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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

Commission File Number: 0-27188

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý    No o

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2004 was $91,179,846 (based upon the September 30, 2004 closing price for shares of the Registrant's Common Stock as reported by the NASDAQ National Market). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE

        Selected portions of the 2005 Proxy Statement are incorporated by reference in Part III of this Report. The Exhibit Index (Item No. 15) incorporates several documents by reference as indicated therein.

ACCELRYS, INC.

2005 Form 10-K

Table of Contents

PART I

ITEM 1. BUSINESS

        Accelrys, Inc. through its wholly owned subsidiaries ("Accelrys" or the "Company") develops and commercializes molecular modeling, simulation, informatics, and decision support software for the life sciences and materials research markets. Accelrys is headquartered in San Diego, California and was incorporated in Delaware in 1993. Our internet address is www.accelrys.com. Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available without charge on our website as soon as reasonably practicable after filed with or furnished to the Securities and Exchange Commission. Significant developments during the fiscal year ended March 31, 2005 include the following:

        On April 1, 2004 we changed our fiscal year end from December 31 to March 31.

        On April 30, 2004, we spun off our drug discovery subsidiary, Pharmacopeia Drug Discovery, Inc. ("PDD"), which integrates proprietary small molecule combinatorial and medicinal chemistry, high-throughput screening, in-vitro pharmacology, computational methods and informatics to discover and optimize lead compounds and drug candidates. The spin-off of PDD resulted in PDD becoming an independent, separately traded, publicly held company. This was accomplished through the distribution to our stockholders of a dividend of one share of PDD common stock for every two shares of Accelrys common stock. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", we have reclassified PDD's current and prior period results of operations, assets and liabilities as discontinued operations in the financial statements. Further, the following report excludes results of operations, assets and liabilities of PDD, unless otherwise noted.

        On May 11, 2004, our shareholders approved the change of the Company's name to Accelrys, Inc. from Pharmacopeia, Inc.

        On September 27, 2004, we acquired all of the outstanding common stock of Scitegic, Inc. (Footnote 4).

        When used anywhere in this document, the words "expect", "believe", "anticipate", "estimate", "intend", "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements herein 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 risks and uncertainties including execution upon our strategic plans, the acceptance of new products, the obsolescence of existing products, the resolution of existing and potential future patent issues, additional competition, changes in economic conditions, and other risks described in documents we have filed with the Securities and Exchange Commission, including the sections of this report on Form 10-K entitled "Risk Factors," "Certain Risks Related to our Business," "Certain Risks Related to Intellectual Property," "Certain Risks Related to the Spin-Off of PDD", and subsequent reports on Form 10-Q. All forward-looking statements in this document are qualified entirely by the cautionary statements included in this document and such other filings. These risks and uncertainties could cause actual results to differ materially from results expressed or implied by forward-looking statements contained in this document. 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.

        We have approximately 525 employees. Our customers include many leading chemical, biotechnology and pharmaceutical organizations. Our software covers disciplines including gene sequence analysis, proteomics, rational drug design, lead optimization, materials research, and formulation design.

OVERVIEW

        For companies in the pharmaceutical, biotechnology, chemical, petrochemical and materials industries, innovation in the discovery and development of new products and the rapid, cost-effective commercialization of these products can be crucial to success. Such organizations also strive to increase the efficiency or effectiveness of products and processes. Marginal process improvements can often have dramatic returns on investment. Companies in these industries invest considerable resources in technologies that suggest productive new pathways for research projects, increase the efficiency of discovery and development processes, or enable them to maximize the use of corporate data, information and knowledge. One such set of technologies is software-based computation, analysis, informatics and knowledge management tools. These tools allow users to simulate key chemical and biological systems, understand and predict fundamental properties, and design new or improved products and processes. They also manage and mine scientific data, turning it into useful information and supporting decision processes and research and development workflows.

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

        Following are brief descriptions of our product lines.

        Modeling and Simulation Software.    Many factors that affect a molecule, including activity, bioavailability, toxicity, shelf life and environmental impact, are governed by fundamental properties such as shape, structure and reactivity that are determined at the sub-atomic, molecular, or near-molecular levels. A spectrum of simulation technologies—quantum mechanical simulation, molecular simulation, and mesoscale simulation—predict these properties and help researchers discover new products, sharpen the focus of experimental activities and improve ultimate product performance. We are a leading provider of such modeling and simulation software.

        We have a broad product suite consisting of over 100 application modules based on proprietary technologies that employ fundamental scientific principles, advanced computer visualization, molecular modeling techniques and computational chemistry. These products allow scientists to perform computations of chemical, biological and materials properties, to simulate, visualize and analyze chemical and biological systems, and to communicate the results to other scientists. We also offer open access to many of our core software development environments, within which customers and third-party licensees can develop, integrate and distribute their own software applications for computational chemistry, biology and materials research.

        We plan to continue enhancing our product and service offerings for specialist computational chemists and biologists, who are the principal users of modeling and simulation products. In addition, we are broadening our user base by enabling straightforward access to these methods by a much larger population of scientists and engineers who do not currently use modeling and simulation software. This also helps expert modelers to connect and communicate more effectively with other research organizations. Further, these products assist organizations in capturing, managing, and sharing the critical knowledge developed in modeling.

        Informatics Software.    We are a leading provider of tools to capture, store, manage, and mine scientific data and information. Informatics is a well-established technology in life sciences, where

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bioinformatics tools are integral to genetic and biological research, and cheminformatics applications are widely used to manage chemical information.

