##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarterly Period Ended:
December 27, 2003

Commission file number: 000-30027



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Moldflow Corporation

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 04-3406763                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

430 Boston Post Road, Wayland, MA
01778

(Address of principal executive offices,
including zip code)


(508) 358-5848

(Registrants telephone number, including
area code)




---

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

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

There were 10,498,816 shares of our common stock,
par value $0.01, outstanding on February 6, 2004.



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TABLE OF CONTENTS



|                                                                   |  |  |  |  |  |  |  | 
|------------------------------------------------------------------ |  |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                                 
|PART I. FINANCIAL INFORMATION                                     
|Item 1. Unaudited Financial Statements                            
|CONDENSED CONSOLIDATED BALANCE SHEET                              
|CONDENSED CONSOLIDATED STATEMENT OF INCOME                        
|CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS                    
|NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS    
|Item 3. Quantitative and Qualitative Disclosures about Market Risk
|Item 4. Controls and Procedures                                   
|PART II. OTHER INFORMATION                                        
|Item 1. Legal Proceedings                                         
|Item 4. Submission of Matters to a Vote of Security Holders       
|Item 6. Exhibits and Reports on Form 8-K                          
|SIGNATURES                                                        
|EX-2.2 AGREEMENT AND PLAN OF MERGER                               
|EX-10.40 EMPLOYMENT AGREEMENT - TIMOTHY TRIPPLETT                 
|EX-10.48 2000 STOCK OPTION & INCENTIVE PLAN                       
|EX-10.49 LOAN MODIFICATION AGREEMENT                              
|EX-31.1 CERTIFICATION OF THE C.E.O.                               
|EX-31.2 CERTIFICATION OF THE C.F.O.                               
|EX-32.1 SECT. 1350 CERTIFICATION OF THE C.E.O.                    
|EX-32.2 SECT. 1350 CERTIFICATION OF THE C.F.O.                    



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##### Table of Contents



MOLDFLOW CORPORATION

FORM 10-Q

For the Quarter Ended December 27,
2003







TABLE OF CONTENTS


|                              |  |                                                                                                                                                                                                |    |        |    | 
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ------ | -- | 
|                              |  |                                                                                                                                                                                                |    | Page  
|                              |  |                                                                                                                                                                                                |    | Number
|                              |  |                                                                                                                                                                                                |    |       
|PART I. FINANCIAL INFORMATION
|Item 1.                       |  | Unaudited Financial Statements:                                                                                                                                                                |    |        |    | 
|                              |  | Condensed Consolidated Balance Sheet as of
    December 27, 2003 and June 30, 2003                                                                                                             |    |        | 2  | 
|                              |  | Condensed Consolidated Statement of Income for
    the three months ended December 27, 2003 and
    December 28, 2002 and for the six months ended
    December 27, 2003 and December 28, 2002 |    |        | 3  | 
|                              |  | Condensed Consolidated Statement of Cash Flows
    the six months ended December 27, 2003 and
    December 28, 2002                                                                            |    |        | 4  | 
|                              |  | Notes to Unaudited Condensed Consolidated
    Financial Statements                                                                                                                             |    |        | 5  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                                                                                      |    |        | 15 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                                                                                 |    |        | 32 | 
|Item 4.                       |  | Controls and Procedures                                                                                                                                                                        |    |        | 33 | 
|PART II. OTHER INFORMATION   
|Item 1.                       |  | Legal Proceedings                                                                                                                                                                              |    |        | 34 | 
|Item 4.                       |  | Submission of Matters to a Vote of Security
    Holders                                                                                                                                        |    |        | 34 | 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                                                                                               |    |        | 34 | 
|Signatures                    |  |                                                                                                                                                                                                | 35 |       

1



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##### Table of Contents






PART I. FINANCIAL INFORMATION






|        |                                   
|------- | ----------------------------------
|Item 1. | Unaudited Financial
    Statements

MOLDFLOW CORPORATION






CONDENSED CONSOLIDATED BALANCE SHEET


|                                         |                                        |                                            |       |          |        |  |       |        |        | 
|---------------------------------------- | -------------------------------------- | ------------------------------------------ | ----- | -------- | ------ |  | ----- | ------ | ------ | 
|                                         |                                        | December 27,                               |       | June 30,
|                                         |                                        | 2003                                       |       | 2003    
|                                         |                                        |                                            |       |         
|                                         |                                        |                                           
|                                         |                                        | (In thousands)                            
|                                         |                                        | (Unaudited)                               
|ASSETS                                  
|Current assets:                          |                                        |                                            |       |          |        |  |       |       
|                                         | Cash and cash equivalents              |                                            | $     | 40,956   |        |  | $     | 38,320 |       
|                                         | Marketable securities                  |                                            |       | 12,004   |        |  |       | 13,820 |       
|                                         | Accounts receivable, net               |                                            |       | 6,233    |        |  |       | 6,147  |       
|                                         | Inventories                            |                                            |       | 428      |        |  |       | 313    |       
|                                         | Prepaid expenses                       |                                            |       | 2,411    |        |  |       | 2,189  |       
|                                         | Other current assets                   |                                            |       | 2,859    |        |  |       | 2,509  |       
|                                         |                                        |                                            |       |          |        |  |       |       
|                                         |                                        | Total current assets                       |       |          | 64,891 |  |       |        | 63,298 | 
|Fixed assets, net                        |                                        |                                            | 4,107 |          |        |  | 3,891 |       
|Acquired intangible assets, net          |                                        |                                            | 471   |          |        |  | 685   |       
|Goodwill                                 |                                        |                                            | 9,720 |          |        |  | 9,670 |       
|Other assets                             |                                        |                                            | 1,500 |          |        |  | 1,933 |       
|                                         |                                        |                                            |       |          |        |  |       |       
|                                         |                                        | Total assets                               |       | $        | 80,689 |  |       | $      | 79,477 | 
|                                         |                                        |                                            |       |          |        |  |       |       
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                        |                                            |       |          |        |  |       |       
|                                         | Accounts payable                       |                                            | $     | 1,990    |        |  | $     | 1,684  |       
|                                         | Accrued expenses                       |                                            |       | 5,794    |        |  |       | 5,732  |       
|                                         | Other current liabilities              |                                            |       | 1,759    |        |  |       | 1,707  |       
|                                         | Deferred revenue                       |                                            |       | 6,480    |        |  |       | 8,551  |       
|                                         |                                        |                                            |       |          |        |  |       |       
|                                         |                                        | Total current liabilities                  |       |          | 16,023 |  |       |        | 17,674 | 
|Deferred revenue                         |                                        |                                            | 788   |          |        |  | 513   |       
|Other long-term liabilities              |                                        |                                            | 592   |          |        |  | 641   |       
|                                         |                                        |                                            |       |          |        |  |       |       
|                                         |                                        | Total liabilities                          |       |          | 17,403 |  |       |        | 18,828 | 
|                                         |                                        |                                            |       |          |        |  |       |       
|Stockholders equity:                    |                                        |                                            |       |          |        |  |       |       
|                                         | Common stock                           |                                            |       | 102      |        |  |       | 102    |       
|                                         | Additional paid-in capital             |                                            |       | 62,974   |        |  |       | 62,867 |       
|                                         | Treasury stock                         |                                            |       | (823     | )      |  |       | (926   | )     
|                                         | Accumulated deficit                    |                                            |       | (3,078   | )      |  |       | (4,090 | )     
|                                         | Accumulated other comprehensive income |                                            |       | 4,111    |        |  |       | 2,696  |       
|                                         |                                        |                                            |       |          |        |  |       |       
|                                         |                                        | Total stockholders equity                 |       |          | 63,286 |  |       |        | 60,649 | 
|                                         |                                        |                                            |       |          |        |  |       |       
|                                         |                                        | Total liabilities and stockholders equity |       | $        | 80,689 |  |       | $      | 79,477 | 
|                                         |                                        |                                            |       |          |        |  |       |       

The accompanying notes are an integral part of
the condensed consolidated financial statements.

2



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##### Table of Contents



MOLDFLOW CORPORATION






CONDENSED CONSOLIDATED STATEMENT OF
INCOME


|                                                          |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |        | 
|--------------------------------------------------------- | ------------------------------------------ | ------------------------------------- | --- | ---------------- |  | ------------ | --- | ------------ |  |  | --- | ------ |  |  | --- | ------ | 
|                                                          |                                            |                                       |     |                 
|                                                          |                                            | Three Months Ended                    |     | Six Months Ended
|                                                          |                                            |                                       |     |                 
|                                                          |                                            | December 27,                          |     | December 28,     |  | December 27, |     | December 28,
|                                                          |                                            | 2003                                  |     | 2002             |  | 2003         |     | 2002        
|                                                          |                                            |                                       |     |                  |  |              |     |             
|                                                          |                                            |                                      
|                                                          |                                            | (In thousands, except per share data)
|                                                          |                                            | (Unaudited)                          
|Revenue:                                                  |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |       
|                                                          | Product                                    |                                       | $   | 5,113            |  |              | $   | 4,216        |  |  | $   | 9,467  |  |  | $   | 7,912  | 
|                                                          | Services                                   |                                       |     | 5,518            |  |              |     | 4,710        |  |  |     | 10,675 |  |  |     | 9,315  | 
|                                                          |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |       
|                                                          | Total revenue                              |                                       |     | 10,631           |  |              |     | 8,926        |  |  |     | 20,142 |  |  |     | 17,227 | 
|                                                          |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |       
|Costs and expenses:                                       |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |       
|                                                          | Cost of product revenue                    |                                       |     | 605              |  |              |     | 674          |  |  |     | 1,243  |  |  |     | 1,335  | 
|                                                          | Cost of services revenue                   |                                       |     | 934              |  |              |     | 283          |  |  |     | 1,563  |  |  |     | 563    | 
|                                                          | Research and development                   |                                       |     | 1,535            |  |              |     | 1,319        |  |  |     | 3,128  |  |  |     | 2,774  | 
|                                                          | Selling and marketing                      |                                       |     | 4,698            |  |              |     | 4,463        |  |  |     | 8,884  |  |  |     | 8,628  | 
|                                                          | General and administrative                 |                                       |     | 2,117            |  |              |     | 1,802        |  |  |     | 4,031  |  |  |     | 3,452  | 
|                                                          | Amortization of acquired intangible assets |                                       |     | 110              |  |              |     | 159          |  |  |     | 221    |  |  |     | 318    | 
|                                                          |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |       
|                                                          | Total operating costs and expenses         |                                       |     | 9,999            |  |              |     | 8,700        |  |  |     | 19,070 |  |  |     | 17,070 | 
|                                                          |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |       
|                                                          | Income from operations                     |                                       |     | 632              |  |              |     | 226          |  |  |     | 1,072  |  |  |     | 157    | 
|Interest income, net                                      |                                            |                                       | 290 |                  |  |              | 284 |              |  |  | 558 |        |  |  | 571 |       
|Other income (loss), net                                  |                                            |                                       | 9   |                  |  |              | (84 | )            |  |  | (34 | )      |  |  | (62 | )     
|                                                          |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |       
|                                                          | Income before income taxes                 |                                       |     | 931              |  |              |     | 426          |  |  |     | 1,596  |  |  |     | 666    | 
|Provision for income taxes                                |                                            |                                       | 336 |                  |  |              | 225 |              |  |  | 584 |        |  |  | 450 |       
|                                                          |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |       
|                                                          | Net income                                 |                                       | $   | 595              |  |              | $   | 201          |  |  | $   | 1,012  |  |  | $   | 216    | 
|                                                          |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |       
|Net income per common share:                              |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |       
|                                                          | Basic                                      |                                       | $   | 0.06             |  |              | $   | 0.02         |  |  | $   | 0.10   |  |  | $   | 0.02   | 
|                                                          | Diluted                                    |                                       | $   | 0.06             |  |              | $   | 0.02         |  |  | $   | 0.10   |  |  | $   | 0.02   | 
|Shares used in computing net income per common
    share: |                                            |                                       |     |                  |  |              |     |              |  |  |     |        |  |  |     |       
|                                                          | Basic                                      |                                       |     | 10,059           |  |              |     | 9,973        |  |  |     | 10,054 |  |  |     | 10,040 | 
|                                                          | Diluted                                    |                                       |     | 10,658           |  |              |     | 10,269       |  |  |     | 10,619 |  |  |     | 10,320 | 

The accompanying notes are an integral part of
the condensed consolidated financial statements.

3



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##### Table of Contents



MOLDFLOW CORPORATION






CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS


|                                                                                      |                                                                   |                  |        |              |   |   |        |        |  
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------- | ------ | ------------ | - | - | ------ | ------ | -
|                                                                                      |                                                                   |                 
|                                                                                      |                                                                   | Six Months Ended
|                                                                                      |                                                                   |                 
|                                                                                      |                                                                   | December 27,     |        | December 28,
|                                                                                      |                                                                   | 2003             |        | 2002        
|                                                                                      |                                                                   |                  |        |             
|                                                                                      |                                                                   |                 
|                                                                                      |                                                                   | (In thousands)  
|                                                                                      |                                                                   | (Unaudited)     
|Cash flows from operating
    activities:                                             |                                                                   |                  |        |              |   |   |        |       
|Net income                                                                            |                                                                   | $                | 1,012  |              |   | $ | 216    |       
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                   |                  |        |              |   |   |        |       
|                                                                                      | Depreciation of fixed assets                                      |                  |        | 694          |   |   |        | 695    |  
|                                                                                      | Amortization of acquired intangible assets                        |                  |        | 221          |   |   |        | 318    |  
|                                                                                      | Amortization of capitalized software development
    costs        |                  |        | 127          |   |   |        | 63     |  
|                                                                                      | Provisions for doubtful accounts                                  |                  |        | 41           |   |   |        | 74     |  
|                                                                                      | Foreign exchange losses                                           |                  |        | 24           |   |   |        | 58     |  
|                                                                                      | Other non-cash charges to income                                  |                  |        | 5            |   |   |        | 77     |  
|Changes in assets and liabilities:                                                    |                                                                   |                  |        |              |   |   |        |       
|                                                                                      | Accounts receivable                                               |                  |        | 359          |   |   |        | 340    |  
|                                                                                      | Inventories, prepaid expenses, and other current
    assets       |                  |        | 254          |   |   |        | 503    |  
|                                                                                      | Other assets                                                      |                  |        | 99           |   |   |        | (175   | )
|                                                                                      | Accounts payable                                                  |                  |        | 221          |   |   |        | 610    |  
|                                                                                      | Accrued expenses and other current liabilities                    |                  |        | (690         | ) |   |        | (1,407 | )
|                                                                                      | Deferred revenue                                                  |                  |        | (2,306       | ) |   |        | (1,287 | )
|                                                                                      |                                                                   |                  |        |              |   |   |        |       
|                                                                                      | Net cash provided by operating activities                         |                  |        | 61           |   |   |        | 85     |  
|                                                                                      |                                                                   |                  |        |              |   |   |        |       
|                                                                                     
|Cash flows from investing
    activities:                                             |                                                                   |                  |        |              |   |   |        |       
|                                                                                      | Purchases of fixed assets                                         |                  |        | (682         | ) |   |        | (765   | )
|                                                                                      | Capitalization of software development costs                      |                  |        | (220         | ) |   |        | (170   | )
|                                                                                      | Sales and maturities of marketable securities                     |                  |        | 1,817        |   |   |        | 3,233  |  
|                                                                                      |                                                                   |                  |        |              |   |   |        |       
|                                                                                      | Net cash provided by investing activities                         |                  |        | 915          |   |   |        | 2,298  |  
|                                                                                      |                                                                   |                  |        |              |   |   |        |       
|                                                                                     
|Cash flows from financing
    activities:                                             |                                                                   |                  |        |              |   |   |        |       
|                                                                                      | Proceeds from collection of notes receivable from
    stockholder |                  |        |             |   |   |        | 14     |  
|                                                                                      | Issuance of common stock                                          |                  |        | 210          |   |   |        | 183    |  
|                                                                                      | Repurchase of common stock                                        |                  |        |             |   |   |        | (909   | )
|                                                                                      |                                                                   |                  |        |              |   |   |        |       
|                                                                                      | Net cash provided by (used in) financing
    activities           |                  |        | 210          |   |   |        | (712   | )
|                                                                                      |                                                                   |                  |        |              |   |   |        |       
|Effect of exchange rate changes on cash and cash
    equivalents                      |                                                                   |                  | 1,450  |              |   |   | (85    | )     
|                                                                                      |                                                                   |                  |        |              |   |   |        |       
|                                                                                     
|Net increase in cash and cash
    equivalents                                         |                                                                   |                  | 2,636  |              |   |   | 1,586  |       
|Cash and cash equivalents, beginning of period                                        |                                                                   |                  | 38,320 |              |   |   | 47,634 |       
|                                                                                      |                                                                   |                  |        |              |   |   |        |       
|Cash and cash equivalents, end of period                                              |                                                                   | $                | 40,956 |              |   | $ | 49,220 |       
|                                                                                      |                                                                   |                  |        |              |   |   |        |       

The accompanying notes are an integral part of
the condensed consolidated financial statements.

