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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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


For the period from April 1, 2004 through June 30, 2004

Commission File Number: 0-27118

ACCELRYS, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 		33-0557266
(I.R.S. Employer Identification No.)

9685 Scranton Road, San Diego, California
(Address of principal executive offices) 		92121-1761
(Zip code)


(858) 799-5000
(Registrant’s telephone number, including area code)

Former name: Pharmacopeia, Inc.
(Former name, former address and former fiscal year, if changed since last report)

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 such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Class   Outstanding at July 30, 2004  
Common Stock, $.0001 par value   25,095,797 shares  

ACCELRYS, INC.

Form 10-Q

Table of Contents

Item Page

PART I. FINANCIAL INFORMATION

Item 1		 Unaudited Consolidated Financial Statements:  

Balance Sheets - June 30, 2004 and December 31, 2003		 3

Statements of Operations - Three Months Ended June 30, 2004 and 2003		 4

Statements of Cash Flows - Three Months Ended June 30, 2004 and 2003		 5

Notes to Unaudited Consolidated Financial Statements		 6

Item 2
Management's Discussion and Analysis of Financial Condition and
Results of Operations 9

Item 3
Quantitative and Qualitative Disclosures about Market Risk		 24

Item 4
Controls and Procedures		 24

PART II. OTHER INFORMATION

Item 1
Legal Proceedings		 25

Item 2
Changes in Securities and Use of Proceeds		 25

Item 3
Defaults Upon Senior Securities		 25

Item 4
Submission of Matters to a Vote of Security Holders		 25

Item 5
Other Information		 25

Item 6
Exhibits and Reports on Form 8-K		 25

Signature
26

Index to Exhibits
27



2

PART I — FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

Accelrys, Inc.
Consolidated Balance Sheets
(Dollars and share amounts in thousands)

ASSETS June 30,
2004		 December 31,
2003
(unaudited)
Current assets:   
   Cash and cash equivalents   $ 30,721   $ 26,985  
   Restricted cash    7,133    --  
   Marketable securities    45,972    106,546  
   Trade receivables, net of allowance for doubtful accounts   
      of $222 and $505, respectively    10,943    39,780  
   Prepaid expenses and other current assets    6,022    4,197  
   Current assets of discontinued operations    --    3,994  
       Total current assets    100,791    181,502  

Property and equipment, net		    8,206    8,441  
Goodwill, net of accumulated amortization of $13,201    34,072    34,072  
Software development costs, net of accumulated amortization   
   of $28,324 and $26,555, respectively    7,821    7,634  
Other assets    850    960  
Long-term assets of discontinued operations    --    7,058  
       Total assets   $ 151,740   $ 239,667  
LIABILITIES AND STOCKHOLDERS' EQUITY   
Current liabilities:  
   Accounts payable   $ 2,313   $ 1,850  
   Accrued liabilities    16,536    18,819  
   Deferred revenue, current portion    22,232    24,595  
   Current liabilities of discontinued operations    --    6,420  
       Total current liabilities    41,081    51,684  

Deferred revenue, long-term		    5,894    4,924  
Lease guarantee, long-term    682    --  
Long-term liabilities of discontinued operations    --    325  

Stockholders' equity:		    
   Preferred stock, $.0001 par value, 2,000 shares authorized,  
       none issued and outstanding    --    --  
   Common stock, $.0001 par value, 40,000 shares authorized,    
       25,088 and 24,949 shares issued, respectively    2    2  
   Additional paid-in capital    243,703    287,592  
   Unearned compensation    (382 )  (536 )
   Lease guarantee    (745 )  --  
   Treasury stock, 644 shares    (8,340 )  (8,340 )
   Accumulated deficit    (130,261 )  (97,318 )
   Accumulated comprehensive income    106    1,334  
       Total stockholders' equity    104,083    182,734  
       Total liabilities and stockholders' equity   $ 151,740   $ 239,667  

See accompanying notes to these unaudited consolidated financial statements.

3

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

For the Three Months
Ended June 30,
2004 2003
Revenue     $ 14,181   $ 19,090  
Cost of revenue    3,786    5,014  
Gross margin    10,395    14,076  
 Research and development    4,123    4,586  
 Sales and marketing    7,769    8,957  
 General and administrative    4,009    4,475  
      Total operating costs and expenses    15,901    18,018  
Operating loss from continuing operations    (5,506 )  (3,942 )
 Interest and other income, net    585    899  
      Loss from continuing operations before provision for income taxes    (4,921 )  (3,043 )
  Provision for income taxes    135    376  
Loss from continuing operations    (5,056 )  (3,419 )
Discontinued operations:  
  Loss from discontinued operations    (1,117 )  (345 )
Net loss   $ (6,173 ) $ (3,764 )
 Loss from continuing operations per share:  
 - Basic and diluted   $ (0.21 ) $ (0.14 )
 Loss from discontinued operatios per share:   
 - Basic and diluted   $ (0.05 ) $ (0.01 )
 Net loss per share:  
 - Basic and diluted   $ (0.25 ) $ (0.16 )
 Weighted average shares of common stock outstanding:   
 - Basic and diluted    24,323    23,707  

See accompanying notes to these unaudited consolidated financial statements.