        Our bioinformatics solutions include a suite of programs enabling molecular biologists to search, edit, compare, map and align sequence data. Researchers use these solutions to enable the analysis of DNA and protein sequences and structure, predict RNA secondary structure and annotate protein sequences. Such capabilities help them to use the genomic data that is being made available by projects such as the Human Genome Project. In addition, we provide enterprise-wide data management and analysis tools that assist in the management of this data. Data visualization and analysis capabilities allow this data to be viewed and understood on standard desktop computers.

        Our cheminformatics software is based on standard database architectures such as Oracle® and Microsoft® Access®. We provide data visualization and analysis software to search, retrieve, and use chemical structures, biological and chemical data, experimental data, and registration information. Many of these tools use industry standard software components and are compliant with applications such as Microsoft Excel®, allowing chemists to use chemical data within familiar productivity tools. We also use this component technology and our database architectures to build customized enterprise-wide systems for client companies, and we sell our components, enabling customization and flexible implementation of our systems by chemical programmers.

        Workflow Software Solution.    Our workflow solution software allows customers to analyze and mine extremely large data sets in real time. Informatics analyses generally require multiple computational steps. To address this issue our solutions allow for automated data analysis protocols to be saved for re-use or shared with a broad community of users within the organization.

BUSINESS STRATEGY

        Our objective is to strengthen Accelrys' position as a leading provider of software-based scientific computation, analysis, informatics, knowledge management, workflow products and services worldwide. We plan to accomplish this by providing a comprehensive set of integrated productivity tools that are central to the enterprise-wide research and development activities of our customers, and by connecting these tools within an information technology ("IT") framework that makes it easier for research organizations to manage data, information, knowledge, and collaborative processes. The key elements of our strategy to achieve this objective include:

        Expand User Base.    We intend to increase sales to our key software accounts and pursue new customers within existing markets. In addition, we intend to target our software not only at a growing number of computational chemists/biologists and informatics specialists, but also the much larger group of scientists and engineers which do not currently use computation and simulation software. We believe we can leverage our strong relationships with our existing specialist users to help promote the use of our software solutions by other scientists working in the same organization as the specialists.

        Further Develop Workflow Software Solutions.    The need for automation of scientific data processing continues to grow as the rate of data generation rapidly increases, and we intend to broaden our successful workflow platform, Pipeline Pilot™, to address more application areas. We will be adding and enhancing the platform with more tools of broad applicability, including report generation, statistics, and text mining. In addition, we intend to adapt the platform to support automation and integration of many of our other products to promote greater use and utility. Finally, to foster the expansion of a thriving community around Pipeline Pilot, we will be encouraging other software vendors, including our competitors, to integrate with the platform so that researchers will have the freedom to assemble complete software solutions containing the best tools for their particular application, even when they come from other vendors.

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        Leverage Core Computational Technology and Maintain Technology Leadership.    We believe that our core scientific software technologies have helped position us at the forefront of computational methods technology providers. We intend to continue to make significant investments in product development in order to improve the efficiency and predictive accuracy of these core technologies and to maintain our technology leadership. We intend to continue to deliver these leading-edge solutions are delivered to customers in an environment that best fits emerging market needs—for example, offering access to some of our leading legacy UNIX® workstation products via Linux® clients.

        Enhance Technology Position.    We will strengthen our scientific and technical expertise through acquisitions and partnerships and through joint development projects with leading academic, government and industrial researchers. We intend to continue to pursue acquisitions and strategic relationships with third parties in order to obtain early access to new technologies, facilitate market acceptance of new products and reduce internal product development investment.

        Expand Informatics Market Share.    Our customers will need more sophisticated and flexible data and knowledge management tools as the use of modeling and simulation, gene sequence analysis and other computational methods expands and as the amount of data about drug discovery and chemical development activities continues to grow. We intend to continue to improve and integrate our bioinformatics and cheminformatics offerings, to develop our components strategy that enables a better fit to customers' individual needs, and to leverage our relationships with customers, in order to achieve this growth.

        Create Collaborative Systems and Environments.    We believe that the desire among our customer base to increase process efficiency across diverse workgroups and disciplines while managing and using enormous quantities of data and information has created a need for workflow tools that help researchers to better collaborate and manage projects. We plan to continue to improve our offerings to include workflow capabilities. As these product offerings expand, we also expect increased opportunities to tailor and customize work group and enterprise-wide solutions for customers through consulting services. The integration of informatics capabilities and provision of collaborative enterprise environment is being pursued through the development of integrated software platforms for discovery research including Discovery Studio®, Materials Studio® and Pipeline Pilot™. We plan to develop our key modeling and informatics capabilities such that they are compatible with these platforms.

SCIENCE AND TECHNOLOGY

        Following are more detailed descriptions of the science and technology supporting each of our various product lines.

        Modeling and Simulation.    Our modeling and simulation technology delivers predictive models of chemical, biological and materials phenomena within an open environment. This technology simulates subatomic, interatomic and intermolecular interactions, and a wide range of corresponding properties, including molecular structure, activity, diversity, stability, morphology, solubility, adhesion, adsorption, diffusion, color, analytical spectra, and optical, electrical and mechanical properties. There are five primary classes of molecular and materials simulation methods, all of which are found in our products:

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Quantum Mechanical (QM) Methods.    Our most fundamental simulation methods compute interactions at the level of electrons and nuclei. These methods are capable of simulating which chemical entities are stable, how chemical reactions occur, and properties such as reactivity, color and magnetism. These methods are computationally demanding. Historically, they have been applied to small, carefully selected models. Technological advances, many driven by us and our partners, are now allowing quantum mechanical methodology to be applied more generally and to larger materials and systems. The problems studied using QM methods are those that are typical in the emerging nanotechnology market.