4



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##### Table of Contents



MOLDFLOW CORPORATION






NOTES TO UNAUDITED CONDENSED
CONSOLIDATED


FINANCIAL STATEMENTS


1.     Basis of
Presentation and Nature of Business

Moldflow Corporation (Moldflow or the
Company) designs, develops, manufactures and markets
computer software applications and enabling hardware for the
design, engineering and manufacture of injection-molded plastic
parts and, as such, revenues are derived primarily from the
plastics design and manufacturing industry. The Company sells
its products primarily to customers in the United States,
Europe, Asia and Australia.

The accompanying unaudited condensed consolidated
financial statements include the accounts of Moldflow
Corporation and its wholly-owned subsidiaries. The condensed
consolidated financial statements have been prepared by the
Company in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC) regarding
interim financial reporting. Accordingly, they do not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial statements
and should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended
June 30, 2003 included in the Companys Annual Report
on Form 10-K. The June 30, 2003 condensed consolidated
balance sheet was derived from the Companys audited
consolidated financial statements. In the opinion of management,
the accompanying unaudited condensed consolidated financial
statements contain all adjustments, consisting only of those of
a normal recurring nature, necessary for a fair presentation of
results for the interim periods presented. The results of
operations for the three-month and six-month periods ended
December 27, 2003 are not necessarily indicative of the
results to be expected for any future period or the full fiscal
year. Certain prior year amounts have been reclassified to
conform to the fiscal 2004 presentation.

The Companys fiscal year end is
June 30. During the fiscal year, the Company follows a
schedule in which each interim quarterly period ends on the
Saturday of the thirteenth week of the reporting period.

2.     Stock Plans
and Stock-based Employee Compensation

A summary of the Companys stock option
activity follows:

|                                               |  |                    |           |                   |  |        |       |                  |  |  |           |   |  |   |      | 
|---------------------------------------------- |  | ------------------ | --------- | ----------------- |  | ------ | ----- | ---------------- |  |  | --------- | - |  | - | ---- | 
|                                               |  |                   
|                                               |  | Three Months Ended
|                                               |  |                   
|                                               |  |                    |           |                  
|                                               |  | December 27, 2003  |           | December 28, 2002
|                                               |  |                    |           |                  
|                                               |  |                    |           | Weighted Average  |  |        |       | Weighted Average
|                                               |  | Shares             |           | Exercise Price    |  | Shares |       | Exercise Price  
|                                               |  |                    |           |                   |  |        |       |                 
|Outstanding at beginning of period             |  |                    | 2,785,799 |                   |  | $      | 9.40  |                  |  |  | 2,566,199 |   |  | $ | 9.25 | 
|Granted                                        |  |                    | 42,200    |                   |  |        | 11.19 |                  |  |  | 50,000    |   |  |   | 7.50 | 
|Exercised                                      |  |                    | (9,675    | )                 |  |        | 4.26  |                  |  |  | (3,998    | ) |  |   | 1.33 | 
|Canceled                                       |  |                    | (23,157   | )                 |  |        | 14.55 |                  |  |  | (130,871  | ) |  |   | 6.29 | 
|                                               |  |                    |           |                   |  |        |       |                  |  |  |           |   |  |   |      | 
|Outstanding at end of period                   |  |                    | 2,795,167 |                   |  | $      | 9.41  |                  |  |  | 2,481,330 |   |  | $ | 9.35 | 
|                                               |  |                    |           |                   |  |        |       |                  |  |  |           |   |  |   |      | 
|Weighted average fair value of options granted |  |                    |           |                   |  | $      | 7.63  |                  |  |  |           |   |  | $ | 4.37 | 

5



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##### Table of Contents



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


|                                               |  |                   |           |                   |  |        |       |                  |  |  |           |   |  |   |       | 
|---------------------------------------------- |  | ----------------- | --------- | ----------------- |  | ------ | ----- | ---------------- |  |  | --------- | - |  | - | ----- | 
|                                               |  |                  
|                                               |  | Six Months Ended 
|                                               |  |                  
|                                               |  |                   |           |                  
|                                               |  | December 27, 2003 |           | December 28, 2002
|                                               |  |                   |           |                  
|                                               |  |                   |           | Weighted Average  |  |        |       | Weighted Average
|                                               |  | Shares            |           | Exercise Price    |  | Shares |       | Exercise Price  
|                                               |  |                   |           |                   |  |        |       |                 
|Outstanding at beginning of period             |  |                   | 2,433,206 |                   |  | $      | 9.33  |                  |  |  | 1,618,975 |   |  | $ | 12.23 | 
|Granted                                        |  |                   | 435,180   |                   |  |        | 9.93  |                  |  |  | 1,116,550 |   |  |   | 4.75  | 
|Exercised                                      |  |                   | (26,748   | )                 |  |        | 2.77  |                  |  |  | (49,635   | ) |  |   | 0.61  | 
|Canceled                                       |  |                   | (46,471   | )                 |  |        | 13.94 |                  |  |  | (204,560  | ) |  |   | 9.10  | 
|                                               |  |                   |           |                   |  |        |       |                  |  |  |           |   |  |   |       | 
|Outstanding at end of period                   |  |                   | 2,795,167 |                   |  | $      | 9.41  |                  |  |  | 2,481,330 |   |  | $ | 9.35  | 
|                                               |  |                   |           |                   |  |        |       |                  |  |  |           |   |  |   |       | 
|Options exercisable at end of period           |  |                   | 1,347,861 |                   |  |        |       |                  |  |  | 682,614   |   |  |   |       | 
|Weighted average fair value of options granted |  |                   |           |                   |  | $      | 6.86  |                  |  |  |           |   |  | $ | 2.71  | 
|Options available for future grant             |  |                   | 1,158,859 |                   |  |        |       |                  |  |  | 1,489,190 |   |  |   |       | 

The Company accounts for stock-based awards to
employees using the intrinsic value method as prescribed by
Accounting Principles Board (APB) Opinion
No. 25 Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no
compensation expense is recorded for options issued to employees
in fixed amounts with fixed exercise prices at least equal to
the fair market value of the Companys common stock at the
date of the grant. The Company has adopted the provisions of
SFAS No. 123, Accounting for Stock Based
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation Transition and
Disclosure, through disclosure only. All stock-based
awards to non-employees are accounted for at their fair value in
accordance with SFAS No. 123.

No compensation cost has been recognized for
employee stock-based awards in the three-month and six-month
periods ended December 27, 2003. In the three-month and six
month periods ended December 28, 2002, compensation cost
for employee stock-based awards was not significant. Had
compensation cost been determined based on the fair value at the
grant dates, the Companys net income would have been the
pro forma amounts indicated in the table below.

|                             |                                                                                                                                             |                                       |      |                  |   |              |        |              |   |   |       |       |   |   |        |       |  
|---------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ---- | ---------------- | - | ------------ | ------ | ------------ | - | - | ----- | ----- | - | - | ------ | ----- | -
|                             |                                                                                                                                             |                                       |      |                 
|                             |                                                                                                                                             | Three Months Ended                    |      | Six Months Ended
|                             |                                                                                                                                             |                                       |      |                 
|                             |                                                                                                                                             | December 27,                          |      | December 28,     |   | December 27, |        | December 28,
|                             |                                                                                                                                             | 2003                                  |      | 2002             |   | 2003         |        | 2002        
|                             |                                                                                                                                             |                                       |      |                  |   |              |        |             
|                             |                                                                                                                                             |                                      
|                             |                                                                                                                                             | (In thousands, except per share data)
|Net income as reported       |                                                                                                                                             | $                                     | 595  |                  |   | $            | 201    |              |   | $ | 1,012 |       |   | $ | 216    |      
|Less:                        |                                                                                                                                             |                                       |      |                  |   |              |        |              |   |   |       |       |   |   |        |      
|                             | Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |                                       |      | 1,108            |   |              |        | 2,277        |   |   |       | 1,304 |   |   |        | 2,792 |  
|                             |                                                                                                                                             |                                       |      |                  |   |              |        |              |   |   |       |       |   |   |        |      
|Pro forma net loss           |                                                                                                                                             | $                                     | (513 | )                |   | $            | (2,076 | )            |   | $ | (292  | )     |   | $ | (2,576 | )    
|                             |                                                                                                                                             |                                       |      |                  |   |              |        |              |   |   |       |       |   |   |        |      
|Net income (loss) per share: |                                                                                                                                             |                                       |      |                  |   |              |        |              |   |   |       |       |   |   |        |      
|                             | Basic  as reported                                                                                                                         |                                       | $    | 0.06             |   |              | $      | 0.02         |   |   | $     | 0.10  |   |   | $      | 0.02  |  
|                             | Basic  pro forma                                                                                                                           |                                       | $    | (0.05            | ) |              | $      | (0.21        | ) |   | $     | (0.03 | ) |   | $      | (0.26 | )
|                             | Diluted  as reported                                                                                                                       |                                       | $    | 0.06             |   |              | $      | 0.02         |   |   | $     | 0.10  |   |   | $      | 0.02  |  
|                             | Diluted  pro forma                                                                                                                         |                                       | $    | (0.05            | ) |              | $      | (0.21        | ) |   | $     | (0.03 | ) |   | $      | (0.26 | )

6



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##### Table of Contents



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


The fair value of each option granted during the
periods presented below was estimated on the grant date using
the Black-Scholes option-pricing model with the following
assumptions:

|                                |  |                    |     |                  |  |              |     |              |  |  |     |   |  |  |     |  
|------------------------------- |  | ------------------ | --- | ---------------- |  | ------------ | --- | ------------ |  |  | --- | - |  |  | --- | -
|                                |  |                    |     |                 
|                                |  | Three Months Ended |     | Six Months Ended
|                                |  |                    |     |                 
|                                |  | December 27,       |     | December 28,     |  | December 27, |     | December 28,
|                                |  | 2003               |     | 2002             |  | 2003         |     | 2002        
|                                |  |                    |     |                  |  |              |     |             
|Dividend yield                  |  |                    |    |                  |  |              |    |              |  |  |    |   |  |  |    |  
|Volatility                      |  |                    | 88  | %                |  |              | 70  | %            |  |  | 90  | % |  |  | 70  | %
|Risk-free interest rate         |  |                    | 3   | %                |  |              | 3   | %            |  |  | 3   | % |  |  | 3   | %
|Expected option life (in years) |  |                    | 4.6 |                  |  |              | 4.7 |              |  |  | 4.7 |   |  |  | 4.4 |  



|   |                            
|-- | ---------------------------
|3. | Net Income Per Common Share

The following table presents the calculation for
both basic and diluted net income per common share:

|                                                                                    |                                  |                                       |        |                  |  |              |        |              |  |   |        |     |  |   |        |     | 
|----------------------------------------------------------------------------------- | -------------------------------- | ------------------------------------- | ------ | ---------------- |  | ------------ | ------ | ------------ |  | - | ------ | --- |  | - | ------ | --- | 
|                                                                                    |                                  |                                       |        |                 
|                                                                                    |                                  | Three Months Ended                    |        | Six Months Ended
|                                                                                    |                                  |                                       |        |                 
|                                                                                    |                                  | December 27,                          |        | December 28,     |  | December 27, |        | December 28,
|                                                                                    |                                  | 2003                                  |        | 2002             |  | 2003         |        | 2002        
|                                                                                    |                                  |                                       |        |                  |  |              |        |             
|                                                                                    |                                  |                                      
|                                                                                    |                                  | (In thousands, except per share data)
|Net income                                                                          |                                  | $                                     | 595    |                  |  | $            | 201    |              |  | $ | 1,012  |     |  | $ | 216    |    
|                                                                                    |                                  |                                       |        |                  |  |              |        |              |  |   |        |     |  |   |        |    
|Weighted average shares used in computing net
    income per common share  basic   |                                  |                                       | 10,059 |                  |  |              | 9,973  |              |  |   | 10,054 |     |  |   | 10,040 |    
|                                                                                    |                                  |                                       |        |                  |  |              |        |              |  |   |        |     |  |   |        |    
|Effect of dilutive securities:                                                      |                                  |                                       |        |                  |  |              |        |              |  |   |        |     |  |   |        |    
|                                                                                    | Restricted stock                 |                                       |        |                 |  |              |        |             |  |   |        |    |  |   |        | 3   | 
|                                                                                    | Stock options                    |                                       |        | 599              |  |              |        | 296          |  |   |        | 565 |  |   |        | 277 | 
|                                                                                    |                                  |                                       |        |                  |  |              |        |              |  |   |        |     |  |   |        |    
|                                                                                    | Dilutive potential common shares |                                       |        | 599              |  |              |        | 296          |  |   |        | 565 |  |   |        | 280 | 
|                                                                                    |                                  |                                       |        |                  |  |              |        |              |  |   |        |     |  |   |        |    
|Weighted average shares used in computing net
    income per common share  diluted |                                  |                                       | 10,658 |                  |  |              | 10,269 |              |  |   | 10,619 |     |  |   | 10,320 |    
|                                                                                    |                                  |                                       |        |                  |  |              |        |              |  |   |        |     |  |   |        |    
|Net income per common share  basic                                                 |                                  | $                                     | 0.06   |                  |  | $            | 0.02   |              |  | $ | 0.10   |     |  | $ | 0.02   |    
|Net income per common share  diluted                                               |                                  | $                                     | 0.06   |                  |  | $            | 0.02   |              |  | $ | 0.10   |     |  | $ | 0.02   |    

Options to purchase 1,009,166 and
1,141,765 shares of common stock were not included in the
calculation of diluted net income per share for the three months
ended December 27, 2003 and December 28, 2002,
respectively, because the option exercise prices were greater
than the average market price of the Companys common stock
during those periods.

Options to purchase 1,025,823 and
1,129,583 shares of common stock were not included in the
calculation of diluted net income per share for the six months
ended December 27, 2003 and December 28, 2002,
respectively, because the option exercise prices were greater
than the average market price of the Companys common stock
during those periods.



|   |                                                            
|-- | -----------------------------------------------------------
|4. | Derivative Financial Instruments and Hedging
    Activities

The Company has established a hedging program
designed to reduce the exposure to changes in currency exchange
rates.

