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

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

Overview

Our Business

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

Our Marketplace

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

Our Strategy

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

Critical Accounting Policies

The critical accounting policies and estimates used in the preparation of our consolidated financial statements are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the fiscal year ended March 31, 2008. There have been no significant changes in our critical accounting policies and estimates from March 31, 2008, other than as described below.

We adopted SFAS No. 157, Fair Value Measurements ("SFAS No. 157") as of April 1, 2008 as required for financial assets and liabilities. SFAS No. 157 provides a definition of fair value, establishes acceptable methods of measuring fair value and expands disclosures for fair value measurements. The principles apply under accounting pronouncements which require measurement of fair value and do not require any new fair value measurements in accounting pronouncements where fair value is the relevant measurement attribute. See note 6 to our consolidated financial statements for required disclosures of fair value measurements for financial assets and liabilities. In February 2008, the FASB issued FASB Staff Position ("FSP") No. 157-2, Effective Date of FASB Statement No. 157 ("FSP No. 157-2"), a one year deferral of SFAS No. 157's fair value measurement requirement for non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. We have elected to defer the adoption of SFAS No. 157 for non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. We do not expect the adoption of SFAS No. 157 for these assets and liabilities to have a material impact on our results of operations or financial position. On October 10, 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, ("FSP No. 157-3") that clarifies the application of SFAS No.157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP No. 157-3 was effective upon issuance, and is applicable to the valuation of our ARS for which there was no active market as of September 30, 2008.

Results of Operations

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

Comparison of the Three Months Ended September 30, 2008 and 2007

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



                                                 Three Months Ended
                                                    September 30,
                                                 2008           2007
              Revenue                               100 %          100 %
              Cost of revenue                        18 %           18 %

              Gross profit                           82 %           82 %
              Operating expenses:
              Product development                    19 %           22 %
              Sales and marketing                    41 %           36 %
              General and administrative             16 %           18 %
              Restructuring charges                  -  %           -  %

              Total operating expenses               76 %           76 %

              Operating income                        6 %            6 %
              Interest and other income, net          2 %            4 %

              Income before income taxes              8 %           10 %
              Income tax expense                      2 %            2 %

              Net income                              6 %            8 %

Revenue

Revenue increased 2% to $20.1 million for the three months ended September 30, 2008, as compared to $19.7 million for the three months ended September 30, 2007. The increase was due to continued growth in orders for solutions and services related to our scientific operating platform product line, partially offset by reduced revenue from deemphasized products.

Cost of Revenue

Cost of revenue increased 3% to $3.5 million for the three months ended September 30, 2008, as compared to $3.4 million for the three months ended September 30, 2007. As a percentage of revenue, cost of revenue remained consistent at 18% for each of the three months ended September 30, 2008 and 2007. The slight increase in cost of revenue was due to higher personnel costs in our services department due to increased headcount, offset by a decrease in distributor and royalty costs as a result of a more favorable product mix.

Operating Expenses

Product Development Expenses. Product development expenses decreased 11% to $3.8 million for the three months ended September 30, 2008, as compared to $4.3 million for the three months ended September 30, 2007. As a percentage of revenue, product development expenses decreased to 19% for the three months ended September 30, 2008, as compared to 22% for the three months ended September 30, 2007. The decrease in product development expenses was primarily attributable to a decrease in personnel and related costs.

Sales and Marketing Expenses. Sales and marketing expenses increased 15% to $8.2 million for the three months ended September 30, 2008, as compared to $7.1 million for the three months ended September 30, 2007. As a percentage of revenue, sales and marketing expenses increased to 41% for the three months ended September 30, 2008, as compared to 36% for the three months ended September 30, 2007. The increase in sales and marketing expense is primarily attributable to an increase in commission and travel costs due to an overall increase in order intake in the current quarter as compared to the same quarter of the prior year, in addition to incurring $0.4 million in severance charges in the current quarter related to the departure of our former Senior Vice President of Sales and Services.

General and Administrative Expenses. General and administrative expenses decreased 8% to $3.3 million for the three months ended September 30, 2008, as compared to $3.5 million for the three months ended September 30, 2007. As a percentage of revenue, general and administrative expenses decreased to 16% for the three months ended September 30, 2008, as compared to 18% for the three months ended September 30, 2007. The decrease was primarily attributable to a reduction in insurance, legal, accounting, and recruiting costs.

Net Interest and Other Income

Net interest and other income was $0.4 million for the three months ended September 30, 2008, as compared to $0.7 million for the three months ended September 30, 2007. The decrease in net interest and other income was primarily attributable to lower interest rates obtained on our cash and marketable securities balances during the current quarter.

