be able to
obtain, or result in the denial of our patent applications.

We may be subject to claims of infringement by 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 or functionality of our products and could prevent us from using technology that we use or expect to use, or
making or selling certain of 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 inadvertently use or disclose alleged trade
secrets or other proprietary information of their former employer. Thus, our products may infringe patent or other intellectual property rights of third parties, and we may be subject to infringement claims by third parties. Any such 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. Such licenses 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.



29



---

##### Table of Contents

Third-party software codes incorporated into our products could subject us to
liability or limit our ability to sell such products. Some of our products include software codes licensed from third parties, including the open source community. Some of these licenses impose certain obligations upon us, including royalty
and indemnification obligations. In the case of codes licensed from the open source community, the licenses may also limit our ability to sell products containing such code. Though we generally review the applicable licenses prior to incorporating
third party code into our software products, there can be no assurance that such third party codes incorporated into our products would not subject us to liability or limit our ability to sell the products containing such code, thereby having a
material adverse affect upon our business.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

On August 27, 2009, we held our Annual Meeting of Stockholders at which the stockholders:



| | (1) | Elected Max Carnecchia and Christopher J. Steffen to the Board of Directors (the Board), to serve for a three-year term to expire at the 2012 Annual Meeting
of Stockholders.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Ratified the selection of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2010.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------

The following directors received the number of votes set opposite his name:



|                       |  |              |  |                         
|---------------------- |  | ------------ |  | ------------------------
|                       |  | For Election |  | Votes Againstor Withheld
|Max Carnecchia         |  | 23,188,284   |  | 1,972,477               
|Christopher J. Steffen |  | 15,331,867   |  | 9,829,061               

The ratification of the selection of Ernst & Young LLP as our independent
registered public accounting firm received 22,068,644 affirmative votes (for the selection), 3,073,903 negative votes (against the selection), and 18,380 votes abstained.

Kenneth L. Coleman and Ricardo B. Levy, Ph.D. continued in office as members of the Board, with their terms expiring at the 2010 Annual Meeting of Stockholders. Larry Ferguson and Jeffrey Rodek continued
in office as members of the Board, with their terms expiring at the 2011 Annual Meeting of Stockholders.



|Item 6. | Exhibits
|------- | --------



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3.1            |  | Restated Certificate of Incorporation of Pharmacopeia, Inc. (incorporated by reference to Exhibit 3.1 to Accelrys, Inc.s Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).                                                                                                                                                                                                                                                  
|               | 
|3.2            |  | Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Pharmacopeia, Inc. (incorporated by reference to Exhibit 3.2 to Accelrys,
Inc.s Annual Report on Form 10-K for the fiscal year ended March 31, 2005).                                                                                                                                                                                       
|               | 
|3.3            |  | Certificate of Amendment of the Restated Certificate of Incorporation of Pharmacopeia, Inc. (incorporated by reference to Exhibit 3.2 to Accelrys, Inc.s Annual Report on Form
10-K for the fiscal year ended March 31, 2005).                                                                                                                                                                                                                     
|               | 
|3.4            |  | Certificate of Amendment of Amended and Restated Certificate of Accelrys, Inc. (incorporated by reference to Exhibit 3.4 to Accelrys, Inc.s Quarterly Report Form 10-Q for the
quarterly period ended September 30, 2007).                                                                                                                                                                                                                         
|               | 
|3.5            |  | Amended and Restated Bylaws of Accelrys, Inc. as amended on June 9, 2005 (incorporated by reference to Exhibit 3.3 to Accelrys, Inc.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
Accelrys, Inc.s Report on Form 8-K dated September 4, 2002).
|               | 
|10.1           |  | Letter Agreement, dated July 15, 2009, between Todd Johnson and Accelrys, Inc. (incorporated by reference to Exhibit 10.1 to Accelrys, Inc.s Current Report
Form 8-K dated July 20, 2009).                                                                                                                                                                                                                                                         



30



---

##### Table of Contents

|               |  |                                                                                     
|-------------- |  | ------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                         
|31.1*          |  | Section 302 Certification of the Principal Executive Officer                        
|               | 
|31.2*          |  | Section 302 Certification of the Principal Financial Officer                        
|               | 
|32.1*          |  | Section 906 Certification of the Chief Executive Officer and Chief Financial Officer



|* | Filed herewith
|- | --------------

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/ RICK E. RUSSORick E. RussoSenior Vice President and Chief FinancialOfficer (Duly Authorized Officer, PrincipalFinancial Officer and Principal AccountingOfficer)Date: November 6, 2009




31