7



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##### Table of Contents



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


At December 27, 2003, currency options and
collars designated as hedging instruments with notional amounts
of $3.1 million, $9.3 million and $1.9 million to
exchange Euros, Japanese yen and Australian dollars for U.S.
dollars, respectively, were outstanding. At December 27,
2003, the total fair values of all currency options and collars
held by the Company of $304,000 and $281,000 were recorded as
components of other current assets and other current
liabilities, respectively. Net unrealized losses on options and
collars that qualified as hedging instruments of $50,000 were
included in accumulated other comprehensive income. The Company
expects these instruments to affect earnings as they mature over
the next eighteen months. During the three-month and six-month
periods ended December 27, 2003, net losses of $37,000 and
$117,000 were recorded as components of other income and expense
on the effective portion of options that were settled. For the
three-month and six-month periods December 27, 2003,
unrealized losses of $43,000 and $64,000 were recognized on the
ineffective portion of the options and collars dedesignated as
hedging instruments. As of December 27, 2003, there were no
financial instruments or derivatives outstanding that did not
qualify for hedge accounting.

At December 28, 2002, currency options and
collars designated as hedging instruments with notional amounts
of $2.7 million, $7.0 million and $1.3 million to
exchange Euros, Japanese yen and Australian dollars for U.S.
dollars, respectively, were outstanding. During the first
quarter of fiscal 2003, the Company discontinued hedge
accounting for the excess portion of instruments that were used
to hedge transactions considered no longer probable of
occurring. At December 28, 2002, these instruments had
notional amounts of $1.2 million and $204,000 to exchange
Japanese yen and Australian dollars for U.S. dollars,
respectively. At December 28, 2002, the total fair values
of all currency options and collars held by the Company of
$160,000 and $351,000 were recorded as components of other
current assets and other current liabilities, respectively. Net
unrealized losses on options and collars that qualified as
hedging instruments of $295,000 were included in accumulated
other comprehensive income. During the three-month and six-month
periods ended December 28, 2002, losses of $73,000 and
$62,000, respectively, were recorded as components of other
income and expense on the effective portion of options that were
settled. For the three-month and six-month periods ended
December 28, 2002, unrealized losses of $10,000 and net
unrealized gains of $28,000, respectively, were recognized on
the ineffective portion of the options and collars dedesignated
as hedging instruments.

5.     Acquired
Intangible Assets

Intangible assets acquired in the Companys
business combinations include goodwill, customer base, developed
technology and non-compete agreements. All of the Companys
acquired intangible assets, except for goodwill, are subject to
amortization over their estimated useful lives. No significant
residual value is estimated for these intangible assets. A
portion of the acquired intangible assets is recorded in the
accounts of our French subsidiary and, as such, is subject to
translation at the currency exchange rates in effect at the
balance sheet date.

The components of acquired intangible assets are
as follows:

|                            |                        |                   |       |               |  |          |        |          |   |              |     |          |  |   |       |       |  |   |        |      |   |   |     |     | 
|--------------------------- | ---------------------- | ----------------- | ----- | ------------- |  | -------- | ------ | -------- | - | ------------ | --- | -------- |  | - | ----- | ----- |  | - | ------ | ---- | - | - | --- | --- | 
|                            |                        |                   |       |              
|                            |                        | December 27, 2003 |       | June 30, 2003
|                            |                        |                   |       |              
|                            |                        | Gross             |       |               |  | Net      |        | Gross    |   |              |     | Net     
|                            |                        | Carrying          |       | Accumulated   |  | Carrying |        | Carrying |   | Accumulated  |     | Carrying
|                            |                        | Amount            |       | Amortization  |  | Amount   |        | Amount   |   | Amortization |     | Amount  
|                            |                        |                   |       |               |  |          |        |          |   |              |     |         
|                            |                        |                  
|                            |                        | (In thousands)   
|Acquired intangible assets: |                        |                   |       |               |  |          |        |          |   |              |     |          |  |   |       |       |  |   |        |      |   |   |     |    
|                            | Customer base          |                   | $     | 429           |  |          | $      | (191     | ) |              | $   | 238      |  |   | $     | 421   |  |   | $      | (116 | ) |   | $   | 305 | 
|                            | Developed technology   |                   |       | 675           |  |          |        | (615     | ) |              |     | 60       |  |   |       | 675   |  |   |        | (533 | ) |   |     | 142 | 
|                            | Non-compete agreements |                   |       | 1,214         |  |          |        | (1,041   | ) |              |     | 173      |  |   |       | 1,205 |  |   |        | (967 | ) |   |     | 238 | 
|                            |                        |                   |       |               |  |          |        |          |   |              |     |          |  |   |       |       |  |   |        |      |   |   |     |    
|Total                       |                        | $                 | 2,318 |               |  | $        | (1,847 | )        |   | $            | 471 |          |  | $ | 2,301 |       |  | $ | (1,616 | )    |   | $ | 685 |    
|                            |                        |                   |       |               |  |          |        |          |   |              |     |          |  |   |       |       |  |   |        |      |   |   |     |    

8



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##### Table of Contents



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


The following table summarizes the expected
remaining amortization of acquired intangible assets as of
December 27, 2003:

|                                  |  |                |     | 
|--------------------------------- |  | -------------- | --- | 
|                                  |  | Estimated     
|                                  |  | Amortization  
|                                  |  | Expense       
|                                  |  |               
|                                  |  | (In thousands)
|Fiscal Year                       |  |                |     | 
|2004 (remainder)                  |  | $              | 173 | 
|2005                              |  |                | 160 | 
|2006                              |  |                | 50  | 
|2007                              |  |                | 50  | 
|2008                              |  |                | 38  | 
|                                  |  |                |     | 
|Total future amortization expense |  | $              | 471 | 
|                                  |  |                |     | 



|   |                           
|-- | --------------------------
|6. | Software Development Costs

Costs associated with the development of computer
software and related products are expensed prior to establishing
technological feasibility, as defined by Statement of Financial
Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, and capitalized thereafter
until commercial release of the software products.

In the second quarter of fiscal 2004, the Company
established technological feasibility of two products, MPI 7.0
and MMS/Production Monitoring, both of which were commercially
released in December 2003. Accordingly, research and development
costs of $220,000 were capitalized in the consolidated balance
sheet.

A summary of capitalized software development
costs follows:

|                                |  |                |       |          |  |   |       |  
|------------------------------- |  | -------------- | ----- | -------- |  | - | ----- | -
|                                |  | December 27,   |       | June 30,
|                                |  | 2003           |       | 2003    
|                                |  |                |       |         
|                                |  |               
|                                |  | (In thousands)
|Gross carrying amount           |  | $              | 1,491 |          |  | $ | 1,271 |  
|Less  accumulated amortization |  |                | (344  | )        |  |   | (217  | )
|                                |  |                |       |          |  |   |       |  
|Net carrying amount             |  | $              | 1,147 |          |  | $ | 1,054 |  
|                                |  |                |       |          |  |   |       |  

All such costs have been included in other assets
in the consolidated balance sheet and are being amortized to
cost of product revenue over a five-year period, the estimated
useful lives of the products.

7.     Comprehensive
Income

Comprehensive income is comprised of net income
and other comprehensive income and losses. Other comprehensive
income includes certain changes in equity that are excluded from
net income, such as cumulative foreign currency translation
adjustments. Other comprehensive income also includes unrealized
gains and losses on the Companys hedging instruments and
unrealized gains and losses on the Companys marketable
securities.

9



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##### Table of Contents



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


The following table presents the calculation of
comprehensive income:

|                                   |                                                                                               |                    |       |                  |   |              |     |              |   |   |       |       |   |   |     |      |  
|---------------------------------- | --------------------------------------------------------------------------------------------- | ------------------ | ----- | ---------------- | - | ------------ | --- | ------------ | - | - | ----- | ----- | - | - | --- | ---- | -
|                                   |                                                                                               |                    |       |                 
|                                   |                                                                                               | Three Months Ended |       | Six Months Ended
|                                   |                                                                                               |                    |       |                 
|                                   |                                                                                               | December 27,       |       | December 28,     |   | December 27, |     | December 28,
|                                   |                                                                                               | 2003               |       | 2002             |   | 2003         |     | 2002        
|                                   |                                                                                               |                    |       |                  |   |              |     |             
|                                   |                                                                                               |                   
|                                   |                                                                                               | (In thousands)    
|Net income                         |                                                                                               | $                  | 595   |                  |   | $            | 201 |              |   | $ | 1,012 |       |   | $ | 216 |     
|Other comprehensive income (loss): |                                                                                               |                    |       |                  |   |              |     |              |   |   |       |       |   |   |     |     
|                                   | Foreign currency translation adjustment                                                       |                    |       | 1,204            |   |              |     | 290          |   |   |       | 1,501 |   |   |     | (119 | )
|                                   | Changes in fair value of marketable securities,
    net of related tax effect                 |                    |       | (3               | ) |              |     |             |   |   |       | (9    | ) |   |     | 8    |  
|                                   | Changes in value of financial instruments
    designated as hedges, net of related tax effect |                    |       | 44               |   |              |     | (73          | ) |   |       | (77   | ) |   |     | (16  | )
|                                   |                                                                                               |                    |       |                  |   |              |     |              |   |   |       |       |   |   |     |     
|                                   | Other comprehensive income (loss)                                                             |                    |       | 1,245            |   |              |     | 217          |   |   |       | 1,415 |   |   |     | (127 | )
|                                   |                                                                                               |                    |       |                  |   |              |     |              |   |   |       |       |   |   |     |     
|Comprehensive income               |                                                                                               | $                  | 1,840 |                  |   | $            | 418 |              |   | $ | 2,427 |       |   | $ | 89  |     
|                                   |                                                                                               |                    |       |                  |   |              |     |              |   |   |       |       |   |   |     |     

8.     Restructuring
Plans

March 2003
Plan

In March 2003, the Company initiated a corporate
restructuring plan (the March 2003 plan) related to
its January 2003 acquisition of Côntrole de Processus
Industriels s.a.r.l. (CPI). The March 2003 plan
included the involuntary termination of four technical employees
and a reduction of space at a leased facility, related to the
integration of CPIs operations. In addition, the March
2003 plan included the write-off of inventories and other assets
and certain intangible assets originally acquired in the
purchase of Branden Technologies in fiscal 2001, which were
deemed impaired by the acquisition of a similar product in
connection with the CPI transaction.

As a result of the March 2003 plan, the Company
recorded pre-tax charges and related accruals of $584,000
($486,000 after tax, or $0.05 per diluted share) in its third
fiscal quarter of 2003. Of this charge, $179,000 related to the
write-off of inventories and, as such, was included as a
component of the cost of product revenue. The remainder of the
charge was recorded as a restructuring charge in the
Companys Consolidated Statement of Income. All significant
activities under the March 2003 plan were completed as of
June 30, 2003.

10



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##### Table of Contents



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


The following table presents the pre-tax charges
incurred by category of expenditure, and related restructuring
costs included in accrued expenses in the Companys balance
sheet (in thousands):

|                                    |  |                  |     |                                 |  |              |     |       |  |           |    |             |  |       |     |       |  |   |     |   |  |   |     |   |  |   |     |   |  |   |     |  
|----------------------------------- |  | ---------------- | --- | ------------------------------- |  | ------------ | --- | ----- |  | --------- | -- | ----------- |  | ----- | --- | ----- |  | - | --- | - |  | - | --- | - |  | - | --- | - |  | - | --- | -
|                                    |  |                  |     |                                
|                                    |  | Non-Cash Charges |     | Charges Requiring Cash Payments
|                                    |  |                  |     |                                
|                                    |  |                  |     | Write-off of                    |  | Write-off of |     |       |  | Employee  |    | Lease       |  |      
|                                    |  | Write-off of     |     | Intangible                      |  | Other        |     |       |  | Severance |    | Termination |  | Other |     |      
|                                    |  | Inventories      |     | Asset                           |  | Assets       |     | Total |  | Costs     |    | Costs       |  | Costs |     | Total
|                                    |  |                  |     |                                 |  |              |     |       |  |           |    |             |  |       |     |      
|Restructuring charge in fiscal 2003 |  | $                | 179 |                                 |  | $            | 217 |       |  | $         | 75 |             |  | $     | 471 |       |  | $ | 79  |   |  | $ | 45  |   |  | $ | 22  |   |  | $ | 146 |  
|Revision of estimated liability     |  |                  |     |                                 |  |              |     |       |  |           |    |             |  |       |     |       |  |   | 1   |   |  |   | (34 | ) |  |   |    |   |  |   | (33 | )
|Cash payments                       |  |                  |     |                                 |  |              |     |       |  |           |    |             |  |       |     |       |  |   | (49 | ) |  |   | (11 | ) |  |   | (22 | ) |  |   | (82 | )
|                                    |  |                  |     |                                 |  |              |     |       |  |           |    |             |  |       |     |       |  |   |     |   |  |   |     |   |  |   |     |   |  |   |     |  
|Balance at June 30, 2003            |  |                  |     |                                 |  |              |     |       |  |           |    |             |  |       |     |       |  |   | 31  |   |  |   |    |   |  |   |    |   |  |   | 31  |  
|Cash payments                       |  |                  |     |                                 |  |              |     |       |  |           |    |             |  |       |     |       |  |   | (31 | ) |  |   |    |   |  |   |    |   |  |   | (31 | )
|                                    |  |                  |     |                                 |  |              |     |       |  |           |    |             |  |       |     |       |  |   |     |   |  |   |     |   |  |   |     |   |  |   |     |  
|Balance at December 27, 2003        |  |                  |     |                                 |  |              |     |       |  |           |    |             |  |       |     |       |  | $ |    |   |  | $ |    |   |  | $ |    |   |  | $ |    |  
|                                    |  |                  |     |                                 |  |              |     |       |  |           |    |             |  |       |     |       |  |   |     |   |  |   |     |   |  |   |     |   |  |   |     |  



| |                
| | ---------------
| | April 2002 Plan

In April 2002, the Company enacted a corporate
restructuring plan (the April 2002 plan) to resize
the Companys operations and to reduce overhead costs. The
April 2002 plan included the involuntary termination of
37 employees, the closing of certain leased offices and the
reduction in size of other leased offices. All significant
activities under the April 2002 plan are complete. As a result
of the April 2002 plan, the Company recorded pre-tax charges and
related accruals in fiscal 2002 of $1.3 million. The
remaining accrual balances as of December 27, 2003 relate
to long-term contractual obligations from facility commitments
that will be paid over five years. The following table presents
the balance of the accrued restructuring charges:

|                                              |  |                |     |  
|--------------------------------------------- |  | -------------- | --- | -
|                                              |  | Accrued Lease 
|                                              |  | Termination   
|                                              |  | Costs         
|                                              |  |               
|                                              |  | (In thousands)
|Balance at June 30, 2003                      |  | $              | 596 |  
|Cash payments                                 |  |                | (50 | )
|Foreign exchange impact and other adjustments |  |                | 42  |  
|                                              |  |                |     |  
|Balance at December 27, 2003                  |  | $              | 588 |  
|                                              |  |                |     |  

9.     Recent
Accounting Pronouncements

In November 2002, the Financial Accounting
Standards Board (FASB) issued Emerging Issues Task
Force 00-21 (EITF 00-21), Revenue
Arrangements with Multiple Deliverables. EITF 00-21
requires revenue arrangements with multiple deliverables to be
divided into separate units of accounting. If the deliverables
in the arrangement meet certain criteria, arrangement
consideration should be allocated among the separate units of
accounting based on their relative fair values. Applicable
revenue recognition criteria are to be considered for separate
units of accounting. The guidance in EITF 00-21 was
effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Companys
adoption of EITF 00-21 did not have a material impact on
its financial position or results of operations.