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Molecular Mechanical (MM) Methods.    Our MM methods probe molecular conformations and the interactions between molecules based on simplified analytical expressions. These methods include automated procedures for probing how a drug molecule binds to an active site, what conformations a polymer chain may adopt, and what similarities exist between a new amino acid sequence and protein sequences for which tertiary structures are known. They also include tools used to determine structure based on X-ray diffraction or nuclear magnetic resonance data. Such methods contain more approximations than quantum methods but can be applied to much larger and more complex systems, providing insight into many chemical processes.



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Mesoscale Methods.    Our mesoscale methods study processes above the molecular scale that are critical to materials and chemical engineering properties. These methods are particularly suited to predicting the properties and mixing behaviors of polymer mixtures, complex fluids, detergents and soft materials.



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Structure Determination and Instrument Simulation.    A range of methods combine the technologies introduced above with techniques to interpret and simulate data captured from analytical instruments so that accurate models of molecular, sub-molecular, and mesoscale structure can be determined. The analytical techniques used include powder diffraction, nuclear magnetic resonance ("NMR"), and infrared spectra. Such methods are often a vital pre-requisite to effective modeling and simulation and also act as essential validation of computational work.



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Correlative Methods.    Correlative methods identify interrelationships between structure and properties that can be used predictively. In many cases, it is known that macroscopic properties are determined by molecular-level behavior, but the analytical details of these relationships are not known. Quantitative structure activity relationship ("QSAR") methods provide a framework in which to correlate molecular attributes and macroscopic properties. This framework can predict, to a reasonable degree of confidence, the properties of molecules that are comparable with a control set for which properties have been measured.

        Platform Technologies.    The computational methods outlined above are offered within an information technology framework designed to support the needs of today's leading research organizations. This framework is delivered via three platforms—Pipeline Pilot, Discovery Studio and Materials Studio.

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We have pioneered an open scientific software architecture through products such as our Cerius²®, Insight II® and Pipeline Pilot software. Many customers have used our published programming interfaces to incorporate and customize new methods into these software packages. The modular architecture is designed to provide streamlined access to the various computational methods, allowing their use in discrete, combined and packaged ways.



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The Discovery Studio software delivers platform technology that provides a common data architecture for pharmaceutical-focused products. The Discovery Studio software combines updated infrastructure technology and market leading science acquired and developed by us. This platform allows us to deliver molecular modeling and simulation desktop products to new classes of users, through the advantages of client-server computing. Application installations range from a single user working on a personal computer ("PC") to a multi-departmental facility accessing a wide range of heterogeneous computer resources to tackle the biggest simulations problems facing the industry. The client application is created using industry-standard languages and protocols on Linux and Windows®, and incorporates powerful new technology that enables the display and manipulation of molecular structures and other data on the PC. Depending on the application, the servers can be Windows® XP/2000® servers, or customers can take advantage of the low cost/high performance servers offered by Linux.

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The Materials Studio software delivers similar benefits via desktop PC's to users in the materials sciences. The client software provides a PC-based modeling and visualization environment from which users can set up, run and analyze results of computations on more powerful computer servers on their Intranet. The servers can be UNIX workstations, Linux servers, or Windows® 2000® servers or workstations. The client software runs on Windows® 2000 and XP®.

        Bioinformatics Software.    Our bioinformatics solutions enable the management and analysis of biological data and provide a wide range of gene sequence analysis capabilities.

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Gene Sequence Analysis.    The core technology serving the bioinformatics and gene sequence analysis market is contained within a suite of programs marketed under the name Accelrys GCG. This suite contains over 130 programs covering the research needs of molecular biologists. Based on published algorithms from the fields of mathematical and computational biology, Accelrys GCG includes sequence comparison, database searching and retrieval, DNA/RNA secondary structure prediction, editing and publication, evolutionary analysis, fragment assembly, gene finding and pattern recognition, importing and exporting, mapping, primer selection, protein analysis, and translation. The computational and analysis capabilities of Accelrys GCG runs on UNIX and Linux servers. They can be accessed through a variety of client user interfaces, enabling broad access to this technology.



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Data Content.    We provide our users with a wide range of public databases in convenient formats that can be updated at regular intervals through our data update services. These include GenBank® and EMBL for nucleic acid sequences, SP-TREMBL protein translations of coding sequences, PIR protein sequences, NRL_3D sequence and three-dimensional structure, GenPept unannotated translations of GenBank sequences, REBASE restriction enzyme data, including specific restriction enzymes, SWISS-PROT well-annotated protein sequences, and PROSITE protein sequence motifs.



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Workflow Software Solutions.    Pipeline Pilot provides an open environment for the automation and integration of scientific data processing. By connecting together modular processing steps into a network through which data flows, researchers can create sophisticated computing routines that automate days of manual effort with a single step. Further, the approach allows data from disparate sources such as databases and flat files to be processed together without first creating and loading a single unifying data management system. As an open platform, Pileline Pilot enables other software vendors to make their products compatible so customers can always choose the best combination of available tools to deploy.

        Cheminformatics Software.    We provide software to manage chemical information, such as 2D chemical structure diagrams and associated property data. This software ranges from chemical data management and analysis technology integrated with standard desktop productivity tools to enterprise-wide informatics systems. We also provide a number of software packages focused on particular applications of interest to the chemist, and a range of useful data content.

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Enterprise Solutions.    The Accord Enterprise Informatics (AEI) suite is a single, powerful environment for enterprise-wide management of chemical structures, biological assay data, and related information. Based on Oracle databases, which are extended to understand chemistry via our DS Accord Chemistry Cartridge, AEI allows customers to manage and share this data and access it via a series of applications focused on specific tasks, including data analysis, management of high throughput screening workflow, and compound registration.



