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, aerospace, chemical, and consumer packaged goods industries. We believe these industries are in the early stages of adoption of these technologies. Thus we believe the market for our products within these industries is nascent. Following our acquisition of SciTegic, 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 condensed consolidated financial statements are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009. There have been no significant changes in our critical accounting policies and estimates from March 31, 2009.

Results of Operations

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

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

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



                                                       Three Months Ended
                                                            June 30,
                                                      2009            2008
        Revenue                                         100 %           100 %
        Cost of revenue                                  17 %            17 %

        Gross profit                                     83 %            83 %
        Operating expenses:
        Product development                              19 %            21 %
        Sales and marketing                              40 %            40 %
        General and administrative                       19 %            17 %
        Restructuring charges (recoveries)              (-  )%            4 %

        Total operating expenses                         78 %            82 %

        Operating income                                  5 %             1 %
        Interest and other income and expense, net      (-  )%            1 %

        Income before income taxes                        5 %             2 %
        Income tax expense                                1 %             2 %

        Net income                                        4 %            -  %

Revenue

Revenue decreased 1% to $20.1 million for the three months ended June 30, 2009, as compared to $20.3 million for the three months ended June 30, 2008. The decrease was due to a decrease in maintenance revenue of approximately $0.4 million, partially offset by an increase in software revenue of approximately $0.3 million.

Cost of Revenue

Cost of revenue was $3.5 million for the three months ended June 30, 2009 and 2008. As a percentage of revenue, cost of revenue remained consistent at 17% for each of the three months ended June 30, 2009 and 2008. The slight decrease in cost of revenue was due to favorable foreign currency fluctuations of $0.2 million, offset by an increase in personnel costs of approximately $0.2 million.

Operating Expenses

Product Development Expenses. Product development expenses decreased 9% to $3.9 million for the three months ended June 30, 2009, as compared to $4.3 million for the three months ended June 30, 2008. As a percentage of revenue,

product development expenses decreased to 19% for the three months ended June 30, 2009, as compared to 21% for the three months ended June 30, 2008. The decrease in product development expenses was primarily attributable to favorable foreign currency fluctuations.

Sales and Marketing Expenses. Sales and marketing expenses were $8.1 million for the three months ended June 30, 2009 and 2008. As a percentage of revenue, sales and marketing expenses remained consistent at 40% for the three months ended June 30, 2009 and 2008. The slight increase in sales and marketing expense is primarily attributable to an increase in personnel and overhead costs of approximately $0.5 million due to increased headcount in our sales and marketing departments, partially offset by favorable foreign currency fluctuations of $0.4 million.

General and Administrative Expenses. General and administrative expenses increased 6% to $3.7 million for the three months ended June 30, 2009, as compared to $3.5 million for the three months ended June 30, 2008. As a percentage of revenue, general and administrative expenses increased to 19% for the three months ended June 30, 2009, as compared to 17% for the three months ended June 30, 2008. The increase was primarily attributable to an increase in relocation expenses of $0.2 million as well as an increase in professional services fees of $0.2 million. These amounts were partially offset by overhead cost savings of $0.1 million and favorable foreign currency fluctuations of $0.1 million.

Restructuring Charges (Recoveries). Restructuring charges (Recoveries) for the three months ended June 30, 2009 related to the receipt of payment on a claim made to our insurance company for reimbursement of the amounts paid to an employee terminated as part of a prior workforce reduction.

Net Interest and Other Income and (Expense)

Net interest and other income and (expense) was ($5,000) for the three months ended June 30, 2009, as compared to $0.3 million for the three months ended June 30, 2008. The decrease in net interest and other income and (expense) was primarily attributable to lower interest income of approximately $0.4 million due to a decrease in interest rates obtained on our cash and marketable securities balances during the quarter ended June 30, 2009 and foreign currency exchange losses of $0.1 million. These items were partially offset by a gain of $0.2 million related to our auction rate securities ("ARS") portfolio.

Income Tax Expense

Income tax expense was $0.3 million for the three months ended June 30, 2009 and 2008.

