##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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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 25, 2004

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)




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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 þ          No o

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

There were 10,755,070 shares of our common
stock, par value $0.01, outstanding on January 31, 2005.



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##### 



MOLDFLOW CORPORATION

FORM 10-Q

For the Quarter Ended December 25,
2004


TABLE OF CONTENTS

|                                   |  |                                                                                                                                      |    |        |    | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ | -- | ------ | -- | 
|                                   |  |                                                                                                                                      |    | Page   |   
|                                   |  |                                                                                                                                      |    | Number |   
|                                   |  |                                                                                                                                      |    |        |   
|PART I.  FINANCIAL
    INFORMATION
|Item 1.                            |  | Unaudited Financial Statements:                                                                                                      |    |        |    | 
|                                   |  | Condensed Consolidated Balance Sheet as of
    December 25, 2004 and June 30, 2004                                                   |    |        | 2  | 
|                                   |  | Condensed Consolidated Statement of Income for
    the three months and six months ended December 25, 2004 and
    December 27, 2003 |    |        | 3  | 
|                                   |  | Condensed Consolidated Statement of Cash Flows
    for the six months ended December 25, 2004 and
    December 27, 2003              |    |        | 4  | 
|                                   |  | Notes to Unaudited Condensed Consolidated
    Financial Statements                                                                   |    |        | 5  | 
|Item 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                            |    |        | 16 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                       |    |        | 38 | 
|Item 4.                            |  | Controls and Procedures                                                                                                              |    |        | 38 | 
|                                  
|PART II.  OTHER
    INFORMATION    |  |                                                                                                                                      |    |       
|Item 1.                            |  | Legal Proceedings                                                                                                                    |    |        | 40 | 
|Item 2.                            |  | Unregistered Sales of Equity Securities and Use
    of Proceeds                                                                      |    |        | 40 | 
|Item 4.                            |  | Submission of Matters to a Vote of Security
    Holders                                                                              |    |        | 40 | 
|Item 5.                            |  | Other Information                                                                                                                    |    |        | 40 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                                                     |    |        | 41 | 
|Signatures                         |  |                                                                                                                                      | 42 |       

1



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##### 






PART I.     FINANCIAL
INFORMATION






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

MOLDFLOW CORPORATION




CONDENSED CONSOLIDATED BALANCE SHEET

|                                         |                                         |                                            |        |        |          |  |        |        |        | 
|---------------------------------------- | --------------------------------------- | ------------------------------------------ | ------ | ------ | -------- |  | ------ | ------ | ------ | 
|                                         |                                         | December 25,                               |        |        | June 30, | 
|                                         |                                         | 2004                                       |        |        | 2004     | 
|                                         |                                         |                                            |        |        |          | 
|                                         |                                         |                                           
|                                         |                                         | (In thousands)                             |       
|                                         |                                         | (Unaudited)                                |       
|ASSETS                                  
|Current assets:                          |                                         |                                            |        |        |          |  |        |       
|                                         | Cash and cash equivalents               |                                            | $      | 39,243 |          |  | $      | 35,987 |       
|                                         | Marketable securities                   |                                            |        | 13,706 |          |  |        | 15,665 |       
|                                         | Accounts receivable, net                |                                            |        | 11,703 |          |  |        | 8,578  |       
|                                         | Inventories                             |                                            |        | 1,318  |          |  |        | 1,246  |       
|                                         | Prepaid expenses                        |                                            |        | 3,175  |          |  |        | 3,442  |       
|                                         | Other current assets                    |                                            |        | 2,675  |          |  |        | 2,063  |       
|                                         |                                         |                                            |        |        |          | 
|                                         |                                         | Total current assets                       |        |        | 71,820   |  |        |        | 66,981 | 
|Fixed assets, net                        |                                         |                                            | 3,953  |        |          |  | 3,502  |       
|Acquired intangible assets, net          |                                         |                                            | 1,769  |        |          |  | 1,986  |       
|Goodwill                                 |                                         |                                            | 18,694 |        |          |  | 18,625 |       
|Other assets                             |                                         |                                            | 3,409  |        |          |  | 3,264  |       
|                                         |                                         |                                            |        |        |          | 
|                                         |                                         | Total assets                               |        | $      | 99,645   |  |        | $      | 94,358 | 
|                                         |                                         |                                            |        |        |          | 
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                         |                                            |        |        |          |  |        |       
|                                         | Accounts payable                        |                                            | $      | 2,843  |          |  | $      | 3,251  |       
|                                         | Accrued expenses                        |                                            |        | 11,345 |          |  |        | 9,653  |       
|                                         | Deferred revenue                        |                                            |        | 8,263  |          |  |        | 10,013 |       
|                                         |                                         |                                            |        |        |          | 
|                                         |                                         | Total current liabilities                  |        |        | 22,451   |  |        |        | 22,917 | 
|Deferred revenue                         |                                         |                                            | 589    |        |          |  | 605    |       
|Other long-term liabilities              |                                         |                                            | 1,218  |        |          |  | 1,257  |       
|                                         |                                         |                                            |        |        |          | 
|                                         |                                         | Total liabilities                          |        |        | 24,258   |  |        |        | 24,779 | 
|                                         |                                         |                                            |        |        |          | 
|Stockholders equity:                    |                                         |                                            |        |        |          |  |        |       
|                                         | Common stock                            |                                            |        | 107    |          |  |        | 106    |       
|                                         | Additional paid-in capital              |                                            |        | 68,057 |          |  |        | 67,554 |       
|                                         | Retained earnings (accumulated deficit) |                                            |        | 1,892  |          |  |        | (1,462 | )     
|                                         | Accumulated other comprehensive income  |                                            |        | 5,331  |          |  |        | 3,381  |       
|                                         |                                         |                                            |        |        |          | 
|                                         |                                         | Total stockholders equity                 |        |        | 75,387   |  |        |        | 69,579 | 
|                                         |                                         |                                            |        |        |          | 
|                                         |                                         | Total liabilities and stockholders equity |        | $      | 99,645   |  |        | $      | 94,358 | 
|                                         |                                         |                                            |        |        |          | 

