ACCELRYS, INC. - FORM 10-Q

ACCELRYS, INC. - FORM 10-Q - May 4, 2011

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EX-32.1 - SECTION 906 CERTIFICATION OF THE CEO AND CFO - ACCELRYS, INC.	dex321.htm
EX-31.1 - SECTION 302 CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER - ACCELRYS, INC.	dex311.htm
EX-31.2 - SECTION 302 CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER - ACCELRYS, INC.	dex312.htm

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 March 31, 2011

¨	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):

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 April 22, 2011, was 55,388,680 net of treasury shares.

ACCELRYS, INC.

FORM 10-Q — QUARTERLY REPORT

For The Quarterly Period Ended March 31, 2011

Table of Contents


PART I — FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements	3

	Condensed consolidated balance sheets as of March 31, 2011(unaudited) and December 31, 2010	3

	Condensed consolidated statements of operations (unaudited) for the three-month periods ended March 31, 2011and 2010	4

	Condensed consolidated statements of cash flows (unaudited) for the three-month periods ended March 31, 2011 and 2010	5

	Notes to condensed consolidated financial statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 1A	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 5.	Other Information	37

Item 6.	Exhibits	38

Signature		39

PART I — FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

Accelrys, Inc.

Condensed Consolidated Balance Sheets

(In thousands)


	March 31,			December 31,
	2011			2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	43,932		$	86,316
Marketable securities		69,277			32,275
Trade receivables, net of allowance for doubtful accounts of $154 and $163 as of March 31, 2011 and December 31, 2010, respectively		36,117			29,489
Prepaid expenses, deferred tax assets and other current assets		8,888			10,709

Total current assets		158,214			158,789
Marketable securities, net of current portion		32,878			16,936
Restricted cash		5,569			5,525
Property and equipment, net		11,943			11,969
Goodwill		69,429			69,356
Purchased intangible assets, net		65,623			70,748
Long-term investments		19,333			18,510
Other assets		11,102			11,449

Total assets	$	374,091		$	363,282

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2,692		$	4,124
Accrued liabilities		15,710			16,849
Accrued compensation and benefits		10,085			12,239
Current portion of accrued restructuring charges		2,684			3,634
Current portion of deferred revenue		89,126			63,888

Total current liabilities		120,297			100,734
Deferred revenue, net of current portion		3,030			3,571
Accrued income tax		7,498			7,220
Accrued restructuring charges, net of current portion		237			472
Lease-related liabilities, net of current portion		2,429			3,639
Stockholders’ equity:
Preferred stock, $.0001 par value; 2,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $.0001 par value; 100,000 shares authorized; 56,928 and 56,733 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		6			6
Additional paid-in capital		459,920			457,883
Lease guarantee		(320	)		(336	)
Treasury stock; 1,348 and 998 shares at March 31, 2011 and December 31, 2010, respectively		(14,339	)		(11,340	)
Accumulated deficit		(205,687	)		(199,973	)
Accumulated other comprehensive income		1,020			1,406

Total stockholders’ equity		240,600			247,646

Total liabilities and stockholders’ equity	$	374,091		$	363,282

See accompanying notes to these condensed consolidated financial statements.

Accelrys, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended March 31,
	2011			2010
Revenue:
License and subscription revenue	$	19,480		$	15,905
Maintenance on perpetual licenses		7,814			2,660
Content		4,048			—
Professional services and other		3,258			2,194

Total revenue		34,600			20,759

Cost of revenue:
Cost of revenue		9,649			3,612
Amortization of completed technology		2,037			41

Total cost of revenue		11,686			3,653

Gross profit		22,914			17,106
Operating expenses:
Product development		8,535			4,412
Sales and marketing		13,489			11,704
General and administrative		4,381			2,831
Business consolidation, transaction and restructuring costs		1,602			706
Purchased intangible asset amortization		2,394			—

Total operating expenses		30,401			19,653

Operating loss		(7,487	)		(2,547	)
Royalty and other income, net		2,280			294

Loss before taxes		(5,207	)		(2,253	)
Income tax expense		507			121

Net loss	$	(5,714	)	$	(2,374	)


Basic and diluted net loss per share	$	(0.10	)	$	(0.09	)

Weighted average shares used to compute net loss per share		55,525			27,698

See accompanying notes to these condensed consolidated financial statements.

Accelrys, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2011			2010
Cash flows from operating activities:
Net loss	$	(5,714	)	$	(2,374	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		6,054			486
Share-based compensation		1,280			1,017
Deferred income taxes		187			55
Other		436			(200	)
Changes in operating assets and liabilities:
Trade receivables		(6,171	)		8,288
Prepaid expense and other current assets		1,187			(100	)
Other assets		3			(113	)
Accounts payable		(1,464	)		1,438
Accrued liabilities, compensation and benefits		(5,733	)		1,615
Deferred revenue		24,047			5,509

Net cash provided by operating activities		14,112			15,621
Cash flows from investing activities:
Purchases of property and equipment, net		(857	)		(193	)
Purchase of software license		—			(113	)
Purchases of marketable securities		(61,397	)		—
Proceeds from maturities and sales of marketable securities		8,073			1,200

Net cash (used in) provided by investing activities		(54,181	)		894
Cash flows from financing activities:
Proceeds from issuance of common stock		842			528
Common stock tendered for payment of withholding taxes		(85	)		—
Repurchases of common stock		(3,000	)		—

Net cash (used in) provided by financing activities		(2,243	)		528
Effect of changes in exchange rates on cash and cash equivalents		(72	)		(351	)

(Decrease) increase in cash and cash equivalents		(42,384	)		16,692
Cash and cash equivalents at beginning of period		86,316			60,429

Cash and cash equivalents at end of period	$	43,932		$	77,121

See accompanying notes to these condensed consolidated financial statements.

Accelrys, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.	Basis of Presentation and Significant Accounting Policies

Financial Statement Preparation

The condensed consolidated financial statements of Accelrys, Inc. (“Accelrys”, “we”, “our” or “us”) as of March 31, 2011 and for the three months ended March 31, 2011 and 2010 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 Transition Report on Form 10-KT for the nine month transition period from April 1, 2010 through December 31, 2010, filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2011 (the “Form 10-KT”).

On July 1, 2010, Alto Merger Sub, Inc., our wholly-owned subsidiary (“Merger Sub”), merged with and into Symyx Technologies, Inc. (“Symyx”), with Symyx surviving as our wholly-owned subsidiary (the “Merger”). Symyx’s results of operations are included in the Company’s consolidated financial statements beginning July 1, 2010.

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 fiscal quarters ended December 31 and March 31. 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 fiscal quarters ended December 31 and March 31. 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.

Change In Fiscal Year

On August 3, 2010, our board of directors approved a change in our fiscal year-end from March 31 to December 31. The fiscal year-end change was effective December 31, 2010 and resulted in a nine month transition period from April 1, 2010 to December 31, 2010. Accordingly, the financial statements and financial comparisons included in this Form 10-Q relate to the three-month periods ended March 31, 2011 and 2010 and the financial results for the three-month period ended March 31, 2010 have been recast to allow for comparison based on our new fiscal periods.

Principles of Consolidation

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

Prior Period Reclassifications

We have reclassified $0.7 million in transaction costs for the period ended March 31, 2010 from general and administrative expenses into business consolidation, transaction and restructuring costs.

Additionally, we have reclassified a portion of our information technology overhead costs out of general and administrative expenses into cost of revenue, product development, and sales and marketing in our previously issued condensed consolidated statements of operations to conform to current period presentation. We believe that the allocation of these costs based on headcount as overhead costs provides a more accurate depiction of the costs associated with cost of revenue, research and development, sales and marketing and general and administrative costs.

The aforementioned amounts have been reclassified in our condensed consolidated statements of operations for the three months ended March 31, 2010 as follows:


	Three Months Ended March 31, 2010
	Original			As reclassified
Revenue	$	20,759		$	20,759
Cost of revenue		3,485			3,653

Gross profit		17,274			17,106

Operating expenses:
Product development		4,151			4,412
Sales and marketing		11,316			11,704
General and administrative		4,350			2,831
Business consolidation, transaction and restructuring costs		4			706

Total operating expenses		19,821			19,653

Operating loss	$	(2,547	)	$	(2,547	)

Additionally, we have reclassified $4.3 million of long term marketable securities to short term marketable securities in our December 31, 2010 balance sheet to conform to current period presentation.

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 on-going basis, we evaluate our estimates, including those related to share-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”),

•

content, and

•

professional services.

Customer billings issued 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 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 or purchase order (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

•

collection of the purchase price from the customer is considered probable.

Software Licenses. We license software on a term and perpetual 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 (“VSOE”) of the fair value of these undelivered 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.