On December 17, 2003, the Staff of the
Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 104 (SAB 104),
Revenue Recognition, which supersedes SAB 101,
Revenue Recognition in Financial Statements.
SAB 104s primary purpose is to rescind the accounting
guidance contained in SAB 101 related to multiple-element
revenue arrangements that was superseded as a result of the
issuance of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. Additionally,

11



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##### Table of Contents



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


SAB 104 rescinds the SECs related
Revenue Recognition in Financial Statements Frequently
Asked Questions and Answers issued with SAB 101 that
had been codified in SEC Topic 13, Revenue
Recognition. While the wording of SAB 104 has changed
to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged
by the issuance of SAB 104, which was effective upon
issuance. The Companys adoption of SAB 104 did not
have a material effect on its financial position or results of
operations.

10.     Credit
Facilities

In January 2004, the Company completed the
renewal of its unsecured $5.0 million working capital
credit facility with a domestic bank. The terms of the facility,
which expires December 2, 2004, are substantially the same
as those of the previous facility. The available borrowing base
of the facility is subject to a calculation that is based upon
eligible accounts receivable. Advances may be in the form of
loans, letters of credit, foreign exchange contracts or other
cash management lines. Loans against the facility bear interest
at the banks prime rate. The facility includes certain
restrictive covenants, all of which the Company was in
compliance with as of December 27, 2003. These covenants
include certain liquidity and profitability measures and
restrictions that limit the ability of the Company to merge,
acquire or sell certain assets without prior approval from the
bank. As of December 27, 2003, the Company had employed
$2.0 million of the available borrowing base through
outstanding foreign exchange contracts and letters of credit.
These advances do not incur interest charges. As of
December 27, 2003, there were no loans advanced against the
facility, and the remaining available borrowing base was
$3.0 million.

Certain subsidiaries of the Company have
established credit facilities with two separate financial
institutions primarily for the purposes of establishing foreign
exchange contracts. Advances against these facilities bear
interest at the institutions published rates plus 2% per
annum. These credit facilities are unsecured. Advances against
these facilities are guaranteed by the Company. There were no
advances against these facilities as of December 27, 2003.

Certain subsidiaries of the Company have
established other credit facilities totaling $207,000 with two
separate financial institutions for general working capital
requirements and foreign exchange facilities. Advances against
these facilities bear interest at the institutions
published rates, plus 1.5% per annum. Advances against one of
these facilities are secured by a $114,000 term deposit and the
assets of an Australian subsidiary of the Company. There were no
advances against these facilities as of December 27, 2003.

11.     Segment and
Geographic Information

The Company is engaged in one reportable industry
segment: the development, marketing and support of software and
enabling hardware products for the plastics part and mold design
and manufacturing industry.

12



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##### Table of Contents



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


Geographic information regarding the
Companys operations follows:

|                                     |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |        | 
|------------------------------------ | ---------------------------------- | ------------------ | - | ---------------- |  | ------------ | - | ------------ |  |  | - | ------ |  |  | - | ------ | 
|                                     |                                    |                    |   |                 
|                                     |                                    | Three Months Ended |   | Six Months Ended
|                                     |                                    |                    |   |                 
|                                     |                                    | December 27,       |   | December 28,     |  | December 27, |   | December 28,
|                                     |                                    | 2003               |   | 2002             |  | 2003         |   | 2002        
|                                     |                                    |                    |   |                  |  |              |   |             
|                                     |                                    |                   
|                                     |                                    | (In thousands)    
|Revenue from unaffiliated customers: |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|Asia/Australia:                      |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|                                     | Design Analysis Solutions products |                    | $ | 1,645            |  |              | $ | 1,435        |  |  | $ | 3,803  |  |  | $ | 2,752  | 
|                                     | Manufacturing Solutions products   |                    |   | 8                |  |              |   | 33           |  |  |   | 8      |  |  |   | 49     | 
|                                     | Services                           |                    |   | 1,708            |  |              |   | 1,372        |  |  |   | 3,319  |  |  |   | 2,705  | 
|                                     |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|                                     | Total Asia/Australia               |                    |   | 3,361            |  |              |   | 2,840        |  |  |   | 7,130  |  |  |   | 5,506  | 
|                                     |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|Americas:                            |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|                                     | Design Analysis Solutions products |                    |   | 304              |  |              |   | 638          |  |  |   | 900    |  |  |   | 1,216  | 
|                                     | Manufacturing Solutions products   |                    |   | 444              |  |              |   | 661          |  |  |   | 749    |  |  |   | 1,154  | 
|                                     | Services                           |                    |   | 1,562            |  |              |   | 1,444        |  |  |   | 3,003  |  |  |   | 2,885  | 
|                                     |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|                                     | Total Americas                     |                    |   | 2,310            |  |              |   | 2,743        |  |  |   | 4,652  |  |  |   | 5,255  | 
|                                     |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|Europe:                              |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|                                     | Design Analysis Solutions products |                    |   | 2,175            |  |              |   | 1,196        |  |  |   | 2,847  |  |  |   | 2,048  | 
|                                     | Manufacturing Solutions products   |                    |   | 537              |  |              |   | 253          |  |  |   | 1,160  |  |  |   | 693    | 
|                                     | Services                           |                    |   | 2,248            |  |              |   | 1,894        |  |  |   | 4,353  |  |  |   | 3,725  | 
|                                     |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|                                     | Total Europe                       |                    |   | 4,960            |  |              |   | 3,343        |  |  |   | 8,360  |  |  |   | 6,466  | 
|                                     |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|Consolidated:                        |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|                                     | Design Analysis Solutions products |                    |   | 4,124            |  |              |   | 3,269        |  |  |   | 7,550  |  |  |   | 6,016  | 
|                                     | Manufacturing Solutions products   |                    |   | 989              |  |              |   | 947          |  |  |   | 1,917  |  |  |   | 1,896  | 
|                                     | Services                           |                    |   | 5,518            |  |              |   | 4,710        |  |  |   | 10,675 |  |  |   | 9,315  | 
|                                     |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       
|                                     | Total consolidated                 |                    | $ | 10,631           |  |              | $ | 8,926        |  |  | $ | 20,142 |  |  | $ | 17,227 | 
|                                     |                                    |                    |   |                  |  |              |   |              |  |  |   |        |  |  |   |       

Revenue from unaffiliated customers in Japan for
the three months ended December 27, 2003 and
December 28, 2002 was $2.2 million and
$1.7 million (20% and 20% of total revenue), respectively.
Revenue from unaffiliated customers in Japan for the six months
ended December 27, 2003 and December 28, 2002 was
$4.6 million and $3.6 million (23% and 21% of total
revenue), respectively. Substantially all of the revenue in the
Americas region is derived from the United States.

|                   |  |                |       |          |  |   |       | 
|------------------ |  | -------------- | ----- | -------- |  | - | ----- | 
|                   |  | December 27,   |       | June 30,
|                   |  | 2003           |       | 2003    
|                   |  |                |       |         
|                   |  |               
|                   |  | (In thousands)
|Fixed assets, net: |  |                |       |          |  |   |       | 
|Asia/Australia     |  | $              | 1,864 |          |  | $ | 1,734 | 
|Americas           |  |                | 1,415 |          |  |   | 1,512 | 
|Europe             |  |                | 828   |          |  |   | 645   | 
|                   |  |                |       |          |  |   |       | 
|Total consolidated |  | $              | 4,107 |          |  | $ | 3,891 | 
|                   |  |                |       |          |  |   |       | 

All of the net fixed assets included in the
Americas are located in the United States.

13



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MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS 
(Continued)


12.     Contingencies,
Commitments and Guarantor Arrangements

In the normal course of business, the Company has
indemnified third parties and has commitments and guarantees
under which it may be required to make payments in certain
circumstances. These indemnities, commitments and guarantees
include: its indemnities to various lessors in connection with
facility leases; indemnities to customers related to
intellectual property and performance of services subcontracted
to other providers; indemnities to vendors that guarantee
expenses incurred by employees of the Company; indemnities and
guarantees to financial institutions related to sales of the
Companys equity securities and performance under credit
facilities of the Companys subsidiaries; and indemnities
to directors and officers of the Company to the maximum extent
permitted under the laws of the State of Delaware. We also may
have indemnity obligations in connection with acquisition
transactions, and do have such obligations pursuant to the
acquisition of American MSI Corporation. The duration of these
indemnities, commitments and guarantees varies, and in certain
cases, is indefinite. The majority of these indemnities,
commitments and guarantees do not provide for any limitation of
the maximum potential future payments the Company could be
obligated to make. The Company has never incurred material costs
to settle claims or defend lawsuits related to these
indemnities, commitments and guarantees. As a result, the
estimated fair value of these agreements is minimal.
Accordingly, no liabilities have been recorded for these
agreements as of December 27, 2003.

The Company generally warrants that its products
will perform in all material respects in accordance with its
standard published specifications in effect at the time of
delivery of the products to the customer for a period of 90 to
120 days from the date of shipment or any longer period
that may be required by local law. The Company records a
liability based upon its history of claims against the
contractual warranty provisions. The following table describes
changes to the warranty provision (in thousands):

|                    |  |                  |    |             |  |   |    | 
|------------------- |  | ---------------- | -- | ----------- |  | - | -- | 
|                    |  |                 
|                    |  | Six Months Ended
|                    |  |                 
|                    |  | December 27      |    | December 28
|                    |  | 2003             |    | 2002       
|                    |  |                  |    |            
|Beginning balance   |  | $                | 42 |             |  | $ | 13 | 
|Additional accruals |  |                  | 5  |             |  |   | 20 | 
|Settlements made    |  |                  |   |             |  |   |   | 
|                    |  |                  |    |             |  |   |    | 
|Ending balance      |  | $                | 47 |             |  | $ | 33 | 
|                    |  |                  |    |             |  |   |    | 

13.     Subsequent
Event

On January 23, 2004, the Company acquired
all of the outstanding stock of American MSI Corporation,
(AMSI), a leading solution provider of hot runner
control systems for the injection molding industry, in exchange
for a cash payment of $7.3 million, which includes the
repayment of AMSIs long-term debt, and the issuance of
349,288 shares of the Companys common stock. The
Company has not yet completed its identification and valuation
of the intangible assets acquired. Preliminarily, the Company
expects such intangible assets to include AMSIs existing
software technology and products, customer base and non-compete
covenant with AMSIs founder. After allocation to the
identifiable assets, any remaining excess of purchase price over
the value of assets acquired will be attributed to goodwill. For
accounting purposes, the total purchase price resulting from the
cash and stock issued is expected to be approximately
$12.0 million.

Under the terms of the merger agreement with
AMSI, the Company agreed to register 174,644 shares of its
common stock issued in connection with the acquisition. These
shares will be registered on Form S-3 which is expected to
be filed within 30 days of the closing date of the
acquisition. Such registration statement will remain
continuously effective until the earlier of two years after the
closing date and such time as all of the shares registered
thereunder and held by the selling stockholder may be sold in a
single day pursuant to Rule 144 under the Securities Act of
1933, as amended.

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##### Table of Contents



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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. You can identify these statements by forward-looking
words such as may, will,
expect, anticipate, believe,
estimate, and continue or similar words.
You should read statements that contain these words carefully
because they discuss our future expectations, contain
projections of our future results of operations or of our
financial condition, or state other forward-looking
information. We believe that it is important to communicate our
future expectations to our investors.

However, there may be events in the future that
we are not able to accurately predict or control and that may
cause our actual results to differ materially from the
expectations we describe in our forward-looking statements.
Investors are cautioned that all forward-looking statements
involve risks and uncertainties, and actual results may differ
materially from those discussed as a result of various factors,
including those factors described in Risk Factors and
Important Factors That May Affect Future Results beginning
on page 27. Readers should not place undue reliance on our
forward-looking statements. We do not undertake any obligation
to update any of our forward-looking statements to reflect
events occurring after the date of this report.

Business Overview

Our primary business is the development, sale and
support of software applications and enabling hardware for the
design and manufacture of injection molded plastic parts. We
develop software products internally and through cooperative
research relationships with a number of public and private
educational and research organizations around the world. In
addition some software is developed by commercial contractors.
Historically, we categorized our products into two groups,
Design Optimization Solutions and Manufacturing Solutions. Our
Design Optimization Solutions allow a product designer or
engineer to simulate the manufacture of a plastic part to
determine the optimal part design and part/mold combination. Our
Design Optimization Solutions include our MPI series for
in-depth part and mold design and our MPA series for part design
and high-level mold design. Our Manufacturing Solutions deliver
a complete collaborative manufacturing management system which
provides production and process data for use in real-time
business performance management and functions to automate the
setup and control of the injection molding process. Our
Manufacturing Solutions products are an integration of our
existing MPX product, our Shotscope product acquired from
Branden Technologies in April 2003, and our CPI production
monitoring system product introduced in January 2003 after our
acquisition of the assets and the ongoing operations of
Côntrole de Processus Industriels s.a.r.l.

On January 23, 2004, we acquired all of the
outstanding stock of American MSI (AMSI), a leading
solution provider of hot runner control systems for the
injection molding industry located in California, in exchange
for $7.3 million of cash, and the issuance of 349,288
shares of our common stock. In conjunction with the acquisition,
we announced our intention to reorganize our operations into two
business units along our Design Optimization and Manufacturing
Solutions product lines. In connection with this reorganization,
we have renamed our Design Optimization Solutions as our Design
Analysis Solutions business. The products and services provided
by AMSI became part of the Manufacturing Solutions product line,
effective the date of the acquisition.

We sell our products and services internationally
through our direct sales operations in 14 countries. We
also sell through a network of distributors, manufacturers
representatives, and value-added resellers and through
distribution arrangements with developers of other design
software products.

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##### Table of Contents



Critical Accounting Policies and Significant
Judgments and Estimates

The preparation of consolidated financial
statements requires estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On
an on-going basis, management evaluates its estimates and
judgments, including those related to bad debts, inventories,
income taxes, warranty obligations, intangible assets,
contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates.

The accounting policies that we believe are most
critical to fully understand our consolidated financial
statements include: revenue recognition, valuation allowances,
acquisition accounting, impairment of intangible assets,
goodwill and other long-lived assets, income tax accounting,
restructuring charges, hedge accounting and capitalization of
software development costs. For a more detailed explanation of
the judgments included in these areas, refer to the
Companys Annual Report on Form 10-K for the year
ended June 30, 2003.

Results of Operations

We generate revenue from two principal sources:



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | license fees for our packaged software and
    enabling hardware products, and                                                                                     
|
| |  | services revenue derived from maintenance and
    support services related to our software products, consulting,
    implementation, training and material testing.

Product revenue.Typically, our customers pay an
up-front, one-time fee for our products. The amount of the fee
depends upon the number and type of software modules licensed,
the associated enabling hardware components and the number of
the customers employees or other users who can access the
software product simultaneously. Our MPA product is subject to
the terms of a click-wrapped software license
agreement that is included as part of each customers
installation process. Revenue for our iMPA product, a
fully functional, application service provider version of our
Part Adviser product, is earned on a pay-per-use basis and, to
date, has not been significant. For sales of our other products,
we generally require a signed license agreement. In addition, we
receive royalty payments from developers of other software
products related to the bundling of our software with their
design software programs. We generally record a larger
percentage of our quarterly revenue in the third month of each
fiscal quarter. Accordingly, our quarterly results, and
particularly our product revenues, are often difficult to
predict prior to the final days of each quarter.

Services revenue.We
derive revenue from maintenance and support contracts that
require us to provide technical support services to customers
and unspecified product upgrades and enhancements on a
when-and-if-available basis. We also provide consulting and
implementation services, training of customers employees
and material testing services.

Cost of product revenue.Cost of product revenue consists
primarily of the costs associated with hardware components for
our Manufacturing Solutions products, compact discs and related
packaging material, duplication and shipping costs and the
salaries of our distribution personnel. In some cases, we pay
royalties to third parties for usage-based licenses of their
products that are embedded in our products. Product royalties
are expensed when the related obligation arises, which is
generally upon the license of our products, and are included in
cost of product revenue. Also included in cost of product
revenue is amortization expense related to capitalized software
development costs.