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Desktop Solutions.    The DS Accord for Excel, Accord Chemistry Control, and Accord Grid Control software allows chemical objects to be stored and manipulated within standard Microsoft desktop productivity tools. This means that the researcher can view and analyze chemical data without the need to learn new software systems, and that the wide range of calculation and data

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management features available in these applications can be easily applied to chemical data without the need for us to develop and maintain specialist tools. The DIVA® and the Tsar® software provides desktop decision support capabilities, allowing users to work with chemical structures, assay results and other chemical and biological data.

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Data Content.    We deliver a range of chemical databases. These include the Chemicals Available for Purchase (CAP) database product, which combines many suppliers' catalogs including the entire Sigma-Aldrich listing, the Failed Reactions Database™, offers data on reactions that afford unexpected results, Solid-Phase Synthesis designed for chemists engaged in the design of combinatorial libraries, Metabolism and Biotransformations providing data on the metabolic fate of organic molecules, Methods in Organic Synthesis (MOS) containing over 3,000 new reactions each year, BioCatalysis covering biomolecule-mediated organic synthesis, Protecting Groups which provides chemists with ready access to selected information on the full range of protecting group chemistry, BIOSTER that provides a critical compilation of thousands of bio-analogous molecule pairs, and a series of two organic chemistry databases offered in association with J.W. Wiley & Sons, publishers.



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Workflow Software Solutions.    Pipeline Pilot provides an open environment for the automation and integration of scientific data processing. By connecting together modular processing steps into a network through which data flows, Pipeline Pilot enables researchers to create sophisticated computing routines that automate days of manual effort with a single step. Further, the approach allows data from disparate sources such as databases and flat files to be processed together without first creating and loading a single unifying data management system. As an open platform, Pileline Pilot enables other software vendors to make their products compatible so customers can always choose the best combination of available tools to deploy.



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Tools and Components.    We enable IT professionals and scientific application developers to construct custom cheminformatics solutions through a wide range of tools and components that include the DS Accord Chemistry Cartridge, Accord Chemistry Control, Accord Grid Control, Accord SDK, and the Combichem Enumeration Components. These are central to our strategy of enabling cheminformatics customers to create systems and solutions that precisely fit their needs.

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PRODUCTS AND SERVICES

        We offer a broad suite of products and services designed to enable our customers to shorten product lead times, reduce research and development costs, improve product and process performance, manage and analyze chemical and biological data and information, and communicate more effectively both inside and outside an organization. These products and services incorporate the following attributes:

        Validated Core Modeling Technology.    The core technology underlying our modeling and simulation products consists of a number of fundamental, scientifically proven methods for conducting predictive computer modeling and analyses of chemical, biological and materials phenomena at the atomic and molecular level. This core technology is validated by over a decade of industrial use and by the publication of hundreds of presentations, papers and articles citing applications of this technology.

        Broad Applicability.    The validated core technology underlying our products enables us to offer products and services to a wide variety of industries, including the pharmaceutical, biotechnology, chemical, petrochemical, electronics, food, paper, agrochemical, aerospace, plastics, paint and natural gas industries. Our products simulate and analyze both small molecules that may be candidates for new drugs and more complex molecular structures such as proteins or the polymers found in advanced materials. These products are used in research applications as diverse as drug discovery, protein design and structure determination, crystallization and formulation, polymer property prediction, catalysis and development of electronic materials.

        Data Management Compliant with Industry Standards.    Our data management and analysis solutions are based on industry-standard technologies such as Oracle. This means that they are compliant with other corporate systems and retain a high level of openness and flexibility. Our technology ensures that these standards are enabled for chemical and biological data.

        Open Architecture.    Many of our products are based upon open architectures that allow customers, collaborators and third parties to develop software applications in the same development environment we use internally. Core molecular modeling functions are included in this open environment, which permits developers to focus on their particular scientific interests and increase the power and utility of their programs by integrating them with our products.

        Ease of Use.    Our products are integrated, modular, focused on specific research areas or techniques, and accessible by intuitive graphical user interfaces ("GUI"). These enable scientists to use molecular simulation in a manner consistent with established analytical and laboratory techniques, in a user-friendly computational environment.

        Increased Access.    We have developed desktop product lines that target a broader group of users, including laboratory scientists and engineers. Scientific researchers increasingly use products running in the Microsoft Windows environment on desktop computers to search for, analyze and communicate scientific data, particularly within corporate Intranets. Our desktop products use familiar technology and are built upon our open architecture and validated core technology.

        Based upon the science, technology and attributes described above, we provide a broad suite of products used throughout the research and development cycle. We believe that offering a "single-shop," integrated drug discovery and chemical development solution will be a significant benefit to our customers. In addition to these software modules, we also offer the following services:

        Customer Support and Training.    Expert telephone support, an Internet-based knowledge-base and request-tracking system, on-site training, web-based training, and scheduled training workshops, are all designed to enhance customer success in application of our technologies.

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        Contract Research.    Our scientists can be contracted to work on specific projects, typically applying our modeling and simulation solutions to problems such as database construction or structure determination. This program provides a high level of collaboration with the customer, and includes mentoring and knowledge transfer related to the application of our modeling tools.

        Implementation and Integration Services.    We can assist customers with the implementation of products, where required. In particular, this is often a requirement for enterprise informatics products. We also offer services that increase the value of our software by providing new business-critical functionality for enterprise systems built around or including our software. This extended functionality is typically developed in the form of configuration files, templates, and plug-ins that are decoupled from the effects of future changes in the underlying software. Our consulting services solutions extend our customers' business workflows and create increased efficiency and effectiveness. These solutions can involve business consulting, project management, advanced data pipelining technologies, customization and integration. Our consulting services deliver open and extensible solutions that can include our products, components and services, and competitor and open source products.