Content. Content is licensed on a term basis and provides customers with access to the licensed content over the term of the agreement. Revenue from these licensing arrangements is recognized ratably over the term of the agreement, which is typically twelve months.

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 recognized as the services are delivered 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. For multi-element arrangements which include software and non-software elements, we separate the non-software elements and recognize those elements over their respective delivery periods.

Deferred Costs

Occasionally we enter into professional service arrangements under which resulting revenue is deferred until certain elements of the arrangements are delivered. As a result, if deemed material, we defer the direct variable expense, not exceeding the revenue deferred, in other current assets on the balance sheet until the period when revenue is recognized. Direct and incremental variable expenses include direct labor costs and direct services contracts with third parties working on the software service arrangements. As of March 31, 2011 and December 31, 2010, we deferred approximately $0.6 million and $0.5 million, respectively, of direct and incremental variable expenses related to software service arrangements where the revenue is deferred until future periods.

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 our 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 ESPP.

We are also required to estimate at the time of the grant the likelihood that the award will ultimately vest (the “pre-vesting forfeiture rate”), and to 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 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.

Our determination of the input variables used in the Black-Scholes option pricing model as well as the pre-vesting forfeiture rate is based on various underlying estimates and assumptions that are highly subjective and are affected by our stock price, among other factors. Changes in these underlying estimates and assumptions could materially affect the fair value of our share-based awards and, therefore, the amount of share-based compensation expense to be recognized in our results of operations.

Income Taxes

We account for income taxes in accordance with ASC Topic 740, 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 them to the amount expected to be realized.

We assess the recoverability of our deferred tax assets on an ongoing basis. In making this assessment we are required to consider all available positive and negative evidence to determine whether, based on such evidence, it is more likely than not that some portion or all of our net deferred assets will be realized in future periods. This assessment requires significant judgment. We do not recognize current and future tax benefits until it is more likely than not that our tax positions will be sustained. In general, any realization of our net deferred tax assets will reduce our effective rate in future periods. However, the realization of deferred tax assets that are related to net operating losses (“NOLs”) that were generated by tax deductions resulting from the exercise of non-qualified stock options will be a direct increase to stockholders’ equity.

We determine whether the benefits of our tax positions are more-likely-than-not to be 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.

Interest and penalties related to income tax matters are recognized in income tax expense. During the three months ended March 31, 2011 we incurred approximately $37,000 in interest and penalties. We did not incur any interest or penalties during the three months ended March 31, 2010.

2.	Business Combinations

On July 1, 2010, we completed the Merger, whereby Symyx became our wholly-owned subsidiary. Pursuant to the terms of the Agreement and Plan of Merger and Reorganization, dated April 5, 2010, by and among Accelrys, Merger Sub and Symyx (the “Merger Agreement”), Symyx stockholders received 0.7802 shares of our common stock (the “Exchange Ratio”) for each share of Symyx common stock held on July 1, 2010. As a result, we issued an aggregate of approximately 27.5 million shares of our common stock to Symyx stockholders on July 1, 2010. In addition, outstanding options to purchase Symyx common stock were assumed by us and converted into options to purchase 2,441,274 shares of our common stock based on the Exchange Ratio. Based on criteria under business combination accounting guidance, Accelrys was deemed to be the accounting acquirer.

As a result of the Merger, our U.S. federal deferred tax assets related to NOL carryforwards of $114.0 million as of December 31, 2010 are subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”).

Fair Value of Consideration Transferred


(in thousands except exchange ratio, share and per share amounts )
Symyx common stock outstanding on June 30, 2010		35,118
Accelerated vesting of Symyx restricted stock units (“Symyx RSUs”) immediately prior to the Merger		132	(1)

Symyx common stock outstanding on June 30, 2010 (including Symyx RSUs)		35,250

Exchange ratio		0.7802

Number of shares of Accelrys stock issued in connection with the Merger		27,502
Per share closing price of Accelrys common stock on June 30, 2010	$	6.45

Fair value of estimated shares of Accelrys common stock to be issued in connection with the Merger	$	177,384
Fair value of exchanged equity awards	$	1,913	(2)

Value of consideration transferred	$	179,297

(1)	Represents unvested Symyx RSUs as of June 30, 2010. Pursuant to the Symyx 2007 Stock Incentive Plan, as amended (the “2007 Plan”) and associated grant agreements, unvested Symyx RSUs accelerated vesting upon a change of control (including the Merger).

(2)

Includes: (a) $1.5 million which represents the fair value of Symyx stock options, granted to Symyx employees in connection with services provided prior to the Merger that were exchanged for options to acquire 2,441,274 shares of Accelrys common stock in connection with the Merger and (b) $0.4 million which represents the fair value of the Symyx stock options which became fully vested on June 30, 2010 in accordance with change of control provisions included in the stock option agreements. The fair value of the vested stock options exchanged is included in the calculation of purchase consideration and was determined using the Black-Scholes option pricing model using an Accelrys share price of $6.45. The assumptions used were as follows:


Expected volatility		32% – 65%
Risk-free interest rate		0.22% – 1.4%
Expected option life in years		0.5 – 4.0
Expected dividend yield		0%

Recording of Assets Acquired and Liabilities Assumed

The Company has not yet finalized the determination of the fair values of the assets acquired and liabilities assumed in connection with the Merger with respect to our evaluation of income tax, including uncertain tax positions, accrued liabilities, and a potential legal contingency. As a result, the fair values set forth below are considered preliminary and subject to potential adjustments.

The following table summarizes the preliminary acquisition-date fair value of the identifiable assets acquired and liabilities assumed, including an amount for recognized goodwill:


	(in thousands)
Fair Value of Consideration Transferred	$	179,297
Less: Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents		74,497
Accounts receivable		14,234
Other current assets		8,193
Property, plant and equipment		8,735
Intangible assets		75,390
Long-term investments		18,510
Other assets		10,223
Other current liabilities		(24,453	)
Deferred revenue		(14,559	)
Other long-term liabilities		(18,239	)

Goodwill	$	26,766

During the quarter ended March 31, 2011, we made measurement period adjustments totaling $73,000 to accrued liabilities and accrued income tax balances.

Actual and Pro Forma Impact of the Merger

The following unaudited pro forma information presents the consolidated results of Accelrys and Symyx for the three months ended March 31, 2010, with adjustments to give effect to pro forma events that are directly attributable to the Merger and have a continuing impact, but exclude the impact of pro forma events that are directly attributable to the Merger and are one-time occurrences. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods, the results of operations that actually would have been realized had the entities been a single company during the periods presented or the results of operations that the combined company will experience after the Merger. The unaudited pro forma information does not give effect to the potential impact of current financial conditions, regulatory matters or any anticipated synergies, operating efficiencies or cost savings that may be associated with the Merger. The unaudited pro forma information also does not include any integration costs, dis-synergies or remaining future transaction costs that the companies may incur as a result of the Merger and combining the operations of the companies.

The unaudited pro forma consolidated results of operations, assuming the Merger had occurred on January 1, 2010 are as follows:


	March 31, 2010
Unaudited pro forma consolidated results:
Revenue	$	42,872
Net loss from continuing operations	$	(4,982	)

3.	Net Loss Per Share

We compute net loss per share pursuant to ASC Topic 260, Earnings Per Share. Accordingly, basic and diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents.

As we reported a net loss for the three months ended March 31, 2011 and March 31, 2010, basic and diluted net loss per share were the same. Potentially dilutive securities outstanding totaling 6.4 million shares and 4.5 million shares were not included in the computation of diluted net loss per share for the three months ended March 31, 2011 and March 31, 2010, respectively, because to do so would have been anti-dilutive.

4.	Share-Based Payments

Share-Based Award Activity

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


	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life
	(In thousands, except per share amounts)
Outstanding at December 31, 2010		5,858		$	9.42
Granted		6			8.52
Exercised		(179	)		4.70
Expired/Forfeited		(280	)		19.76

Outstanding at March 31, 2011		5,405			9.04		7,731		5.38

Exercisable at March 31, 2011		3,377			10.66		4,157		3.78

The aggregate intrinsic value of stock options outstanding and exercisable at March 31, 2011 was based on the closing price of our common stock on March 31, 2011 of $8.00 per share. The total intrinsic value of stock options exercised during the three months ended March 31, 2011 and 2010 was $0.5 million and $47,000, respectively.