Cost of services revenue.Cost of services revenue consists
primarily of salary, fringe benefit and facility related costs
of our maintenance and support, consulting, implementation and
training activities and of our material testing laboratories,
and is expensed when incurred. Additionally, from time to time,
we engage outside consultants to meet peaks in customer demand
for consulting and implementation services.

16



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##### Table of Contents



Research and development.We employ a development staff to
create new products and enhance our existing products. Product
development expenditures, which include salaries, benefits,
travel, payments to universities and other research institutions
and facilities costs, are generally charged to operations as
incurred. SFAS No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise
Marketed, requires the capitalization of certain software
development costs subsequent to the establishment of
technological feasibility up to the point of the products
release for commercial sale. We established technological
feasibility of Shotscope 2.6 and MPI 4.0 in the second
quarter of fiscal 2003 and released the products commercially in
November and December 2002, respectively. In accordance with
SFAS No. 86, research and development costs of $170,000
were capitalized in the six months ended December 28, 2002
related to Shotscope 2.6 and MPI 4.0. In the second
quarter of fiscal 2004, we established technological feasibility
of MPA 7.0 and the MMS/Production Monitoring product, and
released these products commercially in December 2003. This
resulted in the capitalization of $220,000 of research and
development costs.

Selling and marketing.We sell our products primarily through
our direct sales force and indirect distribution channels.
Selling and marketing expenses consist primarily of salaries,
commissions to our sales staff, employee benefits costs, sales
office facilities, travel and promotional events such as trade
shows, advertising, print and web-based collateral materials and
public relations programs.

General and administrative.General and administrative expenses
include compensation, routine legal, audit, tax consulting,
regulatory compliance, insurance and other costs of our
executive management, finance, information technology, human
resources and administrative support activities.

Amortization of acquired intangible assets.These costs represent the amortization
of intangible assets recorded in connection with our
acquisitions. These assets include developed technology,
customer base and non-compete agreements.

Interest income, net.Interest income, net includes interest
income earned on invested cash balances, net of our cost of
borrowings, including interest cost incurred on our working
capital lines of credit.

Other income (loss), net.Other income (loss), net includes
realized and unrealized gains and losses arising from
translation of foreign currency denominated asset and liability
balances, recognized gains and losses on our foreign currency
hedging instruments, and other non-operating income and expense
items.

Provision for income taxes.Our income tax expense includes
federal, state and foreign income taxes. The determination of
our provision for income tax expense requires significant
management judgment regarding forecasts of net income and tax
obligations in the various jurisdictions in which the Company
operates and includes the tax effects of certain items of income
and expense that are reported in differing periods for financial
statement and tax return purposes. Further, we must assess the
likelihood of the realization of our deferred tax assets. If it
is more likely than not that any or all of our deferred tax
assets will not be realized, we must establish a valuation
allowance by including an expense within the income tax
provision. Accordingly, our effective tax rate may vary from
period to period based on changes in estimated taxable income or
loss, changes to the valuation allowance, changes to federal,
state or foreign tax laws, changes in our business across
different jurisdictions with varying country, state and local
income tax rates, deductibility of certain costs and expenses by
jurisdiction and as a result of acquisitions.

17



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The following table sets forth statement of
operations data for the periods indicated as a percentage of
total revenue:

|                           |                                            |                    |     |                  |   |              |      |              |   |  |      |       |   |  |      |       |  
|-------------------------- | ------------------------------------------ | ------------------ | --- | ---------------- | - | ------------ | ---- | ------------ | - |  | ---- | ----- | - |  | ---- | ----- | -
|                           |                                            |                    |     |                 
|                           |                                            | Three Months Ended |     | Six Months Ended
|                           |                                            |                    |     |                 
|                           |                                            | December 27,       |     | December 28,     |   | December 27, |      | December 28,
|                           |                                            | 2003               |     | 2002             |   | 2003         |      | 2002        
|                           |                                            |                    |     |                  |   |              |      |             
|Revenue:                   |                                            |                    |     |                  |   |              |      |              |   |  |      |       |   |  |      |      
|                           | Product                                    |                    |     | 48.1             | % |              |      | 47.2         | % |  |      | 47.0  | % |  |      | 45.9  | %
|                           | Services                                   |                    |     | 51.9             |   |              |      | 52.8         |   |  |      | 53.0  |   |  |      | 54.1  |  
|                           |                                            |                    |     |                  |   |              |      |              |   |  |      |       |   |  |      |      
|                           | Total revenue                              |                    |     | 100.0            | % |              |      | 100.0        | % |  |      | 100.0 | % |  |      | 100.0 | %
|                           |                                            |                    |     |                  |   |              |      |              |   |  |      |       |   |  |      |      
|Costs and expenses:        |                                            |                    |     |                  |   |              |      |              |   |  |      |       |   |  |      |      
|                           | Cost of product revenue                    |                    |     | 5.7              | % |              |      | 7.6          | % |  |      | 6.2   | % |  |      | 7.7   | %
|                           | Cost of services revenue                   |                    |     | 8.8              |   |              |      | 3.2          |   |  |      | 7.8   |   |  |      | 3.3   |  
|                           | Research and development                   |                    |     | 14.4             |   |              |      | 14.8         |   |  |      | 15.5  |   |  |      | 16.1  |  
|                           | Selling and marketing                      |                    |     | 44.2             |   |              |      | 50.0         |   |  |      | 44.1  |   |  |      | 50.1  |  
|                           | General and administrative                 |                    |     | 19.9             |   |              |      | 20.2         |   |  |      | 20.0  |   |  |      | 20.0  |  
|                           | Amortization of acquired intangible assets |                    |     | 1.0              |   |              |      | 1.8          |   |  |      | 1.1   |   |  |      | 1.8   |  
|                           |                                            |                    |     |                  |   |              |      |              |   |  |      |       |   |  |      |      
|                           | Total operating expenses                   |                    |     | 94.0             |   |              |      | 97.6         |   |  |      | 94.7  |   |  |      | 99.0  |  
|                           |                                            |                    |     |                  |   |              |      |              |   |  |      |       |   |  |      |      
|                           | Income from operations                     |                    |     | 6.0              |   |              |      | 2.4          |   |  |      | 5.3   |   |  |      | 1.0   |  
|Interest income, net       |                                            |                    | 2.7 |                  |   |              | 3.2  |              |   |  | 2.8  |       |   |  | 3.3  |      
|Other income (loss), net   |                                            |                    | 0.1 |                  |   |              | (0.9 | )            |   |  | (0.2 | )     |   |  | (0.4 | )    
|                           |                                            |                    |     |                  |   |              |      |              |   |  |      |       |   |  |      |      
|                           | Income before income taxes                 |                    |     | 8.8              |   |              |      | 4.7          |   |  |      | 7.9   |   |  |      | 3.9   |  
|Provision for income taxes |                                            |                    | 3.2 |                  |   |              | 2.5  |              |   |  | 2.9  |       |   |  | 2.6  |      
|                           |                                            |                    |     |                  |   |              |      |              |   |  |      |       |   |  |      |      
|                           | Net income                                 |                    |     | 5.6              | % |              |      | 2.2          | % |  |      | 5.0   | % |  |      | 1.3   | %
|                           |                                            |                    |     |                  |   |              |      |              |   |  |      |       |   |  |      |      

Three Months Ended December 27, 2003
compared to Three Months Ended December 28, 2002



| |        
| | -------
| | Revenue

Total revenue increased 19%, or
$1.7 million, to $10.6 million for the three months
ended December 27, 2003, from $8.9 million for the
three months ended December 28, 2002. On a constant
currency basis, which excludes the impact of changes in foreign
currency exchange rates from those of the previous year, total
revenue increased approximately 7%. The following table sets
forth our total revenue by geographic region for the second
quarter of fiscal 2004 and 2003:

|         |                |                    |   |              |  |  |   |       | 
|-------- | -------------- | ------------------ | - | ------------ |  |  | - | ----- | 
|         |                |                   
|         |                | Three Months Ended
|         |                |                   
|         |                | December 27,       |   | December 28,
|         |                | 2003               |   | 2002        
|         |                |                    |   |             
|         |                |                   
|         |                | (In thousands)    
|Revenue: |                |                    |   |              |  |  |   |      
|         | Asia/Australia |                    | $ | 3,361        |  |  | $ | 2,840 | 
|         | Americas       |                    |   | 2,310        |  |  |   | 2,743 | 
|         | Europe         |                    |   | 4,960        |  |  |   | 3,343 | 
|         |                |                    |   |              |  |  |   |      
|         | Total          |                    | $ | 10,631       |  |  | $ | 8,926 | 
|         |                |                    |   |              |  |  |   |      

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|                             |                |                    |  |              |   |  |  |     |  
|---------------------------- | -------------- | ------------------ |  | ------------ | - |  |  | --- | -
|                             |                |                   
|                             |                | Three Months Ended
|                             |                |                   
|                             |                | December 27,       |  | December 28,
|                             |                | 2003               |  | 2002        
|                             |                |                    |  |             
|                             |                |                   
|                             |                | (In thousands)    
|Percentage of total revenue: |                |                    |  |              |   |  |  |    
|                             | Asia/Australia |                    |  | 32           | % |  |  | 32  | %
|                             | Americas       |                    |  | 22           |   |  |  | 30  |  
|                             | Europe         |                    |  | 46           |   |  |  | 38  |  
|                             |                |                    |  |              |   |  |  |    
|                             | Total          |                    |  | 100          | % |  |  | 100 | %
|                             |                |                    |  |              |   |  |  |    

Product revenue.Product revenue increased 21%, or
$897,000, to $5.1 million for the three months ended
December 27, 2003, from $4.2 million for the three
months ended December 28, 2002. On a constant currency
basis, product revenue increased approximately 7%. The following
table sets forth our product revenue by product group and
geography for the second quarter of fiscal 2004 and 2003:

|                                     |                           |                           |   |              |   |  |   |       |  
|------------------------------------ | ------------------------- | ------------------------- | - | ------------ | - |  | - | ----- | -
|                                     |                           |                          
|                                     |                           | Three Months Ended       
|                                     |                           |                          
|                                     |                           | December 27,              |   | December 28,
|                                     |                           | 2003                      |   | 2002        
|                                     |                           |                           |   |             
|                                     |                           |                          
|                                     |                           | (In thousands, except for
|                                     |                           | percentage data)         
|Asia/Australia product revenue:      |                           |                           |   |              |   |  |   |      
|                                     | Design Analysis Solutions |                           | $ | 1,645        |   |  | $ | 1,435 |  
|                                     | Manufacturing Solutions   |                           |   | 8            |   |  |   | 33    |  
|                                     |                           |                           |   |              |   |  |   |      
|                                     | Total                     |                           |   | 1,653        |   |  |   | 1,468 |  
|                                     |                           |                           |   |              |   |  |   |      
|Americas product revenue:            |                           |                           |   |              |   |  |   |      
|                                     | Design Analysis Solutions |                           |   | 304          |   |  |   | 638   |  
|                                     | Manufacturing Solutions   |                           |   | 444          |   |  |   | 661   |  
|                                     |                           |                           |   |              |   |  |   |      
|                                     | Total                     |                           |   | 748          |   |  |   | 1,299 |  
|                                     |                           |                           |   |              |   |  |   |      
|Europe product revenue:              |                           |                           |   |              |   |  |   |      
|                                     | Design Analysis Solutions |                           |   | 2,175        |   |  |   | 1,196 |  
|                                     | Manufacturing Solutions   |                           |   | 537          |   |  |   | 253   |  
|                                     |                           |                           |   |              |   |  |   |      
|                                     | Total                     |                           |   | 2,712        |   |  |   | 1,449 |  
|                                     |                           |                           |   |              |   |  |   |      
|Total product revenue:               |                           |                           |   |              |   |  |   |      
|                                     | Design Analysis Solutions |                           |   | 4,124        |   |  |   | 3,269 |  
|                                     | Manufacturing Solutions   |                           |   | 989          |   |  |   | 947   |  
|                                     |                           |                           |   |              |   |  |   |      
|                                     | Total                     |                           | $ | 5,113        |   |  | $ | 4,216 |  
|                                     |                           |                           |   |              |   |  |   |      
|Percentage of total product revenue: |                           |                           |   |              |   |  |   |      
|                                     | Design Analysis Solutions |                           |   | 81           | % |  |   | 77    | %
|                                     | Manufacturing Solutions   |                           |   | 19           |   |  |   | 23    |  
|                                     |                           |                           |   |              |   |  |   |      
|                                     | Total                     |                           |   | 100          | % |  |   | 100   | %
|                                     |                           |                           |   |              |   |  |   |      

The increase in product revenue in the second
quarter of fiscal 2004 was primarily a result of an increase in
Design Analysis Solutions revenue from our French and German
markets. This increase was a result of favorable currency
exchange rates and increased sales of our in-depth part and mold
design product, MPI. Product revenue also increased in our
Asia/Australia region, driven primarily by increased sales to
customers in the Japanese automotive industry and the Asian
electronics industry. To a lesser degree, our release of
MPA 7.0 in mid-December 2003, which introduced
complementary add-on modules to our existing MPA

19



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##### Table of Contents



customer base, also contributed to the overall
increase in product revenue. These increases were partially
offset by continued weakness in each of our product lines in the
Americas region.


We added 122 new customers in the second
quarter of fiscal 2004, compared to 87 new customers in the
same period of fiscal 2003. Sales to new customers represented
49% of total product revenues in the second quarter of fiscal
2004, compared to 31% in the same period of fiscal 2003. We sold
115 seats of Design Analysis Solutions products and
223 seats of Manufacturing Solutions products in the second
quarter of fiscal 2004, compared to 97 seats and
133 seats, respectively, in the corresponding period of
fiscal 2003. Pricing of individual products within these product
families can vary greatly, and the mix of products sold during a
given period can significantly impact our average sales price
per seat. As such, we do not believe that average sales prices
per seat provide a meaningful measure of our business.

Services revenue.Services revenue increased 17%, or
$808,000, to $5.5 million for the three months ended
December 27, 2003, from $4.7 million for the three
months ended December 28, 2002. On a constant currency
basis, service revenue increased approximately 7%. This increase
was primarily in the sale of maintenance contracts, which is the
result of historical growth in our customer base arising from
product license sales.

No customer accounted for more than 10% of our
total revenue during the three-month periods ended
December 27, 2003 and December 28, 2002.



| |                   
| | ------------------
| | Costs and Expenses

Cost of product revenue.The cost of product revenue decreased
10%, or $69,000, to $605,000 for the three months ended
December 27, 2003, from $674,000 for the three months ended
December 28, 2002. The decrease was a result of reduced
hardware costs and a redirection of some employees to post-sales
support activities which are included in the cost of services
revenue, partially offset by increased amortization expense
related to capitalized software development costs.

Cost of services revenue.Our cost of services revenue increased
230%, or $651,000, to $934,000 for the three months ended
December 27, 2003, from $283,000 for the three months ended
December 28, 2002. The increase reflects the impact of
organizational changes to redirect technical staff during the
last six months from research and development, sales and
cost of product revenue to our post-sales implementation group,
the cost of which is included in cost of services revenue. The
implementation resources were expanded as a result of the
increased requirements to provide technical assistance to the
growing customer base for our Manufacturing Solutions products.
To enhance the benefits realized by our customers from the
purchase of our solutions, we provide services including the
training of customer personnel, data conversion, and building of
interfaces to other plant and business management systems.
Accordingly, as sales of our Manufacturing Solutions products
increase, we anticipate that our cost of service revenue will
increase when compared with previous periods.