Income Tax Expense

Income tax expense was $0.4 million for the three months ended September 30, 2008, as compared to $0.3 million for the three months ended September 30, 2007. The increase in income tax expense was primarily attributable to timing differences in the deductibility of indefinite lived intangible asset amortization for income tax purposes.

Comparison of the Six Months Ended September 30, 2008 and 2007

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



                                            Six Months Ended
                                              September 30,
                                           2008          2007
                    Revenue                   100 %         100 %
                    Cost of revenue            17 %          17 %

                    Gross profit               83 %          83 %
                    Operating expenses:
                    Product development        20 %          22 %
                    Sales and marketing        40 %          37 %

                                                  Six Months Ended
                                                    September 30,
                                                 2008          2007
               General and administrative            17 %          19 %
               Restructuring charges                  2 %          -  %

               Total operating expenses              79 %          78 %

               Operating income                       4 %           5 %
               Interest and other income, net         1 %           5 %

               Income before income taxes             5 %          10 %
               Income tax expense                     2 %           2 %

               Net income                             3 %           8 %

Revenue

Revenue increased 2% to $40.4 million for the six months ended September 30, 2008, as compared to $39.8 million for the six months ended September 30, 2007. The increase was due to continued growth in orders for solutions and services related to our scientific operating platform product line, partially offset by reduced revenue from deemphasized products.

Cost of Revenue

Cost of revenue was $7.0 million for each of the six months ended September 30, 2008 and 2007. As a percentage of revenue, cost of revenue was consistent at 17% for each of the six months ended September 30, 2008 and 2007. The slight increase in cost of revenues was due to higher personnel costs in our services department due to increased headcount, offset by a decrease in distributor and royalty costs as a result of a more favorable product mix.

Operating Expenses

Product Development Expenses. Product development expenses decreased 6% to $8.1 million for the six months ended September 30, 2008, as compared to $8.6 million for the six months ended September 30, 2007. As a percentage of revenue, product development expenses decreased to 20% for the six months ended September 30, 2008, as compared to 22% for the six months ended September 30, 2007. The decrease in product development expenses was primarily attributable to a decrease in personnel and related costs.

Sales and Marketing Expenses. Sales and marketing expenses increased 11% to $16.3 million for the six months ended September 30, 2008, as compared to $14.7 million for the six months ended September 30, 2007. As a percentage of revenue, sales and marketing expenses increased to 40% for the six months ended September 30, 2008, as compared to 37% for the six months ended September 30, 2007. The increase in sales and marketing expense is primarily attributable to an increase in commission and travel costs due to an overall increase in order intake in the current period as compared to the same period in the prior year, in addition to incurring $0.4 million in severance charges in the current period related to the departure of our former Senior Vice President of Sales and Services.

General and Administrative Expenses. General and administrative expenses decreased 9% to $6.7 million for the six months ended September 30, 2008, as compared to $7.4 million for the six months ended September 30, 2007. As a percentage of revenue, general and administrative expenses decreased to 17% for the six months ended September 30, 2008, as compared to 19% for the six months ended September 30, 2007. The decrease was primarily attributable to a reduction in insurance, legal, accounting, and recruiting costs.

Net Interest and Other Income

Net interest and other income was $0.6 million for the six months ended September 30, 2008, as compared to $1.7 million for the six months ended September 30, 2007. The decrease in net interest and other income was primarily attributable to unfavorable fluctuations in foreign currencies resulting from the cash settlement of certain intercompany transactions and lower interest rates obtained on our cash and marketable securities balances during the current year.

Income Tax Expense

Income tax expense was $0.7 million for each of the six months ended September 30, 2008 and 2007.

Liquidity and Capital Resources

We had cash, cash equivalents, marketable securities, and restricted cash and marketable securities of $70.3 million as of September 30, 2008, as compared to $76.4 million as of March 31, 2008, a decrease of $6.0 million. The decrease in cash, cash equivalents, marketable securities and restricted cash and marketable securities during the six months ended September 30, 2008 was primarily attributable to cash used in operations of $2.5 million, $2.4 million in net property and equipment and software license purchases, additional unrealized losses on our auction rate securities ("ARS") of $0.6 million and losses of $0.8 million due to unfavorable fluctuations in foreign currencies. These decreases were offset by proceeds of $0.5 million from the issuance of our common stock under employee stock plans. Our operating cash flows on a quarterly basis are significantly impacted by changes in accounts receivable balances. Due to the seasonality of our business, accounts receivable balances have historically increased significantly in the third quarter of each fiscal year as a result of higher order intake. The collection of these accounts receivable balances has generally resulted in positive cash flows from operations in the fourth quarter of each fiscal year, while we have historically experienced negative cash flows from operations in the other three fiscal quarters.