RSUs granted under the 2004 Plan and 2007 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:


	Number of Shares			Weighted Average Grant Date Fair Value Per Share
	(In thousands, except per share amounts)
Unvested at December 31, 2010		1,020		$	6.32
Granted		2			8.49
Vested		(26	)		5.52
Forfeited		(6	)		5.54

Unvested at March 31, 2011		990		$	6.35

Included in the vested shares for the period are approximately 10,000 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 typically the vesting period of the award. Total share-based compensation expense recognized in our consolidated statements of operations for the three months ended March 31, 2011 and 2010 was as follows:


	Three Months Ended March 31,
	2011			2010
	(in thousands)
Cost of revenue	$	84		$	78
Product development		233			225
Sales and marketing		420			288
General and administrative		586			426
Business consolidation, transaction and restructuring costs		(43	)		—

Total stock-based compensation expense	$	1,280		$	1,017

No share-based compensation expense was capitalized in the periods presented. At March 31, 2011, the gross amount of unrecognized share-based compensation expense relating to unvested share-based awards was approximately $9.8 million, which we anticipate recognizing as a charge against income over a weighted average period of 2.3 years. The total fair value of RSUs vested was $0.2 million and $0.1 million for the three months ended March 31, 2011 and 2010, respectively.

Stock Repurchases

On November 10, 2010, we entered into a stock repurchase plan with a broker (the “Repurchase Plan”), in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Pursuant to the Repurchase Plan, and subject to the conditions set forth therein and the provisions of Rule 10b-18 of the Exchange Act, we instructed the broker to purchase for our account up to $6.0 million worth of our common stock by March 31, 2011. As of December 31, 2010, we had repurchased 353,955 shares of our common stock for approximately $3.0 million at an average cost of $8.40 per share. We completed the repurchase of the remaining $3.0 million of our common stock by repurchasing 350,553 shares at an average cost of $8.50 per share, in the first quarter of fiscal 2011.

On March 11, 2011, we entered into a second stock repurchase plan (the “Second Repurchase Plan”) with a broker in accordance with Rule 10b5-1 of Exchange Act. Pursuant to the Second Repurchase Plan, and subject to the conditions set forth therein and the provisions of Rule 10b-18 of the Exchange Act, we have instructed the broker to purchase for our account up to an additional $4.0 million worth of our common stock by September 30, 2011. During April 2011, we repurchased 253,624 shares of our common stock for $2.0 million pursuant to the Second Repurchase Plan. All of the shares repurchased under the Repurchase Plan and Second Repurchase Plan have been recorded as treasury stock.

5.	Comprehensive Loss

In accordance with ASC Topic 220, Comprehensive Income, we report the components of comprehensive loss, including net loss, in the financial statements for the period in which they are recognized. Comprehensive loss is defined as all changes in equity during a period from non-owner sources, including foreign currency translation adjustments and unrealized gains and losses on marketable securities. We present comprehensive loss in our consolidated statements of stockholders’ equity. Accumulated other comprehensive loss in stockholders’ equity consists of the following:


	Three Months Ended March 31,
	2011			2010
	(in thousands)
Net loss	$	(5,714	)	$	(2,374	)
Foreign currency translation adjustment		(401	)		283
Unrealized gain on marketable securities		15			—

Total comprehensive loss	$	(6,100	)	$	(2,091	)

6.	Marketable Securities

Our marketable securities consist of debt securities with original maturities of greater than three months and include obligations of U.S. government sponsored enterprises, commercial paper, certificates of deposits, corporate and municipal debt. We account for our investments in marketable securities in accordance with FASB ASC Topic 320, Investments—Debt and Equity Securities (“ASC Topic 320”). Accordingly, our marketable securities have been classified as available-for-sale and are recorded at their estimated fair value, with unrealized gains and losses recorded in stockholders' equity and included in accumulated other comprehensive income. Realized gains and losses on the sale of available-for-sale marketable securities are recorded in royalty and other income, net. Available-for-sale marketable securities with original maturities greater than three months and remaining maturities of one year or less are classified as short-term available-for-sale marketable securities. Available-for-sale marketable securities with remaining maturities of greater than one year are classified as long-term available-for-sale marketable securities as we intend to hold these securities until maturity. Unrealized losses which are not considered other than temporary and unrealized gains are included in accumulated other comprehensive income in stockholders’ equity. Unrealized losses which are determined to be other than temporary are recorded as a charge against income. The cost of marketable securities sold is determined based on the specific identification method.

Marketable securities as of March 31, 2011 and December 31, 2010 consisted of the following:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
March 31, 2011:
Short-Term Marketable Securities:
U.S. Treasury securities	$	6,713	$	1	$	—		$	6,714
U.S. government and agency securities		8,177		1		—			8,178
Commercial paper and certificate of deposits		15,962		1		(1	)		15,962
Corporate debt securities		29,453		13		(6	)		29,460
Municipal debt securities		8,210		—		—			8,210
Foreign government obligations		753		—		—			753

Total Short-Term Marketable Securities	$	69,268	$	16	$	(7	)	$	69,277


Long-Term Marketable Securities:
U.S. Treasury securities	$	4,824	$	3	$	(2	)	$	4,825
U.S. government and agency securities		5,690		2		(8	)		5,684
Corporate debt securities		22,387		10		(28	)		22,369

Total Long-Term Marketable Securities	$	32,901	$	15	$	(38	)	$	32,878


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
December 31, 2010:
Short-Term Marketable Securities:
U.S. Treasury securities	$	5,519	$	—	$	—		$	5,519
U.S. government and agency securities		6,348		—		(2	)		6,346
Commercial paper and certificate of deposits		9,268		1		(1	)		9,268
Corporate debt securities		6,243		2		(3	)		6,242
Municipal debt securities		4,900		—		—			4,900

Total Short-Term Marketable Securities	$	32,278	$	3	$	(6	)	$	32,275


Long-Term Marketable Securities:
U.S. Treasury securities	$	798	$	—	$	(1	)	$	797
U.S. government and agency securities		4,610		—		(7	)		4,603
Corporate debt securities		11,554		1		(19	)		11,536

Total Long-Term Marketable Securities	$	16,962	$	1	$	(27	)	$	16,936

As of March 31, 2011 and December 31, 2010, we did not have any investments in marketable securities that were in an unrealized loss position for twelve months or greater.

We assess our marketable securities for impairment under the guidance provided by ASC Topic 320. Accordingly, 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. The unrealized losses related to our marketable securities held as of March 31, 2011 and December 31, 2010 were primarily caused by recent 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 March 31, 2011.

7.	Long Term Investments

Our long term investments consist of equity investments in privately held companies. We determine the accounting method used to account for investments in equity securities of other business entities in which we do not have a controlling interest primarily based on our ownership of each such business entity and whether we have the ability to exercise significant influence over the strategic, operating, investing, and financing activities of each such business entity. As we do not have a controlling interest or have the ability to exercise significant influence over the companies, we account for our investments using the cost method of accounting. We monitor these investments for impairment by considering current factors including economic environment, market conditions and operational performance and other specific factors relating to the business underlying the investment. We have determined that as of March 31, 2011, these investments were not impaired.

We have determined that one of the entities, Freeslate Inc. (“Freeslate”), in which we carry an approximately 19.5% equity interest, is a variable interest entity in which we are not the primary beneficiary. The key factors in our assessment were that Freeslate’s management team and board of directors were solely responsible for all economic aspects of the entity, including key business decisions that impact Freeslate’s economic performance and we do not have power, through our variable interest, to direct the activities that most significantly impact the economic performance of Freeslate. We also do not hold any seats on Freeslate’s board of directors. Accordingly, we account for our investment in Freeslate as a cost method investment. The carrying value of our investment in Freeslate was $1.0 million as of both March 31, 2011 and December 31, 2010. In addition to our equity interest, we have a warrant allowing us to retain our 19.5% interest in the event of dilution through future stock issuances under Freeslate’s existing stock plans.

We also hold an unsecured promissory note receivable with a face value of $10.0 million from Freeslate, which bears interest at 8% per annum payable annually in arrears. The note requires principal payments in the amount of $1.0 million starting on March 1, 2014 and continuing annually until March 1, 2019, with the final principal payment of $4.0 million due on March 1, 2020. As the note receivable was acquired in the Merger with Symyx, it was revalued in purchase accounting to its then fair value of $8.8 million. The note receivable is not measured at fair value on a recurring basis, but is periodically reviewed for possible impairment. The note receivable is included in other assets in the condensed consolidated balance sheet and has a carrying amount of $8.6 million as of March 31, 2011.

Our maximum exposure to loss as a result of our interests in Freeslate is limited to the aggregate of the carrying value of our equity investment and promissory note receivable. There were no future funding commitments as of March 31, 2011 related to Freeslate.

8.	Fair Value

Financial Assets and Liabilities

We carry our cash equivalents and marketable securities at fair value. Cash equivalents are comprised of short-term, highly liquid investments including money market funds and other investment grade securities such as certificates of deposits, commercial paper, corporate and municipal bonds and obligations of U.S. government sponsored enterprises. Our marketable securities consist of debt securities with original maturities of greater than three months and include obligations of U.S. government sponsored enterprises, commercial paper, certificates of deposits, and corporate and municipal debt.