Research and development.Research and development expenses
increased 16%, or $216,000, to $1.5 million for the three
months ended December 27, 2003, from $1.3 million for
the three months ended December 28, 2002. The increase is
primarily attributable to increased compensation expense, which
resulted from the combination of several factors, including the
impact of changes in foreign currency exchange rates, annual
salary increases which took effect in October, and development
staff added in our January 2003 acquisition of CPI. These
increases were partially offset by the capitalization of
software development costs in accordance with
SFAS No. 86, which was higher than the corresponding
period in fiscal 2003 by $50,000.

Selling and marketing.Selling and marketing expenses
increased 5%, or $235,000 to $4.7 million for the three
months ended December 27, 2003, from $4.5 million for
the three months ended December 28, 2002 due to increased
employee costs resulting from increased sales and annual salary
adjustments, and additional travel and promotional activities.
These increases were partially offset by the impact of the
aforementioned redirection of resources to customer support and
implementation activities, which reduced selling and marketing
expenses by $217,000 as compared to the prior period and
increased cost of services revenue by a corresponding amount.

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##### Table of Contents



General and administrative.General and administrative expenses
increased 17%, or $315,000, to $2.1 million for the three
months ended December 27, 2003, from $1.8 million for
the three months ended December 28, 2002. The increase was
primarily due to increased compensation expense, resulting from
our annual salary increases for our staff and changes in foreign
currency exchange rates and increased professional service fees,
including the cost of audit, tax, and other accounting services.
In addition to these ongoing expenses, we incurred expenses of
$145,000 in connection with preparation for, and compliance
with, the Sarbanes-Oxley Act in the three months ended
December 27, 2003. A significant portion of these expenses
were a result of first-year implementation activities related to
the requirement that companies certify, and the independent
auditors audit and attest to a system of internal controls. As
the audit standards related to the newly required attestation
related to a companys system of internal controls have not
yet been finalized by the Public Company Accounting Oversight
Board, our estimates of the total costs of compliance, a portion
of which was expensed during our second quarter of fiscal 2004,
are subject to further revision. We anticipate, however, that
these costs will continue to be significant over the remainder
of our fiscal year.

Amortization of acquired intangible assets.Amortization expense decreased 31%, or
$49,000, to $110,000 for the three months ended
December 27, 2003, from $159,000 for the three months ended
December 28, 2002. The decrease was primarily a result of
our March 2003 restructuring plan that included the write-off of
certain intangible assets that were acquired in our purchase of
Branden Technologies in March 2001. The reduction of
amortization expense resulting from this write-off was partially
offset by amortization of intangible assets acquired in the
January 2003 acquisition of CPI.

Interest income, net.Interest income, net did not
significantly change from the prior period.

Other income (loss), net.Other income (loss), net increased
111%, or $93,000, to a gain of $9,000 for the three months ended
December 27, 2003, from a loss of $84,000 for the three
months ended December 28, 2002. This was primarily due to
gains arising from our foreign exchange hedging activities for
the three months ended December 27, 2003, while hedge
losses were incurred during the three months ended
December 28, 2002.

Provision for income taxes.The provision for income taxes
increased 49%, or $111,000, to $336,000 for the three months
ended December 27, 2003, from $225,000 for the three months
ended December 28, 2002, primarily a result of higher
income before income taxes. In 2004, our effective annual income
tax rate is estimated to be 37% of income before income taxes,
excluding any impact from the acquisition of AMSI. The expected
annual income tax rate of 37% in 2004 is higher than the
U.S. statutory income tax rate due principally to the
effect of income taxes levied at the state level, the tax impact
of net operating losses for which no financial statement benefit
may be recorded currently, and permanent differences between the
deductibility of certain items for book and tax accounting
purposes, offset, in part, by the impact of differences in tax
rates on income earned in foreign jurisdictions. Our estimated
effective annual income tax rate of 37% is lower than the actual
effective income tax rate for the comparable period of the prior
year due primarily to the effect, in the prior year, of taxable
income in certain jurisdictions that was not offset in the
financial statement income tax provision by losses in other
jurisdictions.

21



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##### Table of Contents



Six Months Ended December 27, 2003
compared to Six Months Ended December 28, 2002



| |        
| | -------
| | Revenue

Total revenue increased 17%, or
$2.9 million, to $20.1 million for the six months
ended December 27, 2003, from $17.2 million for the
six months ended December 28, 2002. On a constant currency
basis, which excludes the impact of changes in foreign exchange
rates from those of the previous year, total revenue increased
approximately 7%. The following table sets forth our total
revenue by geographic region for the first six months of fiscal
2004 and 2003:

|                             |                |                  |   |              |   |  |   |        |  
|---------------------------- | -------------- | ---------------- | - | ------------ | - |  | - | ------ | -
|                             |                |                 
|                             |                | Six Months Ended
|                             |                |                 
|                             |                | December 27,     |   | December 28,
|                             |                | 2003             |   | 2002        
|                             |                |                  |   |             
|                             |                |                 
|                             |                | (In thousands)  
|Revenue:                     |                |                  |   |              |   |  |   |       
|                             | Asia/Australia |                  | $ | 7,130        |   |  | $ | 5,506  |  
|                             | Americas       |                  |   | 4,652        |   |  |   | 5,255  |  
|                             | Europe         |                  |   | 8,360        |   |  |   | 6,466  |  
|                             |                |                  |   |              |   |  |   |       
|                             | Total          |                  | $ | 20,142       |   |  | $ | 17,227 |  
|                             |                |                  |   |              |   |  |   |       
|Percentage of total revenue: |                |                  |   |              |   |  |   |       
|                             | Asia/Australia |                  |   | 35           | % |  |   | 32     | %
|                             | Americas       |                  |   | 23           |   |  |   | 30     |  
|                             | Europe         |                  |   | 42           |   |  |   | 38     |  
|                             |                |                  |   |              |   |  |   |       
|                             | Total          |                  |   | 100          | % |  |   | 100    | %
|                             |                |                  |   |              |   |  |   |       

Product revenue.Product revenue increased 20%, or
$1.6 million to $9.5 million for the six months ended
December 27, 2003, from $7.9 million for the six
months ended December 28, 2002. On a constant currency
basis, product revenue increased approximately 8%. The following
table sets forth our product revenue by product group and
geography for the first two quarters of fiscal 2004 and 2003:

|                                |                           |                           |   |              |  |  |   |       | 
|------------------------------- | ------------------------- | ------------------------- | - | ------------ |  |  | - | ----- | 
|                                |                           |                          
|                                |                           | Six Months Ended         
|                                |                           |                          
|                                |                           | December 27,              |   | December 28,
|                                |                           | 2003                      |   | 2002        
|                                |                           |                           |   |             
|                                |                           |                          
|                                |                           | (In thousands, except for
|                                |                           | percentage data)         
|Asia/Australia product revenue: |                           |                           |   |              |  |  |   |      
|                                | Design Analysis Solutions |                           | $ | 3,803        |  |  | $ | 2,752 | 
|                                | Manufacturing Solutions   |                           |   | 8            |  |  |   | 49    | 
|                                |                           |                           |   |              |  |  |   |      
|                                | Total                     |                           |   | 3,811        |  |  |   | 2,801 | 
|                                |                           |                           |   |              |  |  |   |      
|Americas product revenue:       |                           |                           |   |              |  |  |   |      
|                                | Design Analysis Solutions |                           |   | 900          |  |  |   | 1,216 | 
|                                | Manufacturing Solutions   |                           |   | 749          |  |  |   | 1,154 | 
|                                |                           |                           |   |              |  |  |   |      
|                                | Total                     |                           |   | 1,649        |  |  |   | 2,370 | 
|                                |                           |                           |   |              |  |  |   |      
|Europe product revenue:         |                           |                           |   |              |  |  |   |      
|                                | Design Analysis Solutions |                           |   | 2,847        |  |  |   | 2,048 | 
|                                | Manufacturing Solutions   |                           |   | 1,160        |  |  |   | 693   | 
|                                |                           |                           |   |              |  |  |   |      
|                                | Total                     |                           |   | 4,007        |  |  |   | 2,741 | 
|                                |                           |                           |   |              |  |  |   |      

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##### Table of Contents



|                                     |                           |                           |   |              |   |  |   |       |  
|------------------------------------ | ------------------------- | ------------------------- | - | ------------ | - |  | - | ----- | -
|                                     |                           |                          
|                                     |                           | Six Months Ended         
|                                     |                           |                          
|                                     |                           | December 27,              |   | December 28,
|                                     |                           | 2003                      |   | 2002        
|                                     |                           |                           |   |             
|                                     |                           |                          
|                                     |                           | (In thousands, except for
|                                     |                           | percentage data)         
|Total product revenue:               |                           |                           |   |              |   |  |   |      
|                                     | Design Analysis Solutions |                           |   | 7,550        |   |  |   | 6,016 |  
|                                     | Manufacturing Solutions   |                           |   | 1,917        |   |  |   | 1,896 |  
|                                     |                           |                           |   |              |   |  |   |      
|                                     | Total                     |                           | $ | 9,467        |   |  | $ | 7,912 |  
|                                     |                           |                           |   |              |   |  |   |      
|Percentage of total product revenue: |                           |                           |   |              |   |  |   |      
|                                     | Design Analysis Solutions |                           |   | 80           | % |  |   | 76    | %
|                                     | Manufacturing Solutions   |                           |   | 20           |   |  |   | 24    |  
|                                     |                           |                           |   |              |   |  |   |      
|                                     | Total                     |                           |   | 100          | % |  |   | 100   | %
|                                     |                           |                           |   |              |   |  |   |      

The increase in product revenue for the six
months ended December 27, 2003 was primarily a result of an
increase in product revenue in our European market, particularly
in France and Germany, offset in part by lower revenues from
each of our product families in the Americas region. This
increase was a result of favorable currency exchange rates and
increased sales of our in-depth part and mold design product,
MPI. In addition, product revenue increased in our
Asia/Australia region, particularly in Japan, China and Taiwan,
where we currently are selling primarily Design Analysis
Solutions products. We believe that the increase in product
revenue in Japan is a result of a broadening of the market for
our products beyond our traditional customer base to include
members of the original equipment manufacturers
(OEM) supply chain and the result of a mild economic
recovery in Japan, which resulted in higher levels of capital
spending by our customers. In China and Taiwan, we believe that
local manufacturers are expanding their capabilities to include
a value-added design component to their businesses, which has
resulted in an increase in our product revenue in those
countries.

We added 224 new customers in the six months
ended December 27, 2003, compared to 154 new customers
in the same period of fiscal 2003. Sales to new customers
represented 38% of total product revenues in the six months
ended December 27, 2003, compared to 36% in the same period
of fiscal 2003. We sold 249 seats of Design Analysis
Solutions products and 313 seats of Manufacturing Solutions
products in the six months ended December 27, 2003,
compared to 186 seats and 190 seats, respectively, in
the corresponding period of fiscal 2003. Pricing of individual
products within these product families can vary greatly, and the
mix of products sold during a given period can significantly
impact our average sales price per seat. As such, we do not
believe that average sales prices per seat provide a meaningful
measure of our business.

Services revenue.Services revenue increased 15%, or
$1.4 million, to $10.7 million for the six months
ended December 27, 2003, from $9.3 million for the six
months ended December 28, 2002. On a constant currency
basis, service revenue increased approximately 6%. This increase
was primarily in the sale of maintenance contracts, which is the
result of historical growth in our customer base arising from
product license sales.

No customer accounted for more than 10% of our
total revenue during the six-month periods ended
December 27, 2003 and December 28, 2002.



| |                   
| | ------------------
| | Costs and Expenses

Cost of product revenue.The cost of product revenue decreased
7%, or $92,000, to $1.2 million for the six months ended
December 27, 2003, from $1.3 million for the six
months ended December 28, 2002. The decrease was a result
of reduced hardware costs and a redirection of some staff to
post-sales support activities which are included in the cost of
services revenue, partially offset by increased amortization
expense related to capitalized software development costs.

Cost of services revenue.Our cost of services revenue increased
178%, or $1.0 million, to $1.6 million for the six
months ended December 27, 2003, from $563,000 for the six
months ended December 28, 2002. The

23



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##### Table of Contents



increase reflects the impact of organizational
changes to redirect technical staff during the last six months
from research and development, sales and cost of product revenue
to our post-sales implementation group, the cost of which is
included in cost of services revenue. The implementation
resources were expanded as a result of the increased
requirements to provide technical assistance to the growing
customer base for our Manufacturing Solutions products. To
enhance the benefits realized by our customers from the purchase
of our solutions, we provide services including the training of
customer personnel, data conversion, and building of interfaces
to other plant and business management systems. Accordingly, as
sales of our Manufacturing Solutions products increase, we
anticipate that our cost of service revenue will increase when
compared with previous periods.


Research and development.Research and development expenses
increased 13%, or $354,000, to $3.1 million for the six
months ended December 27, 2003, from $2.8 million for
the six months ended December 28, 2002. The increase is
primarily attributable to increased compensation expense which
resulted from the combination of several factors, including the
impact of changes in foreign currency exchange rates, our annual
salary increases which took effect in October, and development
staff added in our January 2003 acquisition of CPI. These
increases were partially offset by the capitalization of
software development costs in accordance with
SFAS No. 86, which was higher than the corresponding
period of fiscal 2003 by $50,000.

Selling and marketing.Selling and marketing increased 3%, or
$256,000, to $8.9 million for the six months ended
December 27, 2003, from $8.6 million for the six
months ended December 28, 2002 due to a $496,000 increase
in employee costs resulting from increased sales and annual
salary adjustments and additional travel expenses. These
increases were partially offset by the impact of our redirection
of resources to customer support and implementation activities,
which is included in cost of services revenue, which reduced our
selling and marketing expenses by $361,000 as compared to the
prior period and increased cost of services revenue by a
corresponding amount.

General and administrative.General and administrative expenses
increased 17%, or $579,000, to $4.0 million for the six
months ended December 27, 2003, from $3.5 million for
the six months ended December 28, 2002. The increase was
primarily due to increased compensation expense, resulting from
our annual salary increases, changes in foreign currency
exchange rates and increased professional service fees,
including the cost of audit, tax, Sarbanes-Oxley compliance and
preparation costs, and other accounting services.

Amortization of acquired intangible assets.Amortization expense decreased 31%, or
$97,000, to $221,000 for the six months ended December 27,
2003, from $318,000 for the six months ended December 28,
2002. The decrease was primarily a result of our March 2003
restructuring plan that included the write-off of certain
intangible assets that were acquired in our purchase of Branden
Technologies in March 2001. The reduction of amortization
expense resulting from this write-off was partially offset by
amortization of intangible assets acquired in the January 2003
acquisition of CPI.

Interest income, net.Interest income, net decreased 2%, or
$13,000, to $558,000 for the six months ended December 27,
2003 from $571,000 for the six months ended December 28,
2002.

Other income (loss), net.Other income (loss), net increased
45%, or $28,000, to a smaller loss of $34,000 for the six months
ended December 27, 2003, from a loss of $62,000 for the six
months ended December 28, 2002.

Provision for income taxes.The provision for income taxes
increased 30%, or $134,000, to $584,000 for the six months ended
December 27, 2003, from $450,000 for the six months ended
December 28, 2002, primarily a result of higher income
before income taxes. In 2004, our effective annual income tax
rate is estimated to be 37% of income before income taxes
excluding the impact of the acquisition of AMSI. The expected
annual income tax rate of 37% in 2004 is higher than the
U.S. statutory income tax rate due principally to the
effect of income taxes levied at the state level, the tax impact
of net operating losses for which no financial statement benefit
may be recorded currently, and permanent differences between the
deductibility of certain items for book and tax accounting
purposes, offset, in part, by the impact of differences in tax
rates on income earned in foreign jurisdictions. Our estimated
effective annual income tax rate of 37% is

24



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##### Table of Contents



lower than the actual effective income tax rate
for the comparable period of the prior year due primarily to the
effect in the prior year, of taxable income in certain
jurisdictions that was not offset in the financial statement
income tax provision by losses in other jurisdictions.