Net cash used in operating activities was $2.5 million for the six months ended September 30, 2008, as compared to net cash used in operations of $6.0 million for the six months ended September 30, 2007. The decrease in cash used in operating activities was primarily attributable to collections on our accounts receivable balances, and a decrease in deferred revenue.

Net cash used in investing activities was $1.3 million for the six months ended September 30, 2008, as compared to net cash provided by investing activities of $4.3 million for the six months ended September 30, 2007. Significant components of cash flows from investing activities for the six months ended September 30, 2008 included net purchases of property and equipment of $0.5 million, purchases of software licenses of $1.9 million, and a net decrease in our marketable securities portfolio of $1.1 million. Significant components of cash flows from investing activities for the six months ended September 30, 2007 included net purchases of property and equipment of $0.3 million and a net decrease in our marketable securities portfolio of $4.5 million.

Net cash provided by financing activities was $0.5 million for the six months ended September 30, 2008 and $0.3 million for the six months ended September 30, 2007. Cash flows from financing activities for both periods consisted solely of proceeds from the issuance of our common stock under employee stock plans.

As of September 30, 2008, we held $14.6 million in ARS at face value, which are collateralized by student loans, most of which were originated under the Federal Family Education Loan Program and are guaranteed by the United States Federal Department of Education. All of our ARS are AAA rated (or equivalent) by one or more of the major credit rating agencies.

Through February 2008, the face value of our ARS has approximated fair value due to the frequent auction periods, generally every 7 to 28 days, which provided liquidity to these investments. However, since February 2008, all auctions for the ARS we hold have failed as the amount of ARS submitted for sale has exceeded the amount of purchase orders. The result of a failed auction is that these ARS continue to pay interest at contractually stated rates at each respective auction date; however, the liquidity of the ARS will be limited until there is a successful auction, the issuer redeems the securities, the securities mature or until such time as other markets for these ARS develop. We have concluded that the estimated fair value of the ARS no longer approximates the face value due to the lack of liquidity. The ARS have been classified within Level 3 under SFAS No. 157. Their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities.

We estimated the fair value of our ARS utilizing a discounted cash flow analysis as of September 30, 2008. The analysis considered, among other items, the collateralization underlying the security investments, the creditworthiness of the issuer, expected future cash flows, and the estimated time until anticipated market recovery.

Based on our assessment of the credit quality of the underlying collateral, the creditworthiness of the issuers of the ARS, and our belief that as of September 30, 2008, we have the ability and the intent to hold these investments until market recovery, we do not believe these securities to be other-than-temporarily impaired and, as such, we have recorded an additional unrealized loss of $0.4 million during the second quarter of fiscal year 2009, for a total unrealized loss of $1.3 million, to accumulated other comprehensive income as of September 30, 2008. Nonetheless, if uncertainties in the credit and capital markets continue, deteriorate further or there are any ratings downgrades on any ARS we hold, or if we no longer have the ability to hold these investments, we may be required to recognize an impairment charge against net income. As the market for student loan collateralized instruments may take in excess of twelve months to fully recover, we have classified these investments as noncurrent assets on our Consolidated Balance Sheet as of September 30, 2008.

In the event that we need to access our investments in these ARS, we will not be able to do so until a future auction on these investments is successful, the issuer redeems the outstanding securities, a buyer is found outside the auction process, the securities mature, or there is a default requiring immediate payment from the issuer. We do not believe that our inability to access these funds in the near term will have a material impact on our liquidity for the next twelve months.

In October 2008, we received an offer from a counterparty to purchase $14.6 million of our ARS at par value between June 2010 and July 2012. We are currently assessing the terms of the offer, and are in discussions with the counterparty to determine whether an acceptable agreement can be reached regarding the purchase of these ARS.

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

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

We anticipate that our existing capital resources will be adequate to fund our operations for at least the next twelve months. However, there can be no assurance that changes will not occur that would consume available capital resources before then. Our capital requirements depend on numerous factors, including our ability to continue to generate software sales, the purchase of additional capital equipment and acquisitions of other businesses or technologies. There can be no assurance that additional funding, if necessary, will be available to us on favorable terms, if at all. Our forecast for the period of time through which our financial resources will be adequate to support our operations is forward-looking information, and actual results could vary.