4

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

For the Three Months
Ended June 30,
2004 2003
OPERATING ACTIVITIES:            
    Net loss   $ (6,173 ) $ (3,764 )
    Adjustments to reconcile net loss to net cash   
     provided by operating activities   
       Depreciation    1,117    1,083  
       Amortization    884    1,582  
       Contribution of stock to 401(k) members    159    260  
       Amortization of unearned compensation    143    --  
       Non-cash compensation    --    10  
       Changes in assets and liabilities:   
             Trade receivables    (179 )  (434 )
             Prepaid expenses and other current assets    (1,681 )  (533 )
             Other assets    3    92  
             Accounts payable    (2,348 )  436  
             Accrued liabilities    (332 )  1,505  
             Deferred revenue    556    (1,890 )
                  Net cash used by operating activities    (7,851 )  (1,653 )
INVESTING ACTIVITIES:  
    Capital expenditures    (1,194 )  (983 )
    Increase in capitalized software development costs    (975 )  (1,145 )
    Purchases of marketable securities    (31,079 )  (15,973 )
    Proceeds from sales of marketable securities    78,854    12,587  
                 Net cash provided/(used) in investing activities    45,606    (5,514 )
FINANCING ACTIVITIES:  
     Proceeds from issuance of common stock    1,364    986  
     Principal payments on leases payable    --    (3 )
                Net cash provided by financing activities    1,364    983  
Exchange rate effect on cash and cash equivalents    (350 )  437  
Net cash used in discontinued operations    (47,752 )  (1,346 )
Net decrease in cash and cash equivalents    (8,983 )  (7,093 )
Cash and cash equivalents, beginning of period    39,704    31,579  
Cash and cash equivalents, end of period   $ 30,721   $ 24,486  
SUPPLEMENTAL INFORMATION:  
Cash paid during the period for:  
     Interest expense   $ 3   $ 5  
     Income tax expense   $ 69   $ 141  



See accompanying notes to these unaudited consolidated financial statements.

5

Accelrys, Inc.
Notes to Unaudited Consolidated Financial Statements

1. Basis of Presentation

        The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited financial statements do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial statements have been included. Interim results are not necessarily indicative of the results that may be expected for the year. These financial statements should be read in conjunction with the audited financial statements and disclosures thereto included in the Company’s Annual Report (under our former name Pharmacopeia, Inc.) on Form 10-K for the year ended December 31, 2003.

        On April 1, 2004 the Company changed its fiscal year end from December 31 to March 31.

        On April 30, 2004 the Company completed the spin-off of the Company’s Drug Discovery segment, Pharmacopeia Drug Discovery, Inc. (“PDD”), see Note 5. The operations, financial position and cash flows of PDD have been represented as discontinued operations in the accompanying financial statements.

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

2. Net Loss Per Share

        The Company computes net income (loss) per share in accordance with Statement of Financial Accounting Standard No. 128, “Earnings Per Share” (“SFAS 128”). Under the provisions of SFAS 128, basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Diluted earnings per share include the potentially dilutive effect of outstanding stock options, or other dilutive securities. The Company has a net loss for the periods presented; accordingly, the inclusion of common stock equivalents for outstanding stock options would be anti-dilutive and therefore the weighted-average shares used to calculate both basic and diluted loss per share are the same.

3. Stock-Based Compensation

        Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) encourages, but does not require, companies to record compensation cost for stock-based compensation plans at fair value. As permitted by SFAS 123, the Company has elected to continue following Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations, to account for stock-based compensation. Under APB 25, no compensation expense is recognized at the time of option grant because the exercise price of the Company’s employee stock option equals the fair market value of the underlying common stock on the date of grant.

6

        Had the Company followed the fair value measurement provisions of SFAS 123, the following table summarizes the pro forma net loss and pro forma net loss per share that would have been recorded (in thousands, except per share data):


Three Months Ended June 30,
2004 2003
Net loss:            
   As reported   $ (6,173 ) $ (3,764 )
   Deduct: Total stock-based employee  
    compensation expense determined under  
    fair value based method for all awards,  
    net of related tax effects    (1,086 )  (3,101 )
   Pro forma   $ (7,259 ) $ (6,865 )
Basic and diluted net loss per common share:  
   As reported   $ (0.25 ) $ (0.16 )
   Pro forma    (0.30 )  (0.29 )

        The fair value of each option granted during 2004 and 2003 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:


2004 2003
Dividend yield      0 %  0 %
Expected volatility    69.31 %  87.02 %
Risk-free interest rate    4.35 %  2.84 %
Expected life (years)    3.4    6.6  


4. Restructuring

        During the third quarter of 2002, the Company announced that it was undertaking various actions to restructure its operations to improve its overall financial performance. As of June 30, 2004 the remaining obligation under this restructuring was related to a closure of a facility. The following table summarizes the activity and balance of the restructuring liability during the quarter ended June 30, 2004 (dollars in thousands):


Costs to Exit Lease
Obligations
Balance at March 31, 2004     $ 1,096  
Utilization of Reserves:  
     Cash    (56 )
Balance at June 30, 2004   $ 1,040  


        During the quarter ended March 31, 2004, the Company executed a restructuring plan for the purpose of making Research and Development activities more efficient and reducing general and administrative costs. The restructuring effort included a reduction in force of 73 Accelrys employees, of which all had been terminated as of June 30, 2004. As a result, restructuring related charges of approximately $2.8 million were recognized as operating expense during the quarter ended March 31, 2004.

        The following table summarizes the activity and balance of the restructuring reserve liability during the quarter ended June 30, 2004 (dollars in thousands):

7

Accelrys Severance Cost
for