Liquidity and Capital Resources

Historically, we have financed our operations and
met our capital expenditure requirements primarily through funds
generated from operations, sales of our capital stock and
borrowings from lending institutions. As of December 27,
2003, our primary sources of liquidity consisted of our total
cash and cash equivalents balance of $41.0 million, our
marketable securities balance of $12.0 million and our
credit facilities. In January 2004, we renewed our primary
$5.0 million, unsecured working capital credit facility.
The available borrowing base of the facility is subject to a
calculation that is based upon eligible accounts receivable. At
December 27, 2003, we had employed $2.0 million of
available borrowings through outstanding foreign exchange
contracts and letters of credit. The remaining available
borrowings were $3.0 million. In addition to our primary
working capital line of credit, we also utilize domestic and
foreign banking institutions to provide liquidity to our
subsidiaries. We also have relationships with other banking
institutions in order to facilitate foreign currency and hedging
transactions. As of December 27, 2003, we had no
outstanding debt.

At December 27, 2003, our marketable
securities consisted of corporate bonds with maturities in
excess of three months but less than one year. Investments in
marketable securities are made in accordance with our corporate
investment policy. The primary objective of this policy is the
preservation of capital. Investments are limited to high quality
corporate debt, government securities, municipal debt
securities, money market funds and similar instruments. The
policy establishes maturity limits, liquidity requirements and
concentration limits. At December 27, 2003, we were in
compliance with this policy.

Operating activities of the six months ended
December 27, 2003 generated $61,000 of net cash. This was a
result of our net income, adjusted for certain non-cash charges
and expenses such as depreciation and amortization, and
decreases in account receivable balances, which increased cash
by $359,000, and a net decrease in other current and non-current
assets, which generated $353,000 of cash, and increases in
accounts payable, which increased cash by $221,000. These
increases were offset by $690,000 of cash used to reduce accrued
expenses and a $2.3 million reduction of cash due to lower
deferred revenue balances. Many of our European and Japanese
customers renew their existing maintenance and support contracts
in January and April. This timing contributes to a seasonal
decrease in deferred revenue in our second fiscal quarter which,
in turn, reduces our cash generated from operations.

Net cash provided by investing activities was
$915,000 for the six months ended December 27, 2003. Cash
of $1.8 million was generated from the proceeds of sales
and maturities of our marketable securities. This was partially
offset by our purchases of fixed assets and capitalization of
software development costs, which together used $902,000 of cash.

Net cash of $210,000 was provided by financing
activities during the six months ended December 27, 2003.
This cash was generated by exercises of stock options and
proceeds received for common stock under the Companys
Employee Stock Purchase Plan.

On January 23, 2004, the Company utilized
$7.3 million of cash to fund the cash portion of the
purchase price of the acquisition of AMSI. We believe that our
current cash, cash equivalents, marketable securities and
available lines of credit will be sufficient to meet our
anticipated cash needs for working capital and capital
expenditures for at least the next twelve months following the
date of this Quarterly Report. On a long-term basis or to
complete acquisitions in the short term, we may require
additional external financing through credit facilities, sales
of additional equity or other financing vehicles. There can be
no assurance that such financing can be obtained on favorable
terms, if at all.

The Company does not have any special purpose
entities or off-balance sheet financing arrangements. The
Companys cash commitments, as disclosed in Note 18 to
the Companys audited consolidated financial statements,
included in our Annual Report on Form 10-K for the year
ended June 30, 2003, have not changed significantly.

25



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Restructuring



| |                
| | ---------------
| | March 2003 Plan

In March 2003, the Company initiated a corporate
restructuring plan (the March 2003 plan) related to
its January 2003 acquisition of Côntrole de Processus
Industriels s.a.r.l. (CPI). The March 2003 plan
included the involuntary termination of four technical employees
and a reduction of space at a leased facility, related to the
integration of CPIs operations. In addition, the March
2003 plan included the write-off of inventories and other assets
and certain intangible assets originally acquired in the
purchase of Branden Technologies in fiscal 2001, which were
deemed impaired by the acquisition of a similar product in
connection with the CPI transaction.

As a result of the March 2003 plan, the Company
recorded pre-tax charges and related accruals of $584,000
($486,000 after tax, or $0.05 per diluted share) in its
third fiscal quarter of 2003. Of this charge, $179,000 related
to the write-off of inventories and, as such, was included as a
component of the cost of product revenue. The remainder of the
charge was recorded as a restructuring charge in the
Companys Consolidated Statement of Income. All significant
activities under the March 2003 plan were completed as of
June 30, 2003.

The following table presents the pre-tax charges
incurred by category of expenditure, and related restructuring
costs included in accrued expenses in the Companys balance
sheet (in thousands):

|                                    |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |       |  |   |     |   |  |   |     |   |  |   |     |   |  |   |     |  
|----------------------------------- |  | ---------------- | --- | ------------------------------- |  | --------- | --- | ----- |  | --------- | -- | ----------- |  | ----- | --- | ----- |  | - | --- | - |  | - | --- | - |  | - | --- | - |  | - | --- | -
|                                    |  |                  |     |                                
|                                    |  | Non-Cash Charges |     | Charges Requiring Cash Payments
|                                    |  |                  |     |                                
|                                    |  |                  |     | Write-off of                    |  | Write-off |     |       |  | Employee  |    | Lease       |  |      
|                                    |  | Write-off of     |     | Intangible                      |  | of Other  |     |       |  | Severance |    | Termination |  | Other |     |      
|                                    |  | Inventories      |     | Asset                           |  | Assets    |     | Total |  | Costs     |    | Costs       |  | Costs |     | Total
|                                    |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |      
|Restructuring charge in fiscal 2003 |  | $                | 179 |                                 |  | $         | 217 |       |  | $         | 75 |             |  | $     | 471 |       |  | $ | 79  |   |  | $ | 45  |   |  | $ | 22  |   |  | $ | 146 |  
|                                    |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |       |  |   |     |   |  |   |     |   |  |   |     |   |  |   |     |  
|Revision of estimated liability     |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |       |  |   | 1   |   |  |   | (34 | ) |  |   |    |   |  |   | (33 | )
|Cash payments                       |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |       |  |   | (49 | ) |  |   | (11 | ) |  |   | (22 | ) |  |   | (82 | )
|                                    |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |       |  |   |     |   |  |   |     |   |  |   |     |   |  |   |     |  
|Balance at June 30, 2003            |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |       |  |   | 31  |   |  |   |    |   |  |   |    |   |  |   | 31  |  
|                                    |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |       |  |   |     |   |  |   |     |   |  |   |     |   |  |   |     |  
|Cash payments                       |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |       |  |   | (31 | ) |  |   |    |   |  |   |    |   |  |   | (31 | )
|                                    |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |       |  |   |     |   |  |   |     |   |  |   |     |   |  |   |     |  
|Balance at December 27, 2003        |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |       |  | $ |    |   |  | $ |    |   |  | $ |    |   |  | $ |    |  
|                                    |  |                  |     |                                 |  |           |     |       |  |           |    |             |  |       |     |       |  |   |     |   |  |   |     |   |  |   |     |   |  |   |     |  



| |                
| | ---------------
| | April 2002 Plan

In April 2002, the Company enacted a corporate
restructuring plan (the April 2002 plan) to resize
the Companys operations and to reduce overhead costs. The
April 2002 plan included the involuntary termination of
37 employees, the closing of certain leased offices and the
reduction in size of other leased offices. All significant
activities under the April 2002 plan are complete. As a result
of the April 2002 plan, the Company recorded pre-tax charges and
related accruals in fiscal 2002 of $1.3 million. The
remaining accrual balances as of December 27, 2003 relate
to long-term contractual obligations from facility commitments
that will be paid over five years. The following table presents
the balance of the accrued restructuring charges:

|                                              |  |                   |     |  
|--------------------------------------------- |  | ----------------- | --- | -
|                                              |  | Accrued Lease    
|                                              |  | Termination Costs
|                                              |  |                  
|                                              |  | (In thousands)   
|Balance at June 30, 2003                      |  | $                 | 596 |  
|Cash payments                                 |  |                   | (50 | )
|Foreign exchange impact and other adjustments |  |                   | 42  |  
|                                              |  |                   |     |  
|Balance at December 27, 2003                  |  | $                 | 588 |  
|                                              |  |                   |     |  

Recent Accounting Pronouncements

In November 2002, the Financial Accounting
Standards Board (FASB) issued Emerging Issues Task
Force 00-21 (EITF 00-21), Revenue
Arrangements with Multiple Deliverables. EITF 00-21
requires

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revenue arrangements with multiple deliverables
to be divided into separate units of accounting. If the
deliverables in the arrangement meet certain criteria,
arrangement consideration should be allocated among the separate
units of accounting based on their relative fair values.
Applicable revenue recognition criteria are to be considered for
separate units of accounting. The guidance in EITF 00-21
was effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Companys
adoption of EITF 00-21 did not have a material impact on
its financial position or results of operations.


On December 17, 2003, the Staff of the
Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 104
(SAB 104), Revenue Recognition,
which supersedes SAB 101, Revenue Recognition in
Financial Statements. SAB 104s primary purpose
is to rescind the accounting guidance contained in SAB 101
related to multiple-element revenue arrangements that was
superseded as a result of the issuance of EITF 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables. Additionally, SAB 104 rescinds the
SECs related Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers issued
with SAB 101 that had been codified in SEC Topic 13,
Revenue Recognition. While the wording of
SAB 104 has changed to reflect the issuance of
EITF 00-21, the revenue recognition principles of
SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The
Companys adoption of SAB 104 did not have a material
effect on its financial position or results of operations.

Impact of Inflation

We believe that our revenue and results of
operations have not been significantly impacted by inflation.

Risk Factors and Important Factors That May
Affect Future Results

You should carefully consider the following risks
and uncertainties prior to making an investment in our common
stock. These risks and uncertainties may also cause our actual
results to differ materially from those contained in or
predicted by our forward-looking statements.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | A general economic slowdown, particularly
    in our end markets, may continue to impact our
    results.

The demand for our products is largely driven by
the demand for the products in our primary end markets. Many of
these end markets, particularly the automotive,
telecommunications and electronics industries experienced severe
economic declines which significantly and adversely affected our
business in fiscal 2002 and 2003. While general economic trends
have improved in some geographic markets, continuation of this
general economic slowdown will materially and adversely affect
us by decreasing our revenue as compared to prior years, or by
lowering our revenue growth.



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business model is changing as we
    further develop and exploit our Manufacturing Solutions
    products, and our recent reorganization of our sales, marketing
    and support staff along business unit lines may result in
    disruption in our sales.

The development and implementation of a robust
set of Manufacturing Solutions products has required that we
devote significant research and development, marketing and
executive level resources to this product family. Further
expenditures of time and effort will be required in order to
maximize the potential of this set of

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##### Table of Contents



products. We recently completed the acquisition
of AMSI, a provider of hot runner control systems, with products
focused solely on the manufacturing market. In connection with
this acquisition, we reorganized our business into two
strategically focused business units, one focused on Design
Analysis products and one on Manufacturing Solutions Products.
This change in organizational structure may lead to disruption
in our business operations, as we have begun to split our direct
sales into product-specific sales forces, which will be
reporting directly to the responsible business unit leader. In
addition, the Companys executive vice president of sales
resigned from the Company and the transition of the sales force
may cause disruption in our selling cycles and have a material
adverse effect on our results of operations. Our results of
operations could be adversely affected by significant delays in
developing, completing or shipping our new or enhanced
Manufacturing Solutions products as well as by delays in
acceptance of these products by customers. Because these
products interact with other factory or enterprise-wide systems,
we may be required to provide additional functionality or
services, which may delay the recognition of revenue. Further,
our acquisition of AMSI may delay the development and completion
of our Manufacturing Solutions products as we seek to integrate
newly acquired technology into our product platform. Our
Manufacturing Solutions business unit will be managed by the
former chief executive officer and sole stockholder of AMSI and
our ability to successfully integrate the AMSI business will be
dependent on our ability to retain this employee.




| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our quarterly operating results are subject
    to significant fluctuations and, as a result, period-to-period
    comparisons of our results of operations are not necessarily
    meaningful and should not be relied upon as indicators of future
    performance.

We have experienced significant historical
fluctuations in our results of operations on a quarterly basis.
We expect to continue to experience significant fluctuations in
our future quarterly results of operations due to a variety of
factors, many of which are outside of our control, including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | seasonal slowdowns, in particular, in our first
    fiscal quarter, in many of the markets in which we sell our
    products,                                                                                                                                                                                                                                                                                                                 
|
| |  | changes in the mix of products and services we
    provide as sales of our Manufacturing Solutions products and our
    services will result in lower gross margins and may result in a
    longer selling cycle, which may be more significant following
    the acquisition of AMSI, which will result in a higher
    percentage of sales coming from our Manufacturing Solutions
    products as compared to our Design Analysis products,
|
| |  | the timing and magnitude of capital expenditures,
    including costs relating to the expansion of our operations and
    infrastructure, and planned program spending, such as that
    required for major marketing initiatives or tradeshows,                                                                                                                                                                                              
|
| |  | the timing and magnitude of our tax expense,
    resulting from the globally distributed nature of our selling
    and research and development operations that may lead to
    increased taxable income in certain jurisdictions that may not
    be offset by losses in other tax jurisdictions,                                                                                                                                            
|
| |  | introductions of new services or enhancements by
    us and our competitors and changes in our and our
    competitors pricing policies,                                                                                                                                                                                                                                                                                                     
|
| |  | currency fluctuations, and                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | timing and integration of acquisitions,
    particularly the acquisition of AMSI which will require time and
    focus by our management team and may lead to disruptions in our
    business.                                                                                                                                                                                                                                                

In addition, like many software companies, we
usually record a larger percentage of our quarterly revenue in
the third month of the fiscal quarter. Also, our Manufacturing
Solutions products may involve a longer selling cycle with
corresponding larger order sizes which may lead to an inability
to close on orders or make shipments in the period immediately
preceding the end of the fiscal quarter. Accordingly, our
quarterly results are often difficult to predict prior to the
final days of the quarter.

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| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | If we experience delays in introducing new
    products or if our existing or new products do not achieve
    market acceptance, we may lose revenue.

Our industry is characterized by:



| |   |                                             
| | - | --------------------------------------------
| |  | rapid technological advances,               
|
| |  | evolving industry standards,                
|
| |  | changes in end-user requirements,           
|
| |  | intense competition,                        
|
| |  | technically complex products,               
|
| |  | frequent new product introductions, and     
|
| |  | evolving offerings by product manufacturers.

We believe our future success will depend, in
part, on our ability to anticipate or adapt to these factors and
to offer on a timely basis products that meet customer demands.
For example, the introduction of new products and services
embodying new technologies and the emergence of new industry
standards can render our existing products obsolete. The
development of new or enhanced products is a complex and
uncertain process, requiring the anticipation of technological
and market trends. We may experience design, manufacturing,
marketing and other difficulties that could delay or prevent our
development, introduction or marketing of new products and
enhancements and result in unexpected expenses.

Our growth and profitability also will depend
upon our ability to expand the use and market penetration of our
existing product lines as well as new products we introduce.
Market acceptance of our products will depend in part on our
ability to demonstrate the cost-effectiveness, ease of use and
technological advantages of our products over competing products.



| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our recent acquisition of AMSI and any
    future mergers, acquisitions and strategic relationships may
    result in lost revenue caused by business disruptions and missed
    opportunities caused by the distraction of our
    management.