Liquidity and Capital Resources

We had cash, cash equivalents, marketable securities, and restricted cash of $83.7 million as of June 30, 2009, as compared to $81.8 million as of March 31, 2009, an increase of $1.9 million. The increase in cash, cash equivalents, marketable securities and restricted cash during the three months ended June 30, 2009 was primarily attributable to favorable foreign currency fluctuations of $1.0 million, as well as cash provided by operations of $0.3 million and a gain on our ARS of $0.2 million. 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 provided by operating activities was $0.3 million for the three months ended June 30, 2009, as compared to net cash used in operations of $0.8 million for the three months ended June 30, 2008. The increase in cash provided by operating activities was primarily attributable to fluctuations in our accounts receivable and deferred revenue balances.

Net cash used in investing activities was $3.3 million for the three months ended June 30, 2009, as compared to $1.1 million for the three months ended June 30, 2008. Significant components of cash flows from investing activities for the three months ended June 30, 2009 included net purchases of property and equipment of $0.1 million, and a net increase in our marketable securities portfolio of $3.3 million. Significant components of cash flows from investing activities for the three months ended June 30, 2008 included net purchases of property and equipment of $0.4 million, purchases of software licenses of $1.9 million, and a net decrease in our marketable securities portfolio of $1.1 million.

Net cash provided by financing activities was $0.2 million for the three months ended June 30, 2009 as compared to $0.5 million for the three months ended June 30, 2008. Cash flows from financing activities for both periods consisted solely of proceeds from the issuance of our common stock under employee stock plans.

As of June 30, 2009, 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. During the quarter, ARS with a par value of $50,000 were called by the issuer at par.

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

We estimated the fair value of our ARS as of June 30, 2009 utilizing a discounted cash flow analysis. The analysis considered, among other items, the collateralization underlying the security investments, the creditworthiness of the issuer, expected future cash flows, and the estimated time until anticipated market recovery. Due to entering into an agreement whereby one of our investment firms will repurchase our ARS at par value, we intend to sell the securities prior to maturity and have determined that the decline in value of our ARS as of June 30, 2009 is other-than-temporary. Accordingly, in fiscal year 2009 we reversed prior unrealized losses on our ARS from accumulated other comprehensive income and recorded the losses as a charge to income during the same period. The total loss recognized in fiscal year 2009 on these ARS was $1.9 million. During the quarter ended June 30, 2009, as a result of our analysis of fair value as described above, we recognized a gain on the ARS of $0.2 million.

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

The ARS Agreement covers ARS with a par value of $14.6 million and a fair value of $12.9 million as of June 30, 2009. We have accounted for the Put Option as a freestanding financial instrument and elected to record the value under the fair value option of SFAS No. 159. This resulted in our recording a $1.7 million asset in fiscal year 2009 with a corresponding credit to income for the value of the Put Option. During the quarter ended June 30, 2009, the value of the Put Option increased $28,000 with a corresponding credit to income of the same amount.

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

On January 5, 2009, Mr. Mark Emkjer resigned as our President, Chief Executive Officer and as a member of the Board of Directors (the "Board"). In connection with Mr. Emkjer's resignation, on January 6, 2009, we entered into a Separation Agreement and Release (the "Separation Agreement"). Pursuant to the Separation Agreement: (i) Mr. Emkjer remained employed by the Company through January 31, 2009 to assist with transitioning his duties; (ii) on February 1, 2009, we paid Mr. Emkjer $315,000, less applicable withholdings; (iii) through June 30, 2009 we paid Mr. Emkjer an additional $420,000, less applicable withholdings; (iv) on August 15, 2009, we will pay Mr. Emkjer $560,000, less applicable withholdings;
(v) each month for a period of 5 months following August 15, 2009, we will pay Mr. Emkjer the amount of $140,000, less applicable withholdings; and (vi) we will pay Mr. Emkjer's COBRA benefits for a maximum of 24 months following the date of the termination of Mr. Emkjer's employment. Our obligations to Mr. Emkjer pursuant to the Separation Agreement are contingent upon Mr. Emkjer's abiding by certain non-competition, non-solicitation and non-disparagement obligations for a period of 24 months following the date of the termination of his employment, all as set forth in the Separation Agreement

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

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

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