Fair value accounting provides a definition of fair value, establishes acceptable methods of measuring fair value and expands disclosures for 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—Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

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.

Where applicable, the determination of fair values is based on unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date. This pricing methodology applies to our Level 1 investments. To the extent quoted prices in active markets are not available at the measurement date, fair values can be based on usage of observable market prices in less active markets, use of broker/dealer quotes and alternative pricing sources with reasonable levels of price transparency. Because many fixed income securities do not trade on a daily basis or have market prices from multiple sources, the pricing applications may apply available information as applicable to determine the fair value as of the measurement date. This methodology applies to our Level 2 investments. Currently we do not hold any Level 3 investments.

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 at March 31, 2011		Quoted Market Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
March 31, 2011:
Cash equivalents (1)	$	16,583		10,884	$	5,699		—
Short-Term Marketable Securities:
U.S. Treasury securities		6,714		6,714		—		—
U.S. government and agency securities		8,178		—		8,178		—
Commercial paper and certificate of deposits		15,962		—		15,962		—
Corporate debt securities		29,460		—		29,460		—
Municipal debt securities		8,210		—		8,210		—
Foreign government obligations		753		—		753		—
Long-Term Marketable Securities:
U.S. Treasury securities		4,825		4,825		—		—
U.S. government and agency securities		5,684		—		5,684		—
Corporate debt securities		22,369		—		22,369		—

Total	$	118,738	$	22,423	$	96,315		—

(1)	Cash equivalents are included in the Cash and cash equivalents line in the consolidated balance sheet

There were no transfers between Level 1 and Level 2 securities during the three months ended March 31, 2011.


	Carrying Value at December 31, 2010		Quoted Market Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
December 31, 2010:
Cash equivalents (1)	$	59,751	$	53,146	$	6,605		—
Short-Term Marketable Securities:
U.S. Treasury securities		5,519		5,519		—		—
U.S. government and agency securities		6,346		—		6,346		—
Commercial paper and certificate of deposits		9,268		—		9,268		—
Corporate debt securities		6,242		—		6,242		—
Municipal debt securities		4,900		—		4,900		—
Long-Term Marketable Securities:
U.S. Treasury securities		797		797		—		—
U.S. government and agency securities		4,603		—		4,603		—
Corporate debt securities		11,536		—		11,536		—

Total	$	108,962	$	59,462	$	49,500		—

(1)	Cash equivalents are included in the Cash and cash equivalents line in the consolidated balance sheet

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. Our investments in privately-held companies and our note receivable from a privately-held company are carried at cost. It is impracticable for us to estimate the fair value of these instruments on a recurring basis if there are no identified events or changes in circumstances that may have a significant adverse effect on their fair value.

Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The non-financial assets and liabilities are recognized at fair value subsequent to initial recognition when they are deemed to be other-than-temporarily impaired. There were no non-financial assets and liabilities deemed to be other-than-temporarily impaired and measured at fair value on a nonrecurring basis for the periods presented.

9.	Goodwill and Purchased Intangible Assets

Intangible assets consist of the following as of March 31, 2011 and December 31, 2010.


	March 31, 2011						December 31, 2010
	Weighted Average Life (yrs)		Gross Carrying Amount		Accumulated Amortization		Weighted Average Life (yrs)		Gross Carrying Amount		Accumulated Amortization
			(In thousands)						(In thousands)
Intangible assets subject to amortization:
Purchased technology		8	$	52,650	$	15,256		8	$	52,650	$	12,668
Purchased customer relationships		7		19,750		4,189		7		19,750		2,953
Purchased backlog		3		6,340		1,737		3		6,340		852
Purchased contract base		5		50		50		5		50		50
Purchased intellectual property		5		1,998		1,129		5		1,998		1,028
Purchased trademark/tradename		5		5,600		904		5		5,600		589

			$	86,388	$	23,265			$	86,388	$	18,140

Intangible assets not subject to amortization:
Purchased trademark/tradename			$	2,500					$	2,500

Intangible assets are amortized over their estimated useful lives either on a straight-line or accelerated basis that reflects the pattern in which the economic benefits of the intangible assets are expected to be realized, which range from two to fifteen years, with no residual value. Intangible asset amortization expense was $5.1 million and $0.1 million for the three months ended March 31, 2011 and March 31, 2010, respectively.

Future estimated amortization expense for intangible assets as of March 31, 2011 and for each of the succeeding five years is as follows (in thousands):


2011	$	15,367
2012		16,974
2013		11,696
2014		8,547
2015		4,617

Total	$	57,201

The changes in the carrying amount of goodwill for the three months ended March 31, 2011, are as follows (in thousands):


Balance at December 31, 2010	$	69,356
Goodwill measurement period adjustments		73	(1)

Total	$	69,429

(1)	As discussed in Note 2, we made measurement period adjustments related to the Merger totaling $73,000 to accrued liabilities and accrued income tax balances.

10.

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 $12.5 million as of March 31, 2011. In the event that PDD defaults on its 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 $0.3 million at March 31, 2011 and December 31, 2010.

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 March 31, 2011.

11.

Restructuring Activities

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


	Severance and Related Costs			Lease Obligation Exit and Facility Closure Costs			Total
	(In thousands)
Balance at March 31, 2009	$	175		$	817		$	992
Additional severance and lease abandonment charges		(74	)		(12	)		(86	)
Adjustments to liability		(61	)		142			81
Cash payments		(43	)		(370	)		(413	)
Effect of foreign exchange		3			63			66

Balance at March 31, 2010		—			640			640
Symyx acquired balance		138			5,860			5,998
Additional severance and lease abandonment charges		4,500			230			4,730
Adjustments to liability		—			40			40
Cash payments		(1,763	)		(5,549	)		(7,312	)
Effect of foreign exchange		(9	)		20			11

Balance at December 31, 2010	$	2,866		$	1,241		$	4,107
Additional severance charges		482			—			482
Adjustments to liability		—			(63	)		(63	)
Cash payments		(1,418	)		(201	)		(1,619	)
Effect of foreign exchange		(6	)		20			14

Balance at March 31, 2011	$	1,924		$	997		$	2,921

In July 2010, as a result of the Merger, we implemented a plan to terminate the employment of approximately 80 employees in the U.S., Europe and Asia-Pacific. As a result of the terminations, we have incurred total severance charges of approximately $5.0 million, with $4.5 million incurred during the fiscal period ended December 31, 2010 and $0.5 million incurred during the three months ended March 31, 2011. As of March 31, 2011, $3.2 million in cash payments had been made, and the remaining $1.8 million will be paid during the year ending December 31, 2011.

Prior to the Merger, Symyx had implemented various restructuring plans under which lease obligations of approximately $0.6 million and severance obligations of approximately $0.1 million remained as of the completion of the Merger. Additionally, prior to 2007, we had implemented a restructuring plan under which our lease obligation remains. Our remaining lease obligations terminate in 2012, 2016 and 2022, respectively.

All amounts incurred in connection with the above activities are recorded in the “Business consolidation, transaction and restructuring costs” line in the accompanying consolidated statements of operations, with the exception of the acquired balance of $6.0 million that was recorded in our preliminary purchase price allocation upon completion of the Merger, as further described in Note 2.

12.

Royalty and Other Income, Net

Royalty and other income, net includes non-operating items such as interest income, realized investment gains and losses, unrealized investment gains and losses related to securities determined to be other-than-temporarily impaired and foreign currency exchange gains and losses. It also includes royalty income (net of royalty expense) and amortization of purchased intangible assets related to products that are not part of current operations. As part of the Merger with Symyx, we have retained the rights to receive royalty income related to the divestiture of the High Productivity Research business unit previously divested by Symyx.

Royalty and other income, net consisted of the following:


	Three Months Ended
	March 31, 2011			March 31, 2010
	(In thousands)
Royalty income, net	$	1,944			—
Interest Income		318		$	78
Foreign currency transaction gain		609			216
Purchased intangible assets amortization		(591	)		—

Total royalty and other income, net	$	2,280		$	294

13.