In January 2004 we acquired American MSI
Corporation, a privately held company specializing in
development and sale of hot runner control systems for the
plastics processing industry. Further, we may engage in other
acquisitions and strategic relationships in the future. We may
not be able to identify suitable acquisition candidates, and, if
we do identify suitable candidates, we may not be able to make
such acquisitions on commercially acceptable terms or at all. If
we merge with or acquire another company including AMSI, we will
only receive the anticipated benefits if we successfully
integrate the acquired business into our existing business in a
timely and non-disruptive manner. We will have to devote a
significant amount of time and management and financial
resources to do so. Even with this investment of management and
financial resources, the acquisition of AMSI or another business
may not produce the revenues, earnings or business synergies
that we anticipated. If we fail to integrate the acquired
business effectively or if key employees of that business leave,
the anticipated benefits of the acquisition would be
jeopardized. The time, capital, management and other resources
spent on an acquisition that failed to meet our expectations
could cause our business and financial condition to be
materially and adversely affected. In addition, acquisitions can
involve non-recurring charges and amortization of significant
amounts of acquired identifiable intangible assets that could
adversely affect our results of operations.



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we become subject to intellectual
    property infringement claims, we could incur significant
    expenses and we could be prevented from offering specific
    products or services.

Our products include proprietary intellectual
property. We may become subject to claims that we infringe on
the proprietary rights of others. In the United States and
elsewhere, a significant number of software and business method
patents have been issued over the past decade and the holders of
these patents have been actively seeking out potential
infringers. In addition, our Manufacturing Solutions products
require interaction

29



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with an injection molding machine, the use and
technology of which are subject to a wide variety of world-wide
patents and other intellectual property protection. If any
element of our products or services violates third-party
proprietary rights, we might not be able to obtain licenses on
commercially reasonable terms to continue offering our products
or services without substantial re-engineering and any effort to
undertake such re-engineering might not be successful. In
addition, any claim of infringement could cause us to incur
substantial costs defending against the claim, even if the claim
is invalid, and could distract our management from our business.
Any judgment against us could require us to pay substantial
damages and could also include an injunction or other court
order that could prevent us from offering our products and
services.




| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | We may lose sales to competitors if we are
    unable to protect important intellectual property.

Our ability to compete effectively against other
companies in our industry will depend, in part, on our ability
to protect our proprietary rights in our technology. We may be
unable to maintain the proprietary nature of our technology.
While we have attempted to safeguard and maintain our
proprietary rights, we do not know whether we have been or will
be completely successful in doing so.

We face the following risks in protecting our
intellectual property:



| |   |                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we cannot be certain that our pending United
    States and foreign patent applications will result in issued
    patents or that the claims allowed are or will be sufficiently
    broad to protect our technology,                                                              
|
| |  | third parties may design around our patented
    technologies or seek to challenge or invalidate our patented
    technologies,                                                                                                                                                    
|
| |  | patents of others may have an adverse effect on
    our ability to do business,                                                                                                                                                                                                    
|
| |  | the contractual provisions that we rely on, in
    part, to protect our trade secrets and proprietary knowledge may
    be breached, and we may not have adequate remedies for any
    breach and our trade secrets and proprietary information may be
    disclosed to the public,
|
| |  | our trade secrets may also become known without
    breach of such agreements or may be independently developed by
    competitors,                                                                                                                                                
|
| |  | foreign countries, including some of those in
    which we do business, may reduce or limit the protection of our
    intellectual property rights, and                                                                                                                            
|
| |  | the cost of enforcing the protection of our
    intellectual property rights may reduce our future profitability.                                                                                                                                                                  



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Our financial condition or results of
    operations may be adversely affected by international business
    risks.

The majority of our employees, including sales,
support and research and development personnel, are located
outside of the United States. Similarly, the majority of our
revenues are derived from customers outside the United States
and certain intellectual property is owned by subsidiary
companies located outside the United States. Conducting business
outside of the United States is subject to numerous risks,
including:



| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | decreased liquidity resulting from longer
    accounts receivable collection cycles typical of certain foreign
    countries,                                                                                                                                   
|
| |  | decreased revenue on foreign sales resulting from
    possible foreign currency exchange and conversion issues,                                                                                                                                                 
|
| |  | lower productivity resulting from difficulties
    managing our sales, support and research and development
    operations across many countries,                                                                                                               
|
| |  | decreased earnings based on changes in tax
    regulations in foreign jurisdictions or the timing of required
    tax payments in foreign jurisdictions that may not yet, or ever,
    be offset by tax benefits arising from losses in other
    jurisdictions,

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| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | lost revenue resulting from difficulties
    associated with enforcing agreements and collecting receivables
    through foreign legal systems,
|
| |  | lost revenue resulting from the imposition by
    foreign governments of trade protection measures, and                                        
|
| |  | higher cost of sales resulting from import or
    export licensing requirements.                                                               



| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have more limited financial and other
    resources than many of our competitors and potential competitors
    and may be unable to compete successfully against
    them.

We operate in a highly competitive environment
and may not be able to successfully compete. Companies in our
industry and entities in similar industries could decide to
focus on the development of software and enabling hardware
solutions for the design, analysis and manufacturing of
injection molded plastic parts. Many of these entities have
substantially greater financial, research and development,
manufacturing and marketing resources than we do. Increased
competition may result in price reductions, reduced
profitability and loss of market share.



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Disruption of operations at our development
    facilities could interfere with our product development and
    production cycles.

A significant portion of our computer equipment,
source code and personnel, including critical resources
dedicated to research and development, are presently located at
operating facilities in Australia, the United States and Europe.
The occurrence of a natural disaster or other unanticipated
catastrophe at any of these facilities could cause interruptions
in our operations and services. Extensive or multiple
interruptions in our operations at our development facilities
could severely disrupt our product development.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Our Manufacturing Solutions products may
    lead to product liability claims against us.

Our Manufacturing Solutions products are
installed directly on our customers injection molding
machines and, in certain cases, automatically adjust the
operation of these machines. As a result, it is possible that
our customers may claim that our product interfered with the
proper operation of their machines and may seek reimbursement
for consequential and other damages from us. Although we
expressly disclaim any liability for consequential or other
damages in connection with our sale of these products, this
disclaimer may not protect us from claims for damages from our
customers and these claims may adversely affect our
relationships with our customers or our reputation generally. In
addition, our insurance coverage limits may not be adequate to
protect us against any product liability claims that arise. This
insurance is expensive and may not be available on acceptable
terms, or at all.



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our stock price is highly volatile and our
    stock price could experience substantial declines and our
    managements attention may be diverted from more productive
    tasks.

The stock market has experienced extreme price
and volume fluctuations. In addition, the per share price of our
common stock has experienced significant volatility since we
have been a public company. Many factors may cause the market
price for our common stock to decline, including:



| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | revenues and operating results failing to meet
    the expectations of securities analysts or investors in any
    quarter,                                                                                                                                                                                    
|
| |  | downward revisions in securities analysts
    estimates or changes in general market conditions,                                                                                                                                                                                                              
|
| |  | changes in our senior management personnel,                                                                                                                                                                                                                                                                    
|
| |  | distribution or sale of shares of our common
    stock by insiders or affiliated person, including the shares
    received by the selling stockholder in connection with the
    acquisition of AMSI, a portion of which will be registered for
    resale on Form S-3 and could therefore be sold at any time,
|
| |  | technological innovations by competitors or in
    competing technologies,                                                                                                                                                                                                                                     
|
| |  | a decrease in the demand for our common stock,                                                                                                                                                                                                                                                                 

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| |   |                                                              
| | - | -------------------------------------------------------------
| |  | investor perception of our industry or our
    prospects, and
|
| |  | general technology or economic trends.                       

In the past, companies that have experienced
volatility in the market price of their stock have been the
subjects of securities class action litigation. We may be
involved in securities class action litigation in the future.
Such litigation often results in substantial costs which may not
be covered by our directors and officers liability
insurance, and a diversion of managements attention and
resources and could harm our business, financial condition and
results of operations.



| |                                                                         
| | ------------------------------------------------------------------------
| | We make estimates in determining our
    worldwide income tax provision.

We make significant estimates in determining our
worldwide income tax provision. These estimates are subject to
many transactions, calculations and proceedings where the
ultimate tax outcome is uncertain. These proceedings currently
include customary inquiry activities by various taxing
authorities. Although we believe that our estimates are
reasonable, the final outcome of tax matters and proceedings
could be different than the estimates reflected in the
historical income tax provision and accruals. Such differences
could have a material impact on income tax expense and net
income in the period in which such determination is made.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | We are dependent on distributors to
    distribute a substantial portion of our Manufacturing Solutions
    products.

Following the acquisition of AMSI, we will
distribute a substantial portion of our Manufacturing Solutions
products through a network of independent, regional channel
partners. The channel partners sell our products to new and
existing customers, expand installations within their existing
customer base, offer consulting services and provide the first
line of technical support. Consequently, we will be highly
dependent on the efforts of the channel partners. Difficulties
in ongoing relationships with channel partners, such as delays
in collecting accounts receivable, failure to meet performance
criteria or to promote our products as aggressively as we
expect, and differences in the handling of customer
relationships could adversely affect our performance.
Additionally, the loss of any major channel partner for any
reason, including a channel partners decision to sell
competing products rather than our products, could have a
material adverse effect on us. Moreover, our future success will
depend substantially on the ability and willingness of our
channel partners to continue to dedicate the resources necessary
to promote our products and to support a larger installed base
of our products following the acquisition of AMSI by Moldflow.
If the channel partners are unable or unwilling to do so, we may
be unable to achieve revenue growth with respect to the products
sold primarily through this channel.




Item 3.     Quantitative
and Qualitative Disclosures about Market Risk

We develop our products in research centers in
Australia, the United Kingdom, France and the United States. We
sell our products globally through our direct sales force and
indirect distributor channels. As a result, our financial
results are affected by factors such as changes in foreign
currency exchange rates, political climate and weak economic
conditions in foreign markets. In the future, we expect to
increase our international operations in our existing markets
and in geographic locations where we do not have any operations
now.

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We collect amounts representing a substantial
portion of our revenues and pay amounts representing a
substantial portion of our operating expenses in foreign
currencies. As a result, changes in currency exchange rates from
time to time may affect our operating results. We engage in
hedging transactions designed to reduce our exposure to changes
in currency exchange rates. We cannot assure you, however, that
any efforts we make to hedge our exposure to currency exchange
rate changes will be successful.

We invest our excess cash balances in highly
liquid, interest bearing instruments. These instruments expose
us to interest rate risk and, as a result, changes in interest
rates from time to time may affect our operating results. These
instruments, along with our accounts receivable, also
potentially expose us to credit risk. Our investments are
limited to high-grade corporate debt securities, government
issued debt, municipal debt securities, money market funds, and
similar high quality instruments to mitigate this credit risk.
The credit risk associated with accounts receivable is minimal
due to the large number of customers and their broad dispersion
over geographic regions and industries.




Item 4.     Controls
and Procedures

As required by Rules 13a-15 and 15d-15 under
the Securities Exchange Act of 1934, we have evaluated with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period
covered by this report. In designing and evaluating our
disclosure controls and procedures, we and our management
recognize that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and our management
necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. Based upon that
evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that they believe that, as of
December 27, 2003, our disclosure controls and procedures
were reasonably effective to ensure that information required to
be disclosed by us in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commissions rules and forms. In compliance with the rules,
we intend to continue to review and document our disclosure
controls and procedures, including our internal control over
financial reporting, on an ongoing basis, and may from time to
time make changes aimed at enhancing their effectiveness and to
ensure that our systems evolve with our business. There were no
changes in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on
Form 10-Q that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.

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##### Table of Contents






PART II. OTHER INFORMATION






Item 1.     Legal
Proceedings


From time to time, we may be involved in various
claims and legal proceedings arising in the ordinary course of
business. We are not currently a party to any such claims or
proceedings, which, if decided adversely to us, would either
individually or in the aggregate have a material adverse effect
on our business, financial condition or results of operations.






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


On November 18, 2003, the Company held its
Annual Meeting of Stockholders. The stockholders voted to elect
two Class I Directors for a three-year term and to amend
the Companys 2000 Stock Option and Incentive Plan to
modify the number and frequency of the options to purchase
shares of common stock automatically granted to non-employee
members of the Board of Directors of the Company. The results of
the stockholder vote were as follows:



| |                                      
| | -------------------------------------
| | PROPOSAL 1: ELECTION OF
    DIRECTORS

|                 |  |     |           |          |  |  |           | 
|---------------- |  | --- | --------- | -------- |  |  | --------- | 
|NAME OF DIRECTOR |  | FOR |           | WITHHELD
|                 |  |     |           |         
|Mr. Schechter    |  |     | 7,860,080 |          |  |  | 1,494,055 | 
|Mr. Thomas       |  |     | 7,873,632 |          |  |  | 1,480,503 | 



| |                                                                  
| | -----------------------------------------------------------------
| | PROPOSAL 2: AMENDMENT OF 2000
    STOCK OPTION AND INCENTIVE PLAN

|        |  |  |           | 
|------- |  |  | --------- | 
|FOR     |  |  | 6,114,620 | 
|AGAINST |  |  | 1,940,521 | 
|ABSTAIN |  |  | 10,303    | 
|NO-VOTE |  |  | 1,288,691 | 






Item 6.     Exhibits
and Reports on Form 8-K


(a) Exhibits

|      |  |                                                                                                                                                                                                                                        
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.2   |  | Agreement and Plan of Merger by and among
    Moldflow Corp., MF Merger Sub I, Inc., American MSI
    Corp., the Timothy and Deborah Triplett Family Trust,
    Timothy L. Triplett and Deborah A. Triplett dated
    January 23, 2004.
|10.40 |  | Employment Agreement, dated January 23, 2004
    between Moldflow Corporation and Timothy Triplett.                                                                                                                                    
|10.48 |  | Third Amendment to the Moldflow Corporation 2000
    Stock Option and Incentive Plan.                                                                                                                                                  
|10.49 |  | Loan Modification Agreement, dated
    January 15, 2004, between Silicon Valley Bank and Moldflow
    Corporation.                                                                                                                     
|31.1  |  | Certification of CEO.                                                                                                                                                                                                                  
|31.2  |  | Certification of CFO.                                                                                                                                                                                                                  
|32.1  |  | Section 1350 Certification of CEO.                                                                                                                                                                                                     
|32.2  |  | Section 1350 Certification of CFO.                                                                                                                                                                                                     

(b) Reports on Form 8-K

On October 23, 2003, the Company filed a
Form 8-K disclosing the financial results for the fiscal
quarter ended September 27, 2003.

On December 18, 2003, the Company filed a
Form 8-K disclosing the election of Robert J. Lepofsky
to its Board of Directors.

On January 26, 2004, the Company filed a
Form 8-K disclosing the acquisition of American MSI
Corporation, the resignation of Richard Underwood, the
Companys Executive Vice President of Sales, and the
financial results for the fiscal quarter ended December 27,
2003.

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SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



| |                     
| | --------------------
| | MOLDFLOW CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ A. ROLAND THOMAS

| |                                          
| | -----------------------------------------
| |                                          
| | A. Roland Thomas                         
| | President and Chief Executive
    Officer
|
| | MOLDFLOW CORPORATION                     



| |     |                          
| | --- | -------------------------
| | By: | /s/ SUZANNE E. MACCORMACK

| |                                               
| | ----------------------------------------------
| |                                               
| | Suzanne E. MacCormack                         
| | Executive Vice President of Finance
    and   
| | Administration and Chief Financial
    Officer
| | (Principal Financial Officer)                 

Date: February 10, 2004

35