PRODUCT USES

        Our products are used in a variety of research areas within a number of industries. The principal research and development areas in which our products are used include the following:

        Sequence to Structure.    Our bioinformatics, proteomics, and structural biology software provides tools that enable researchers to tackle the range of problems inherent in moving from gene sequence data to fully characterized targets for drug discovery projects. This range of activities represents the early stages of the drug discovery process and is an essential pre-requisite for the structure-based route to drug discovery. Relevant problems include finding sequences within the huge quantities of available genetic data, characterizing those sequences and relating them to particular functions, determining the secondary structure of DNA and RNA, determining the three dimensional molecular structure of proteins (often using data from analytical techniques such as NMR and X-ray diffraction), and understanding the relationship between this structure and function. The key product for gene sequence analysis is the Accelrys GCG Package software, now augmented and accessible via Accelrys Gene software. Products used in macromolecular structure determination and subsequent protein modeling include Discovery Studio™, CNX®, Insight II® application modules, QUANTA™, Discover®, CHARMm®, and Felix™ software.

        Lead Identification and Optimization.    The next step in drug discovery is the development and optimization of potential small molecule drugs based on these targets. Our rational drug design products allow the design of small organic therapeutics, based on a protein active site model or on activity data for a set of compounds. Related techniques are used to design and assess combinatorial molecular libraries that are screened for desired activity using high throughput experimentation. We thus bring together the worlds of computation and experimentation. The large quantities of data generated by such activities can be managed and analyzed using our informatics tools—resulting in more focused testing and design. Rational drug design and combinatorial chemistry products include Catalyst®, Cerius² and Insight II®, and DS MedChem Explorer software. Cheminformatics tools applied to manage relevant data are based on the Accord Enterprise Informatics product.

        Drug Development.    Following the discovery process, a drug must be delivered successfully—administered as a crystalline solid in a pill, or through some other mechanism such as a patch or spray. Our crystallization software solves a range of problems that are important to the development and formulation of pharmaceuticals—for example, establishing possible crystalline structures for the solid material of a pill. Such problems are critical across the chemicals industries, affecting products such as paints, pigments, and petrochemicals. Our crystallization products are delivered as Cerius² and Materials Studio application modules.

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        Improving Materials and Processes in the Chemicals Industry.    Many of our other solutions support the design of improved products and processes across the chemicals industry. In addition to the crystallization tools introduced above, two key technology areas in this respect are polymer science and catalysis. Polymer modeling products are used by researchers in the chemical, plastics, rubber, adhesives, petrochemical, aerospace and automotive industrial sectors to analyze and predict polymer properties and establish the link between these properties and the molecular-level structure of the material. Our polymer products allow these researchers to construct and characterize models of polymers and predict key properties, such as blend compatibility, mechanical behavior, cohesion and adhesion to surfaces. Our polymer products include the Cerius² and the Insight II application modules—the full range of polymer technology is now extended and available within the Materials Studio product line through such products as Discover, Equilibria, and MesoDyn modules. Our catalysis products are used by companies in the chemical, petrochemical, natural gas and plastics industries and by catalyst manufacturers to characterize catalysts and sorbent materials, to simulate thermodynamic and reactivity data, and to understand and control chemical reactions. Our products are used to characterize and design metallocene catalysts, zeolites and other molecular sieves, and metal oxides. Legacy products include the Cerius² and the Insight II application modules. Our Materials Studio product line targets the chemical industry and includes such products as Discover, DMol3, and CASTEP modules.

        Other Materials-based Industries.    Our products have a broad range of applications across industries including electronics, aerospace, structural materials, automotive and energy. In electronics, for example, the trend toward microminiaturization of electronic devices has created a need for improved processes and materials. Semiconductor and electronics companies use our products to understand surface chemistry, defects, thin oxide layers, magnetic properties, and the performance of new packaging materials. Legacy products include the Cerius² and the Insight II application modules. Our Materials Studio product line targets this industry through the Discover, Dmol3, and CASTEP modules.

        Nanotechnology.    We are a leading provider of key tools for nanotechnology research and development. Our modeling and simulation technology and our scientists have contributed to significant scientific projects that include improving the efficiency of novel nanotube-based display devices, controlling and optimizing new gas sensor materials, developing nanodot-based solid-state lighting, designing ultrasensitive electromechanical sensors made from nanotubes, and developing efficient production methods for clay-polymer nanocomposites.

CUSTOMERS

        Our customer base consists of commercial, governmental and academic organizations. No single customer accounted for more than 10% of our revenue during the fiscal year ended March 31, 2005.

        Industrial Customers.    Our industrial customers include many of the largest pharmaceutical, biotechnology, chemical, petroleum and semiconductor companies worldwide. In each of the past three fiscal years, a significant portion of our total revenue has been derived from pharmaceutical, biotechnology and chemical companies.

        Governmental Customers.    Many governmental institutions in the United States, Canada, Europe and the Asia/Pacific region use our products.

        Academic Customers.    Many universities in the United States, Europe and the Asia/Pacific region use our products. This use historically has been for purposes of academic research, but we believe our products increasingly may be used as a part of formal university teaching curricula.

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STRATEGIC AND ACADEMIC ALLIANCES

        We have entered into a number of strategic alliances relating to product development, product distribution and joint marketing. We plan to continue to cultivate relationships with academic, governmental and commercial research organizations for purposes of identifying and licensing new technology to use in product development. In addition, we plan to maintain and expand our alliances focusing on the compatibility of our products with databases and database management systems, other computational chemistry and molecular simulation products, and products in related markets such as laboratory instrumentation. We also intend to continue to enter into porting and joint marketing arrangements with hardware vendors on whose systems our products operate.