Legal Proceedings

Prior to the completion of the Merger, several lawsuits were filed against Symyx, the members of the Symyx board of directors and certain executive officers of Symyx, Accelrys and Merger Sub in purported class action lawsuits brought by individual Symyx stockholders challenging the Merger. The first of such lawsuits was a class action lawsuit filed in the Superior Court of the State of California, County of Santa Clara, purportedly on behalf of the stockholders of Symyx, against Symyx and its directors and chief financial officer, as well as Accelrys and Merger Sub, alleging, among other things, that Symyx’s directors breached their fiduciary duties to the stockholders of Symyx in connection with the proposed Merger. Subsequent to the filing of such lawsuit, several additional suits were filed, also in Santa Clara County, each of which was substantially similar to the first lawsuit. The lawsuits were ultimately consolidated into a single action and on May 20, 2010, the plaintiffs filed a single consolidated complaint (the “Complaint”). The Complaint serves as the only complaint in the combined litigation going forward (the “Consolidated Action”), which is pending in the Superior Court for the County of Santa Clara (the “Court”). The Complaint, like the previously filed complaints, alleges, among other things, that Symyx’s directors breached their fiduciary duties to the stockholders of Symyx in connection with the Merger, and was seeking, among other things, to enjoin the defendants from completing the Merger pursuant to the terms of the Merger Agreement.

On June 22, 2010, the defendants entered into a memorandum of understanding (the “MOU”) with the plaintiffs, pursuant to which the defendants and the plaintiffs agreed to settle the Consolidated Action. Subject to court approval and further definitive documentation the MOU resolves the allegations by the plaintiffs against the defendants made in connection with the Merger and the Merger Agreement, and provides a release and settlement by the purported class of Symyx stockholders with prejudice of all asserted claims against the defendants without costs to any defendant (other than as expressly provided in the MOU), in exchange for Symyx’s agreement to provide additional supplemental disclosures to the joint proxy statement/prospectus issued by Accelrys and Symyx in connection with the Merger. Accelrys and Symyx made the appropriate supplemental disclosures on June 23, 2010. On January 28, 2011 the plaintiffs filed the Unopposed Notice of Motion for Preliminary Approval of a Class Action Settlement and supporting documents. On February 25, 2011, the Court signed a preliminary approval order, which granted preliminary certification of a non-opt out class and set a settlement hearing for May 6, 2011 to determine whether a final order and judgment should be granted to settle this matter. Upon settlement, we will be obligated to pay any attorneys fees and expenses awarded to the plaintiffs, if any. If the settlement is not approved or the conditions of the MOU are not satisfied, we intend to take all appropriate actions to defend against the allegations made in the Complaint.

14.

Recent Accounting Pronouncements

In September 2009, the FASB issued ASC 605-25-65-1, Multiple-Deliverable Revenue Arrangements. The new guidance states that if VSOE 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 adoption of ASU 2009-13 is applicable only to our non-software transactions as our software transactions will continue to be accounted for using guidance applicable to software transactions. The new guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We adopted this guidance on a prospective basis on January 1, 2011, and therefore applied it to relevant revenue arrangements originating or materially modified on or after that date. Our adoption of this guidance did not have a material impact on our results of operations, financial position or cash flows.

In December of 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 amends ASC Topic 350. ASU 2010-28 clarifies the requirement to test for impairment of goodwill. ASC Topic 350 requires that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative an entity must assume that it is more likely than not that a goodwill impairment exists, perform an additional test to determine whether goodwill has been impaired and calculate the amount of that impairment. The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. Early adoption is not permitted. This new guidance is not expected to have a material effect our results of operations, financial position or cash flows.

15.

Subsequent Events

On March 11, 2011, we entered into the Second Stock Repurchase plan in accordance with Rule 10b5-1 of Exchange Act. Pursuant to the Second Repurchase Plan, and subject to the conditions set forth therein and the provisions of Rule 10b-18 of the Exchange Act, we have instructed the broker to purchase for our account up to an additional $4.0 million worth of our common stock by September 30, 2011. During April 2011, we purchased 253,624 shares of our common stock for $2.0 million pursuant to the Second Repurchase Plan. All of the shares repurchased have been recorded as treasury stock.

On April 28, 2011, the Company committed to the implementation of a reduction in force of approximately 10-15 employees, in connection with the streamlining of its operations and integrating its Content business. The Company estimates that it will incur total cash charges of approximately $1.0 million relating to these actions. The Company commenced implementation of the reduction in force on May 3, 2011 and expects all related actions to be substantially completed by December 31, 2011.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. These statements are often identified by the use of words such as “expect”, “believe”, “anticipate”, “estimate”, “intend”, “plan” and similar expressions and variations or negatives of these words 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 the execution of 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 SEC, including this Report in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and subsequent reports on Form 10-Q and Form 10-K. All forward-looking statements in this document are qualified entirely by the cautionary statements included in this document and such other filings. These forward-looking statements speak only as of the date of this document. 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.

Unless the context requires otherwise, in this report the terms “we,” “us” and “our” refer to Accelrys, Inc. and its wholly-owned or indirect subsidiaries, and their respective predecessors.

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

On July 1, 2010, pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub merged with and into Symyx, with Symyx surviving as our wholly-owned subsidiary. Symyx’s operating results are included in our results of operations beginning July 1, 2010. The financial statements and financial comparisons included in this Form 10-Q relate to the three-month periods ended March 31, 2011 and 2010. The financial results for the three-month period ended March 31, 2010 have been recast to allow for comparison based on our recent change in fiscal year-end from March 31 to December 31.

Our Business

We develop and commercialize scientific informatics software products and services for industries and organizations that rely on scientific innovation to differentiate themselves in the marketplace. In July 2010, we completed the Merger, increasing the breadth and depth of our scientific product portfolio by adding a set of complementary scientific applications, content databases and technologies. Prior to the Merger, our products were primarily utilized by our customers’ research organizations. As a result of the Merger we have expanded our focus to include products that are utilized by our customers’ development organizations. Collectively, therefore, our products and services are intended to optimize our customers’ research and development value chain, from early research through development into early manufacturing. Our software is used by our customers’ scientists, biologists, chemists and information technology professionals to design, execute and manage scientific experiments in-silico or in the lab and to aggregate, mine, manage, analyze and interactively report on the scientific data from those experiments. The ability to integrate and access data from diverse data sources, and to make that information accessible throughout the scientific value chain, enables our customers to reduce costs, enhance productivity and more efficiently provide innovative and effective products to their customers.

Our customers include leaders from a variety of industries, including pharmaceutical, biotechnology, agricultural, energy, chemicals, aerospace, consumer packaged goods and industrial products, as well as various government and academic entities. We market our software products and services worldwide, principally through our direct sales force, augmented by the use of third party distributors. We are headquartered in San Diego, California and were incorporated in Delaware in 1993.

Description of Our Markets and Business

Our customers differentiate themselves through scientific innovation. As a result, innovation in the discovery and development of new products, compliance with applicable regulations, rapid, cost-effective commercialization of such products and the ability to protect the intellectual property therein is crucial to our customers’ success. Therefore, they invest considerable resources in technologies that help identify productive new pathways for research projects, help develop new materials, increase the efficiency of discovery and development processes, and otherwise enable them to maximize the use of scientific data, information and knowledge. Our software solutions allow our customers to effectively design, plan and execute scientific experiments in a repeatable process and in compliance with regulations; leverage the vast amounts of information stored in both corporate databases and public data sources to optimize their processes and accelerate innovation; model, predict and analyze potential scientific outcomes; and access comprehensive, integrated and cross-referenced databases and reference works.

The pharmaceutical and biotechnology industries are a very important part of our business. Our products have been widely adopted within the research functions of businesses in these industries, but less widely adopted by the development functions of such businesses. In addition, these markets present challenges due to industry consolidation, the maturity of these markets, patent expirations, reduction in the level of discovery research activity, increased competition, including competition from open source software and outsourcing of research to other entities. The other industries to which we market our products, including energy, material, agricultural, aerospace and consumer packaged goods, are earlier in the adoption curve for such scientific software products, which we view as both a challenge and an opportunity.

Business Strategy

Scientific research and development organizations face several challenges that impact their ability to comply with applicable regulations, protect their intellectual property and rapidly and cost-effectively bring products to market. Among these challenges is the fact that scientific data is often found in disparate databases and that research, development and early manufacturing processes are disconnected, manually intensive, inefficient and repetitive.

Our overall strategy is to help our customers address these challenges by offering them an open enterprise-scale scientific software platform and a broad portfolio of scientific software applications leveraging our deep domain expertise in chemistry, biology and the materials sciences. We believe the combination of our enterprise R&D platform and associated set of applications, including the Electronic Lab Notebook (the “ELN”), computer aided design modeling and simulation software, data management and informatics software, content, and professional services help optimize our customers’ scientific value chain.

Historically, we have had a strong presence in our customers’ research organizations. Symyx’s products have also had a presence in its customers’ development organizations. We believe that the combination of our products with the products we acquired as a result of the Merger (most significantly the ELN) enables us to provide greater value to the development function of these organizations. Our strategy is to continue to integrate and enhance our offerings in order to further enhance the value of the products we acquired and the value of our products’ collective portfolio to these organizations, thus enabling us to expand upon our presence in the research and development organizations of our existing customers. In addition, we believe such enhanced offerings will enable us to extend our presence to new customers’ development organizations. We also intend to continue to develop advanced analysis, scientific and reporting component collections in order to extend our platform’s value to and use by our customers.

Our strategy also includes offering professional services to further tailor our enterprise R&D platform to our customers’ individual business needs, thereby increasing its utility and value. Because our enterprise R&D platform is the underlying operating platform for many products in our broad portfolio, and integration with the Symyx applications is a development priority, we expect the use of these products to expand as the use of our platform grows, thus further increasing our sales and value to our customers.

Our enterprise R&D platform is an open platform. We partner with third party organizations and academic institutions which develop scientific software and services, and we enable and encourage these companies to develop applications that operate on our platform, further proliferating its utility and value to our customers.

We also focus on industries in markets where scientific innovation is a key differentiator, but the use of scientific software solutions has not been widely adopted. As we develop a greater presence in these markets, we believe our ability to attract additional customers will increase.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We review our estimates on an on-going basis, including those related to 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, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. 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 the Form 10-K. Except for the changes to our critical accounting policies and estimates discussed below, we believe that there were no significant changes in our critical accounting policies and estimates since December 31, 2010.

Multiple-Deliverable Revenue Arrangements

On January 1, 2011 we adopted new accounting guidance for multiple-deliverable revenue arrangements that are outside the scope of industry-specific software revenue recognition guidance on a prospective basis for arrangements entered into or materially modified after January 1, 2011 (the beginning of our fiscal year). This guidance amends the criteria for allocating consideration in multiple-deliverable revenue arrangements by establishing a selling price hierarchy. The selling price used for each deliverable will be based on vendor specific objective evidence (“VSOE”), if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available. See Note 1 to our financial statements for more information.

Results of Operations

Historically, we have received approximately two-thirds of our annual customer orders in the quarters ended December 31 and March 31. 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 have generally experienced an increase in operating costs and expenses during the quarters ended December 31 and March 31 with only a minimal corresponding incremental increase in revenue. 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.

Comparison of the Three Months Ended March 31, 2011 and 2010

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


	Three Months Ended March 31,
	2011			2010
Revenue:
License and subscription revenue		56	%		76	%
Maintenance on perpetual licenses		23	%		13	%
Content		12	%		—
Professional services and other		9	%		11	%

Total revenue		100	%		100	%

Cost of revenue:
Cost of revenue		28	%		17	%
Amortization of completed technology		6	%		*	%

Total cost of revenue		34	%		18	%

Gross profit		66	%		82	%
Operating expenses:
Product development		25	%		21	%
Sales and marketing		39	%		56	%
General and administrative		13	%		14	%
Business consolidation, transaction and restructuring costs		5	%		3	%
Purchased intangible asset amortization		7	%		*	%

Total operating expenses		88	%		95	%

Operating loss		(22	)%		(12	)%
Royalty and other income, net		7	%		1	%

Loss before income taxes		(15	)%		(11	)%
Income tax expense		1	%		1	%

Net loss		(17	)%		(11	)%

*	Less than 1%.

Due to rounding to the nearest percent, totals may not equal the sum of the line items in the table above.

Revenue

Total revenue increased to $34.6 million for the three months ended March 31, 2011, as compared to $20.8 million for the three months ended March 31, 2010. The increase in revenue during the quarter ended March 31, 2011 was attributable to the Merger.

License and subscription revenue. License and subscription revenue increased to $19.5 million for the three months ended March 31, 2011, as compared to $15.9 for the three months ended March 31, 2010. As a percentage of total revenue, license and subscription revenue was 56% for the three months ended March 31, 2011 as compared to 76% for the three months ended March 31, 2010. The increase in license and subscription revenue during the quarter ended March 31, 2011 was attributable to the Merger.

Maintenance on perpetual licenses. Maintenance on perpetual licenses revenue increased to $7.8 million for the three months ended March 31, 2011, as compared to $2.7 million for the three months ended March 31, 2010. As a percentage of total revenue, revenue from maintenance on perpetual licenses increased to 23% for the three months ended March 31, 2011 as compared to 13% for the three months ended March 31, 2010. The increase in revenue from maintenance on perpetual licenses was attributable to the Merger.

Content. Content revenue was $4.0 million for the three months ended March 31, 2011 and comprised 12% of total revenue for the three months ended March 31, 2011.

Professional services and other. Professional services and other revenue increased to $3.3 million for the three months ended March 31, 2011, as compared to $2.2 for the three months ended March 31, 2010. As a percentage of total revenue, professional services and other revenue decreased slightly to 9% for the three months ended March 31, 2011 as compared to 11% for the three months ended March 31, 2010.

Total Cost of Revenue

Cost of Revenue. Cost of revenue increased to $9.6 million for the three months ended March 31, 2011, as compared to $3.6 million for the three months ended March 31, 2010. As a percentage of revenue, cost of revenue increased to 28% for the three months ended March 31, 2011 as compared to 17% for the three months ended March 31, 2010. The increase in cost of revenue during the quarter ended March 31, 2011 was primarily attributable to an increase in software and content royalties of approximately $1.6 million, an increase in personnel and related expenses in our services department of approximately $2.8 million, an increase in professional fees of approximately $0.5 million and an increase in overhead expense of approximately $1.1 million, each as a result of the Merger.

Amortization of Completed Technology. Amortization of completed technology increased to $2.0 million for the three months ended March 31, 2011, as compared to $41,000 for the three months ended March 31, 2010. As a percentage of revenue, amortization of completed technology increased to 6% for the three months ended March 31, 2011 as compared to less than 1% for the three months ended March 31, 2010. The increase in amortization of completed technology was due to amortization of completed technology intangible assets acquired in the Merger.

Operating Expenses

Product Development Expenses. Product development expenses increased to $8.5 million for the three months ended March 31, 2011, as compared to $4.4 million for the three months ended March 31, 2010. As a percentage of revenue, product development expenses increased to 25% for the three months ended March 31, 2011 as compared to 21% for the three months ended March 31, 2010. The increase in product development expenses during the quarter ended March 31, 2011 was primarily attributable to an increase in personnel and related expenses of approximately $2.3 million, an increase in professional fees of approximately $0.6 million and an increase in overhead expense of approximately $1.2 million, each as a result of the Merger.

Sales and Marketing Expenses. Sales and marketing expenses increased to $13.5 million for the three months ended March 31, 2011, as compared to $11.7 million for the three months ended March 31, 2010. As a percentage of revenue, sales and marketing expenses were 39% for the three months ended March 31, 2011 as compared to 56% for the three months ended March 31, 2010. The increase in sales and marketing expenses during the quarter ended March 31, 2011 was primarily attributable to an increase in personnel and related expenses of approximately $1.2 million, an increase in overhead expense of approximately $0.8 million, offset by a decrease in professional fees of approximately $0.3 million, each as a result of the Merger.

General and Administrative Expenses. General and administrative expenses increased to $4.4 million for the three months ended March 31, 2011, as compared to $2.8 million for the three months ended March 31, 2010. As a percentage of revenue, general and administrative expenses were 13% for the three months ended March 31, 2011 as compared to 14% for the three months ended March 31, 2010. The increase in general and administrative expenses during the quarter ended March 31, 2011 was primarily attributable to an increase in personnel and related expenses of approximately $0.8 million, an increase in professional fees of approximately $0.2 million and an increase in overhead expense of approximately $0.6 million, each as a result of the Merger.

Business Consolidation, Transaction and Restructuring Costs. Business consolidation, transaction and restructuring costs of $1.6 million for the three months ended March 31, 2011, consisted of $1.1 million in business consolidation costs and $0.5 million in restructuring costs. As a percentage of revenue, business consolidation and restructuring costs were 5% for the three months ended March 31, 2011. We have classified all transaction and integration related costs to business consolidation costs, which include personnel costs of $0.5 million related to employees who have been notified they are being terminated from the Company, and professional service and other costs of $0.6 million directly related to the Merger and integrating Symyx into the Company. Business consolidation, transaction and restructuring costs of $0.7 million for the three months ended March 31, 2010, consisted of transaction costs related to the Merger.

Purchased Intangible Asset Amortization. Purchased intangibles assets amortization was $2.4 million for the three months ended March 31, 2011. As a percentage of revenue, amortization of purchased intangible assets was 7% for the three months ended March 31, 2011, and was related solely to the amortization of backlog, customer relationship and trademark intangible assets acquired in the Merger.