CONSORTIA

        We have historically formed a number of consortia with outside parties, commonly for purposes of market expansion and product development. These consortia include several customers which typically pay us membership and software license fees. We believe the formation and management of these consortia helps us focus on topical industrial needs, and establishes the consortia members as an initial customer base for our products. We believe our consortia also help us establish valuable working relationships with leaders in our target markets.

        During fiscal year 2005, we established the Nanotechnology Consortium ("Nanotech Consortium") to bring together industry, scientists and academia to spur nanotechnology innovation. The goal of the Nanotech Consortium is to accelerate the development of software tools that enable the design of nanomaterials and nanodevices. Additionally, the Nanotech Consortium is intended to enhance nanotechnology research and development by fostering collaboration between scientists and engineers. A partial list of the members of the Nanotech Consortium includes Corning Incorporated, Fujitsu, e2v Technologies, Imperial College, London, and Uppsala University, Sweden.

SALES AND MARKETING

        We market our products and services worldwide. Historically, the Company has generated approximately 50%, 30% and 20% of its revenues from the United States, EMEA (defined as Europe and Middle East and Africa) and Asia Pacific, respectively. In these regions we have direct sales forces, consisting of field sales, certain distributor arrangements, and telesales representatives. Certain of our telesales representatives focus exclusively on sales to academic researchers. The direct sales representatives and other telesales representatives work in teams selling to commercial and governmental accounts in assigned geographic territories. Our direct sales representatives typically focus on larger accounts and transactions and work closely with our pre-sales support scientists in order to demonstrate our products and their applicability to various research and development efforts. Our other distributor relationships are focused in the Asia market, and complement the direct sales approach.

        In support of our sales activities, we participate in industry trade shows, publish our own newsletters, place advertisements in other industry publications, publish articles in industrial and scientific publications, conduct direct mail campaigns, sponsor industry conferences and seminars, and maintain a World Wide Web site that contains information about us and our product and service offerings.

        Our customers' buying habits have historically resulted in a higher concentration of sales in the third quarter of our fiscal year.

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PRODUCT DEVELOPMENT

        Our product development expenses in the three fiscal years and two three month periods were as follows (in thousands):

        The increase in product development expenses for the year ended December 31, 2003 as compared with the year ended March 31, 2005 was due to additional product development activities by SciTegic, offset by decreases in staffing costs and other cost efficiencies realized throughout the year. The decrease in product development expenses for the year ended December 31, 2002 as compared to the year ended December 31, 2003 was due to a reduction in development headcount and an increase in the rate of capitalizable activities. The decrease in product development expenses for the three months ended March 31, 2003 as compared to the three months ended March 31, 2004 resulted from cost efficiencies realized by the business.

        Development of our software is focused on expanding product lines, designing enhancements to our core technology and integrating existing and new products into our principal software architectures. We intend to offer regular updates to our products and to expand our existing product suite. A key component of our product development activities is the extension of our core UNIX-based software architecture to accommodate access to our products from desktop computers.

        We license or acquire products from corporate, governmental and academic institutions. These arrangements sometimes involve joint development efforts and frequently require the payment of royalties by us. The development and royalty obligations, scope of distribution rights, duration and other terms of these arrangements vary depending on the product, the market, resource requirements, the other parties with which we contract and other factors. We intend to continue to license or otherwise acquire technology or products from third parties.

        We have also developed products with funding and direction from customers through our consortia activities, see "Business—Consortia," and we currently intend to continue to develop products as part of our consortia arrangements with customers.

CUSTOMER SERVICE AND SUPPORT

        We are committed to providing customers with superior support including telephone, electronic mail, fax and Internet-based technical support services; training; user group conferences; and targeted contract services involving application of our technology and scientific expertise to particular research needs of customers. We believe that customer service, support and training are key to the adoption and successful utilization of our products.

        Purchases of perpetual licenses to use our products include at least one year of maintenance services, consisting of technical support and software upgrades. Thereafter, we offer renewals of

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maintenance services on an annual basis in return for an annual fee. Annual and multi-year licenses to use our products generally include maintenance services. Most of our customers contract for maintenance and support services. These give customers access to new releases, technical notes, documentation addenda and other support which enables customers to utilize our products more effectively, including access to our technical and scientific support personnel during extended business hours. Both internally and through our distribution channels, we offer training conducted by staff knowledgeable in both the theory and application of our products. Technical newsletters and bulletins and advance notification about future software releases are sent to customers to keep them informed and to help them with resource allocation and scheduling. To maintain an ongoing understanding of customer requirements, we sponsor scientific symposia and user group meetings throughout the year.

COMPETITORS

        The market for our products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Our competitors offer a variety of products and services to address this market. We believe that the principal competitive factors in this market are product quality, flexibility, ease-of-use, scientific validation and performance, functionality and features, open architecture, quality of support and service, reputation and price. Competition currently comes from the following principal sources (and competitors that supply such sources listed in alphabetical order): other software packages for analysis of chemical and biological data (Elsevier MDL, IDBS, LION bioscience); desktop software applications (CambridgeSoft, Invitrogen, Tripos), including chemical drawing (CambridgeSoft, Elsevier MDL), molecular modeling and analytical data simulation applications (Chemical Computing Group, Schrodinger, Tripos); other types of simulation software provided to engineers (Reactive Design); and firms supplying databases, such as chemical or genomic information databases (Elsevier MDL, LION bioscience), database management systems and information technology (Elsevier MDL, IDBS, LION bioscience). In addition, certain of our licenses grant the right to sublicense our software. As a result, our customers and third-party licensees could develop specific simulation applications using our technology and compete with us by distributing such programs to potential customers. Customers or licensees could also develop their own modeling, simulation, analyses, bioinformatics or cheminformatics technology and cease using our products and services. Further, they may choose to sublicense such technology.