Net Royalty and Other Income

Net royalty and other income increased to $2.3 million for the three months ended March 31, 2011 as compared to $0.3 million for the three months ended March 31, 2010. Significant components of net royalty and other income for the three months ended March 31, 2011 included interest income of $0.3 million, royalty revenue of $2.1 million, and a foreign currency exchange gain of $0.6 million, partially offset by royalty expense of $0.1 million and amortization of purchased intangible assets of $0.6 million. Significant components of net royalty and other income for the three months ended March 31, 2010 included interest income of $0.1 million and a foreign currency exchange gain of $0.2 million.

Income Tax Expense

Income tax expense was $0.5 million for the three months ended March 31, 2011 as compared to income tax expense of $0.1 million for the three months ended March 31, 2010.

Liquidity and Capital Resources

We had cash, cash equivalents, marketable securities, and restricted cash of $151.7 million as of March 31, 2011, as compared to $141.1 million as of December 31, 2010, an increase of $10.6 million. The increase in cash, cash equivalents, marketable securities and restricted cash during the three months ended March 31, 2011 was primarily attributable to cash provided by operations of $14.1 million, proceeds from the sale of common stock of $0.8 million, net of shares tendered for payment of withholding tax, partially offset by purchases of capital equipment of $0.9 million and repurchases of our common stock of $3.0 million.

The following table sets forth a summary of our cash flows for the periods indicated (in thousands):


	Three Months Ended March 31,
	2011			2010
	(Unaudited)
Net cash provided by operating activities	$	14,112		$	15,621
Net cash (used in) provided by investing activities		(54,181	)		894
Net cash (used in) provided by financing activities		(2,243	)		528

Net cash used in operating activities was $14.1 million for the three months ended March 31, 2011, as compared to $15.6 million for the three months ended March 31, 2011. The decrease in cash provided by operating activities was primarily attributable to our net loss, as well as changes in working capital for the three months ended March 31, 2011.

Net cash used by investing activities was $54.2 million for the three months ended March 31, 2011, as compared to net cash provided by investing activities $0.9 million for the three months ended March 31, 2010. Significant components of cash flows from investing activities for the three months ended March 31, 2011 included net purchases of property and equipment of $0.9 million, purchases of marketable securities of approximately $61.4 million, partially offset by proceeds from maturities of marketable securities of approximately $8.1 million. Significant components of cash flows from investing activities for the three months ended March 31, 2010 included net purchases of property and equipment of $0.2 million and purchases of software licenses of $0.1 million, partially offset by proceeds from maturities of marketable securities of approximately $1.2 million.

Net cash used in financing activities was $2.2 million for the three months ended March 31, 2011 as compared to net cash provided by financing activities of $0.5 million for the three months ended March 31, 2010. Significant components of cash flows from financing activities for the three months ended March 31, 2011 included repurchases of the Company’s common stock of $3.0 million, offset by $0.8 million 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 (“RSUs”). Cash flows from financing activities for the three months ended March 31, 2010 consisted solely of proceeds from the issuance of our common stock under employee stock plans, reduced by the aforementioned payments to taxing authorities on behalf of our employees upon vesting of RSUs.

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.

On November 10, 2010, we entered into the Repurchase Plan in accordance with Rule 10b-5 of the Exchange Act. Pursuant to the Repurchase Plan, and subject to the conditions set forth therein and the provisions of Rule 10b-18 of the Exchange Act, we instructed the broker to purchase for our account up to $6.0 million worth of our common stock by March 31, 2011. On the basis of the foregoing, as of December 31, 2010, we had repurchased 353,955 shares of our common stock for approximately $3.0 million at an average cost of $8.40 per share. We completed the repurchase of the remaining $3.0 million of our common stock by repurchasing 350,553 shares at an average cost of $8.50 per share, in the first quarter of fiscal 2011.

On March 11, 2011, we entered into the Second Repurchase Plan in accordance with Rule 10b5-1 of Exchange Act. Pursuant to the Second Repurchase Plan, and subject to the conditions set forth therein and the provisions of Rule 10b-18 of the Exchange Act, we have instructed the broker to purchase for our account up to an additional $4.0 million worth of our common stock by September 30, 2011. During April 2011, we purchased 253,624 shares of our common stock for $2.0 million pursuant to the Second Repurchase Plan.

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 our 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.

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 the Form 10-KT. Our exposures to market risk have not changed materially since December 31, 2010.

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 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 March 31, 2011.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended March 31, 2011 that materially affected, or are reasonably likely to materially affect, those controls.

PART II — OTHER INFORMATION

Item 1.

Legal Proceedings

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 for the life science industry declined approximately 18% between fiscal year 2008 and 2009, approximately 16% between fiscal year 2009 and 2010 and approximately 21% during the nine months ended December 31, 2009 and 2010. 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.

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 informatics 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 informatics 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 provider 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 development expenditures. Because some of 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 informatics 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 10% between fiscal year 2008 and fiscal year 2009 and approximately 14% between fiscal year 2009 and fiscal year 2010. 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.

Revenue from our content business has been declining and may continue to decline. As a result of the Merger, we have acquired a content business. This business faces intense competition both from third parties and the increasing availability of freely-available content databases. As a result, revenue from this content business has been declining. If we are unable to reverse the decline in this business or to increase revenues from our other businesses in order to offset the decline, our revenues and results of operations may suffer.

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, San Ramon, California, Bend, Oregon, and Cambridge, United Kingdom. We also conduct sales and customer support activities at our facilities in Bedminster, New Jersey, Burlington, Massachusetts, Paris, France, Basel, Switzerland, 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, San Ramon, Santa Clara 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, San Ramon, California, Santa Clara, California 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.

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. During the nine months ended December 31, 2010 and in fiscal years 2010 and 2009, 51%, 54% and 52%, 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:


	Nine Months Ended			Years Ended
Region	December 31, 2010			March 31, 2010			March 31, 2009
U.S.		49	%		46	%		48	%
Europe		28	%		30	%		28	%
Asia-Pacific		23	%		24	%		24	%

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, both prior to and as a result of the Merger, 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% from March 31, 2006 to July 1, 2010 when we completed the Merger. In addition, as a result of the Merger, we implemented a reduction in force of approximately 15% of the combined employee workforce after the Merger. 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.

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 and certain groups of consultants. One or more of these key employees or consultants 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.

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 U.S., Europe and Asia have been experiencing disruption in recent years, including, among other things, 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 U.S. 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 our 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 nine months ended December 31, 2010, and the years ended March 31, 2007 and 2006. Although we generated net income for the years ended March 31, 2010, 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:

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changes in the demand for our products and services;

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the introduction of competitive software;

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our ability to license desirable technologies;

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

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

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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 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 companies and universities, we also provide products and services to smaller companies. Our financial success depends upon the creditworthiness and ultimate collection of amounts due from our customers, including our smaller customers with fewer financial resources. While we have not experienced significant customer defaults during the past three fiscal years, 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 quarters ended December 31 and March 31. 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 have generally experienced an increase in operating costs and expenses during the quarters ended December 31 and March 31 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 $12.5 million as of March 31, 2011. 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. In recent years, there have been several changes in laws, rules, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and various other new regulations promulgated by the SEC and rules promulgated by the national securities exchanges.

The Dodd-Frank Act, enacted in July 2010, expands federal regulation of corporate governance matters and imposes requirements on publicly-held companies, including us, to, among other things, provide stockholders with a periodic advisory vote on executive compensation and also adds compensation committee reforms and enhanced pay-for-performance disclosures. While some provisions of the Dodd-Frank Act are effective upon enactment, others will be implemented upon the SEC’s adoption of related rules and regulations. The scope and timing of the adoption of such rules and regulations is uncertain and accordingly, the cost of compliance with the Dodd-Frank Act is also uncertain.

The Sarbanes-Oxley Act required changes in some of our corporate governance and securities disclosure and compliance practices. Under the Sarbanes-Oxley Act, 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.

These and other new or changed laws, rules, regulations and standards are, or will be, subject to varying interpretations in many cases due to their lack of specificity. As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Further, compliance with new and existing laws, rules, regulations and standards 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. Members of our board of directors and our principal executive officer and principal financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified directors and executive officers, which could harm our business. 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 U.S. 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.

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.

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;

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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 April 22, 2011, the top ten institutional holders of our common stock held approximately 48.9% 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.

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 our board of directors. In 2002, we adopted a stockholder rights plan, which is triggered upon commencement or announcement of a hostile tender offer or when any one person or group acquires 15% or more of our common stock. The rights plan, once triggered, enables our stockholders (other than the stockholder responsible for triggering the rights plan) to purchase our common stock at reduced prices. These provisions of our governing documents and stockholder rights plan, and of Delaware law, could have the effect of delaying, deferring or preventing a change of control, including without limitation a proxy contest, making 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 U.S. We believe that our success depends, in part, upon our ability to protect our intellectual property throughout the world. However, the laws of some foreign countries may not be as comprehensive as those of the U.S. and may not be sufficient to protect our proprietary rights abroad. In addition, we generally do not pursue patent protection outside the U.S. 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 U.S.