        Certain of our competitors and potential competitors have longer operating histories than us and have greater financial, technical, marketing and other resources. Further, many of our competitors offer products and services directed at more specific markets than those targeted by us, enabling these competitors to focus a greater proportion of their efforts on such markets. Certain offerings that are competitive with our products and services are developed and made available by governmental 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. 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.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

        We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary rights. We also have nineteen United States and foreign patents. We believe that factors such as the technological and creative skills of our

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personnel, new product development, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technological leadership position. We seek to protect our software, documentation and other written materials primarily under trade secret and copyright laws, which afford only limited protection. However, there can be no assurance that we can successfully protect our intellectual property. Furthermore, there can be no assurance that others will not develop technologies that are similar or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In limited instances, we have licensed source codes of certain products to customers or collaborators. For these reasons, policing unauthorized use of our products may be difficult. In addition, the laws of some foreign countries do not protect proprietary rights as fully as do the laws of the United States. Historically we have not relied on our patent portfolio to protect our intellectual property.

        There can be no assurance that third parties will not claim infringement by us of their intellectual property rights. There can be no assurance that our products do not infringe upon the patent or other intellectual property rights of third parties, that we will not be required to seek licenses for or otherwise acquire rights to technology as a result of claims of infringement or that other companies will not bring infringement suits against us. We expect in general that product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segments grows and the functionality of products in different industry segments overlaps. Any 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 discontinue or recall products or to enter into royalty or licensing agreements.

        Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. In the event of a successful claim of product infringement against us, our failure or inability to license or design around the infringed technology would have a material adverse effect on our business, our financial condition and results of operations.

EMPLOYEES

        As of March 31, 2005, we had approximately 525 regular employees. None of our employees is covered by collective bargaining agreements. Substantially all of our employees, other than certain of our executive officers and employees with customary employment arrangements within Europe, are at will employees, which means that each employee can terminate his/her relationship with us and we can terminate our relationship with him/her at any time. We offer industry competitive wages and benefits and are committed to maintaining a workplace environment that promotes employee productivity and satisfaction. We believe our relations with our employees are good.

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CERTAIN RISKS RELATED TO OUR BUSINESS

        You should carefully consider the risks described below before investing in our securities. The risks described below are not the only ones 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.

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

        Changes in the accounting treatment of stock options will adversely affect our results of operations.    In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123R. "Share-Based Payment" (SFAS 123R), which is a revision of SFAS 123. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and does not permit pro forma disclosure as an alternative to financial statement recognition. We currently plan to adopt SFAS 123R in our first fiscal quarter ending June 30, 2006. The adoption of the SFAS 123R fair value method will have a significant adverse impact on our reported results of operations because the stock-based compensation expense will be charged directly against our report earnings. The impact of our adoption of SFAS 123R cannot be predicted at this time because it will depend on the future fair values and number of share-based payments granted in the future. However, had we adopted SFAS 123 in prior periods, the magnitude of the impact of that standard would have approximated the impact of SFAS 123 assuming the application of the Black-Scholes model as described in the disclosure of pro forma net loss and pro forma net loss per share in Footnote 2 of our Notes to Consolidated Financial Statements.

        Our future profitability is uncertain.    We generated losses in the twelve months ended December 31, 2002, and 2003, the three months ended March 31, 2004 and the twelve months ended March 31, 2005. Continuing net losses may limit our ability to fund our operations and we may not generate income from operations in the future. Our future profitability depends upon many factors, including several that are beyond our control. These factors include without limitation:

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changes in the demand for our products and services;



•

the introduction of competitive software;



•

our ability to license desirable technologies;



•

the rate of adoption by our customers of our new subscription licenses option;



•

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

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•

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

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

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



•

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



•

consulting and outsourcing services;



•

other types of simulation software provided to engineers;



•

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



•

academic and government sponsored institutes focused on nanotechnology.

        In addition, some of our software licenses grant the right to sublicense our software. As a result, our software customers and third-party licensees could develop specific simulation applications using our software developer's kit and compete with us by distributing these programs to our potential customers. Customers or licensees could also develop their own simulation technology or informatics software and cease using our products and services. Some of our competitors and potential competitors in this sector have longer operating histories than us and have greater financial, technical, marketing, research and development and other resources. Many of our competitors offer products and services directed at more specific markets than those we target, enabling these competitors to focus a greater proportion of their efforts and resources on these markets. Some offerings that compete with our products are developed and made available at lower cost by governmental 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. Finally, we also face competition from open source software initiatives, in which developers provide software and intellectual property free over the Internet.

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

        Our investments in sales and business development efforts may not result in additional sales of our products and services.    Our products and services involve lengthy sales and business development cycles, often requiring us to expend considerable financial and personnel resources without any assurance that revenue will be recognized. These sales and business development cycles typically are long for a number of reasons. Sales cycles are impacted by the time and resources required to educate potential customer organizations as to the value and comparative advantages of our products. As a result, we may expend substantial funds and effort to negotiate agreements for collaborative relationships, services

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and products, but may ultimately be unable to consummate the related transaction. Under such circumstances, our results of operations and ability to achieve profitability will be adversely affected.

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

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costs associated with software development and sales;



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the purchase of additional capital equipment; and



•

acquisitions of other businesses or technologies.

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

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

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overall product performance;



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ease of implementation and use;



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accuracy of simulation;



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breadth and integration of product offerings;



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



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willingness of customers to pay for such use.

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

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

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



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

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•

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



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



•

developing enhanced modeling and informatics tools to address the needs of companies engaged in nanotechnology research.

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

        Delays in release of new or enhanced products or services 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. As a result, in the months following the introduction of certain releases, we generally devote significant resources to correct these errors. There can be no assurance, however, that all of these errors can be corrected. Although we test each new or enhanced software product or service before being released to the market, there can be no assurance that significant errors will not be found in existing or future releases after these products are released.

        If we are unable to license software to, or collect receivables from, our early stage biotechnology customers or other customers, our operating results may be adversely affected.    We license our modeling, simulation, data analysis and informatics software to smaller, development stage biotechnology customers. Often these customers have limited or no operating history, and require considerable funding to launch their businesses. As we have experienced in recent years, they often significantly scale back, or altogether cease, operations. Therefore, there is considerable risk in counting on such customers for revenue growth, because transactions with these customers carry financial risk. Such customers are vulnerable to, and may be adversely impacted by, the tightening of available credit and capital during periods of contraction affecting the United States and our other key markets. As a result of these conditions, these customers may be unable to license or, if under a license, may be unable to pay for, Accelrys products. If we are not able to collect such payments, we may be required to write-off significant accounts receivable and recognize bad debt expense which could materially and adversely affect our operating results. As a result of these types of exposures and other potential exposures, we recorded a provision for doubtful accounts as follows:

        We will need to achieve commercial acceptance of our products and services in the nanotechnology industry to obtain significant product revenue from that industry.    We intend to develop and sell our products and services to companies in the nanotechnology industry. We do not know when a market for nanotechnology-enabled products will develop, if at all, and we cannot reasonably estimate the projected size of any market that may develop. In addition, nanotechnology-enabled products may

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achieve some degree of market acceptance in one segment of the nanotechnology industry but may not achieve market acceptance in other segments of the industry for which we are developing products. If the segments of the market we are targeting fail to accept nanotechnology-enabled products or determine that other products were superior, we may not be able to achieve commercial acceptance of our products and services. Even if we develop nanotechnology products and those products achieve commercial acceptance, if the size of the potential markets for our products is not sufficient, we will be unable to generate significant revenue from the nanotechnology industry.

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

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

        Health care reform and restrictions on reimbursement may affect the ability of pharmaceutical, biotechnology and industrial chemical companies to 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 our markets 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 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.

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

        We operate in business lines that change rapidly and in unexpected ways.    Rapid technological change and uncertainty due to new and emerging technologies characterize the software, drug discovery and

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chemical development industries. We may be unable to develop, integrate and market, on a timely basis, the new and enhanced products and services necessary to keep pace with competitors. Our products and services may be rendered obsolete by the offerings of our competitors. Failure to anticipate or to respond to changing technologies, or significant delays in the development or introduction of products or services, could cause customers to delay or decide against purchases of our products or services.

        Failure to attract and retain skilled personnel could have a material adverse effect on us.    Our success depends in part on the continued service of key scientific, software, sales, business development, engineering and management personnel and our ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel. Immigration laws may further restrict our ability to attract or hire qualified personnel. We may not be able to continue to attract and retain the personnel necessary for the development of our business. Failure to attract and retain key personnel could have a material adverse effect on our business, financial condition and results of operations. Further, we are highly dependent on the principal members of our scientific and management staff. One or more of these key employees could retire or otherwise leave our employ within the foreseeable future, and the loss of any of these people could have a material adverse effect on our business, financial condition and results of operations. We do not intend to maintain key person life insurance on the life of any employee.

        We may be unable to develop strategic relationships with large technology companies.    A component of our business strategy is to develop strategic relationships with larger technology companies. We believe that through such relationships we can add revenue, expand our distribution channels, maximize our research and development resources, improve our competitive position and increase market awareness and acceptance of scientific products. To date, we have entered into strategic relationships with such companies as International Business Machines, Oracle and Hewlett-Packard. There can be no assurance that any such relationship will continue, that relationships with similar large organizations can be developed, or that any such existing or new alliances will produce substantial revenue or profit opportunities.

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

        There can be no assurance as to the effect of the SciTegic acquisition on our business or operating results.    In September 2004, we acquired SciTegic. The acquisition involved numerous risks, including, among other things: potentially higher than estimated acquisition expenses; difficulties in successfully assimilating the operations, technologies and personnel of SciTegic; diversion of management's attention from other business concerns; risks of entering markets in which we have no or limited direct prior experience; and the potential loss of key employees and customers as a result of the acquisition.

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Though to date we believe these risks have not materialized there can be no assurance as to the continuing effect of the SciTegic acquisition or future acquisitions on our business or operating results.

        Enacted and proposed changes in securities laws and regulations are likely to increase our costs.    The Sarbanes-Oxley Act of 2002 ("SOX") required changes in some of our corporate governance and securities disclosure or compliance practices. The Securities and Exchange Commission (the "SEC") has promulgated new rules on a variety of subjects and Nasdaq has issued revisions to its requirements for companies that are Nasdaq-listed. In June 2003, the SEC adopted certain rules as directed by Section 404 of SOX. These rules require that publicly held companies, including us, include in their annual report to shareholders a report of management on our internal controls over financial reporting. Our independent auditors are required to attest to management's assessment of internal controls over financial reporting. We are required to comply with this requirement, and further related requirements and interpretations, in our annual reports. If our financial reporting controls are not deemed effective, there will be an adverse impact on our reputation that could negatively impact our stock price.

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

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