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.

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.

Certain Risks Resulting from the Merger

Any failure to integrate successfully the businesses of Accelrys and Symyx in the expected timeframe will adversely affect the combined company’s future results. The success of the Merger will depend, in large part, on the ability of the combined company to realize the anticipated benefits, including annual net operating synergies, from combining the businesses of Accelrys and Symyx. To realize these anticipated benefits, the combined company must successfully integrate the businesses of Accelrys and Symyx. This integration will be complex and time-consuming.

The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in the combined company’s failure to achieve some or all of the anticipated benefits of the Merger.

Potential difficulties that may be encountered in the integration process include the following:

•

lost sales and customers as a result of customers of either of the two companies deciding not to do business with the combined company;

•

complexities associated with managing the larger, more complex, combined business;

•

integrating personnel from the two companies while maintaining focus on providing consistent, high quality products;

•

potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the Merger; and

•

performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the Merger and integrating the companies’ operations.

The combined company’s future results will suffer if the combined company does not effectively manage its expanded operations following the Merger. The size of the combined company’s business is significantly larger than businesses of Accelrys and Symyx as stand-alone entities prior to the Merger. The combined company’s future success depends, in part, upon its ability to manage this expanded business, which will pose substantial challenges for the combined company’s management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. We cannot assure you that the combined company will be successful or will realize the expected operating efficiencies, annual net operating synergies, revenue enhancements and other benefits currently anticipated to result from the Merger.

The Merger may not be accretive and may cause dilution to the combined company’s earnings per share, which may negatively impact the price of the common stock of the combined company following the completion of the Merger. We anticipate that the Merger will be accretive to the earnings per share of the combined company for our 2011 fiscal year completion of the Merger. This expectation is based on preliminary estimates and assumes certain synergies expected to be realized by the combined company during such time. These estimates and assumptions could materially change due to additional transaction-related costs, the failure to realize any or all of the benefits expected in the Merger or other factors beyond the our control. All of these factors could delay, decrease or eliminate the expected accretive effect of the Merger and cause resulting dilution to the combined company’s earnings per share or to the price of the common stock of the combined company.

The Merger has resulted in changes to our board of directors that may affect the combined company’s operations. Upon completion of the Merger, the composition of our board of directors changed in accordance with the Merger Agreement. The combined company’s board of directors now consists of 10 members, including the six directors of Accelrys prior to the Merger and four of the individuals who served as directors of Symyx prior to the Merger. This new composition of our board of directors may affect the business strategy and operating decisions of the combined company.

The success of the combined company will depend on relationships with third parties and pre-existing customers of Accelrys and Symyx, which relationships may be adversely affected by customer preferences or public attitudes about the Merger. The combined company’s success will be dependent on the ability to maintain and renew relationships with pre-existing customers and other clients of both Accelrys and Symyx and to establish new client relationships. There can be no assurance that the business of the combined company will be able to maintain pre-existing customer contracts and other business relationships, or enter into or maintain new customer contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important customer relationships could have a material adverse effect on the business, financial condition or results of operations of the combined company.

The combined company’s ability to utilize its net operating loss (“NOL”) and tax credit carryforwards in the future is limited by Sections 382 and 383 of the Code. In general, under Section 382 and 383 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOL and credit carryforwards to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (which is generally three years). The amount of the annual limitation is generally equal to the value of the stock of the corporation immediately prior to the ownership change, multiplied by the adjusted federal tax-exempt rate set by the Internal Revenue Service.

As a result of the Merger, Accelrys and Symyx have undergone an “ownership change” for purposes of Section 382 of the Code. Accordingly, the combined company’s ability to utilize Accelrys’s and Symyx’s NOLs and tax credit carryforwards will be limited as described in the preceding paragraph. These limitations could in turn result in increased future tax payments for the combined company, which could have a material adverse effect on the business, financial condition or results of operations of the combined company.

The price of our common stock following the Merger may be affected by factors different from those that affected the price of shares of Accelrys or Symyx prior to the Merger. The business of Accelrys differs from the business of Symyx in important respects and, accordingly, the results of operations of the combined company and the price of our common stock following the completion of the Merger may be affected by factors different from those factors that affected the independent results of operations of Accelrys and Symyx. As a result, the price of our common stock could fluctuate in a manner or based on factors not in keeping with the historical results of fluctuations in the stock prices of Accelrys or Symyx prior to the Merger.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On November 10, 2010, we entered into a Stock Repurchase Plan with a broker (the “Repurchase Plan”), in accordance with Rule 10b5-1 of the Exchange Act. Pursuant to the Repurchase Plan, and subject to the conditions set forth therein and the provisions of Rule 10b-18 of the Exchange Act, we instructed the broker to purchase for our account up to $6.0 million worth of our common stock by March 31, 2011. On the basis of the foregoing, we purchased $3.0 million worth of our common stock in the quarter ended December 31, 2010, and we purchased the remaining $3.0 million of our common stock by repurchasing 350,553 shares at an average cost of $8.50 per share in the first quarter of fiscal 2011.

On March 11, 2011, we entered into a second Stock Repurchase Plan with a broker (the “Second Repurchase Plan”) in accordance with Rule 10b5-1 of Exchange Act. Pursuant to the Second Repurchase Plan, and subject to the conditions set forth therein and the provisions of Rule 10b-18 of the Exchange Act, we have instructed the broker to purchase for our account up to an additional $4.0 million worth of our common stock by September 30, 2011. During April 2011, we repurchased 253,624 shares of our common stock for $2.0 million pursuant to the Second Repurchase Plan.

The following table sets forth information concerning purchases of our common stock, in each fiscal month during the three months ended March 31, 2011, which upon repurchase are classified as treasury shares available for general corporate purposes:


	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Approximate dollar value of shares that may yet be purchased under the plan or programs
							(In thousands)
On January 1, 2011							$	3,000
1/1/2011 – 1/31/2011		268,652	$	8.49		268,652	$	2,281
2/1/2011 – 2/28/2011		81,901	$	8.64		81,901		—

Item 5.

Other Information

On April 28, 2011, the Company committed to the implementation of a reduction in force of approximately 10-15 employees, in connection with the streamlining of its operations and integrating its Content business. The Company estimates that it will incur total cash charges of approximately $1.0 million relating to these actions. The Company commenced implementation of the reduction in force on May 3, 2011 and expects all restated actions to be substantially completed by December 31, 2011.

In connection with its annual review of executive compensation, on April 28, 2011, our board of directors approved an increase of 5% in the annual base salary of Max Carnecchia, our President and Chief Executive Officer, and an increase of 3% in the annual base salaries of the following executive officers: Michael Piraino, our Executive Vice President and Chief Financial Officer, Todd Johnson, our Executive Vice President of Sales, Marketing and Services, Trevor Heritage, our Executive Vice President, Software Products, Mathew Hahn, our Senior Vice President and Chief Technology Officer, David Mersten, our Senior Vice President, General Counsel and Secretary, Anil Thakur, our Senior Vice President, Software Development, Frank Brown, our Senior Vice President and Chief Science Officer, and Judith Ohrn Hicks, our Vice President, Human Resources. In addition, the annual target bonus for each of Mr. Carnecchia and Mr. Thakur was increased from 90% and 40%, respectively, to 100% and 50%, respectively.

Item 6.

Exhibits


Exhibit Number		Description
2.1		Agreement and Plan of Merger and Reorganization, dated April 5, 2010, by and among Accelrys, Inc., Alto Merger Sub, Inc. and Symyx Technologies, Inc. (incorporated by reference to Exhibit 2.1 of Accelrys, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

3.1		Restated Certificate of Incorporation of Pharmacopeia, Inc., as amended (including a Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock) (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).

3.2		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 quarter ended September 30, 2007).

3.3		Certificate of Amendment to the Restated Certificate of Incorporation of Accelrys, Inc. (incorporated by reference to Exhibit 3.1 to Accelrys, Inc.’s Current Report on Form 8-K filed on July 2, 2010).

3.4		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 Current Report on Form 8-K filed on September 4, 2002).

4.2		First Amendment to Rights Agreement, dated as of April 5, 2010 (incorporated by reference to Exhibit 4.1 to Accelrys, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

10.1		2011 Management Incentive Plan for the Calendar Year Ending December 31, 2011 (incorporated by reference to Exhibit 10.1 to Accelrys, Inc.’s Current Report on Form 8-K filed on March 7, 2011).

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/ MICHAEL A. PIRAINO
		Michael A. Piraino
		Executive Vice President and Chief Financial
		Officer (Duly Authorized Officer, Principal
		Financial Officer and Principal Accounting Officer)

		Date: May 4, 2011

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