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

2



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##### 



MOLDFLOW CORPORATION



CONDENSED CONSOLIDATED STATEMENT OF
INCOME


|                                                          |                                            |                                       |       |        |                  |  |     |              |  |  |              |        |  |  |       |        | 
|--------------------------------------------------------- | ------------------------------------------ | ------------------------------------- | ----- | ------ | ---------------- |  | --- | ------------ |  |  | ------------ | ------ |  |  | ----- | ------ | 
|                                                          |                                            |                                       |       |       
|                                                          |                                            | Three Months Ended                    |       |        | Six Months Ended | 
|                                                          |                                            |                                       |       |        |                  | 
|                                                          |                                            | December 25,                          |       |        | December 27,     |  |     | December 25, |  |  | December 27, |       
|                                                          |                                            | 2004                                  |       |        | 2003             |  |     | 2004         |  |  | 2003         |       
|                                                          |                                            |                                       |       |        |                  |  |     |              |  |  |              |       
|                                                          |                                            |                                      
|                                                          |                                            | (In thousands, except per share data) |      
|                                                          |                                            | (Unaudited)                           |      
|Revenue:                                                  |                                            |                                       |       |        |                  |  |     |              |  |  |              |        |  |  |       |       
|                                                          | Product                                    |                                       | $     | 9,562  |                  |  | $   | 5,113        |  |  | $            | 17,489 |  |  | $     | 9,467  | 
|                                                          | Services                                   |                                       |       | 6,695  |                  |  |     | 5,518        |  |  |              | 12,750 |  |  |       | 10,675 | 
|                                                          |                                            |                                       |       |        |                  |  |     |              |  |  |              |       
|                                                          | Total revenue                              |                                       |       | 16,257 |                  |  |     | 10,631       |  |  |              | 30,239 |  |  |       | 20,142 | 
|                                                          |                                            |                                       |       |        |                  |  |     |              |  |  |              |       
|Costs and expenses:                                       |                                            |                                       |       |        |                  |  |     |              |  |  |              |        |  |  |       |       
|                                                          | Cost of product revenue                    |                                       |       | 1,875  |                  |  |     | 605          |  |  |              | 3,716  |  |  |       | 1,243  | 
|                                                          | Cost of services revenue                   |                                       |       | 1,650  |                  |  |     | 934          |  |  |              | 2,946  |  |  |       | 1,563  | 
|                                                          | Research and development                   |                                       |       | 2,040  |                  |  |     | 1,535        |  |  |              | 3,685  |  |  |       | 3,128  | 
|                                                          | Selling and marketing                      |                                       |       | 5,611  |                  |  |     | 4,698        |  |  |              | 10,306 |  |  |       | 8,884  | 
|                                                          | General and administrative                 |                                       |       | 3,066  |                  |  |     | 2,117        |  |  |              | 5,576  |  |  |       | 4,031  | 
|                                                          | Amortization of acquired intangible assets |                                       |       | 73     |                  |  |     | 110          |  |  |              | 151    |  |  |       | 221    | 
|                                                          |                                            |                                       |       |        |                  |  |     |              |  |  |              |       
|                                                          | Total operating costs and expenses         |                                       |       | 14,315 |                  |  |     | 9,999        |  |  |              | 26,380 |  |  |       | 19,070 | 
|                                                          |                                            |                                       |       |        |                  |  |     |              |  |  |              |       
|Income from operations                                    |                                            |                                       | 1,942 |        |                  |  | 632 |              |  |  | 3,859        |        |  |  | 1,072 |       
|Interest income, net                                      |                                            |                                       | 384   |        |                  |  | 290 |              |  |  | 730          |        |  |  | 558   |       
|Other income (loss), net                                  |                                            |                                       | 16    |        |                  |  | 9   |              |  |  | (42          | )      |  |  | (34   | )     
|                                                          |                                            |                                       |       |        |                  |  |     |              |  |  |              |       
|                                                          | Income before income taxes                 |                                       |       | 2,342  |                  |  |     | 931          |  |  |              | 4,547  |  |  |       | 1,596  | 
|Provision for income taxes                                |                                            |                                       | 733   |        |                  |  | 336 |              |  |  | 1,193        |        |  |  | 584   |       
|                                                          |                                            |                                       |       |        |                  |  |     |              |  |  |              |       
|                                                          | Net income                                 |                                       | $     | 1,609  |                  |  | $   | 595          |  |  | $            | 3,354  |  |  | $     | 1,012  | 
|                                                          |                                            |                                       |       |        |                  |  |     |              |  |  |              |       
|Net income per common share:                              |                                            |                                       |       |        |                  |  |     |              |  |  |              |        |  |  |       |       
|                                                          | Basic                                      |                                       | $     | 0.15   |                  |  | $   | 0.06         |  |  | $            | 0.31   |  |  | $     | 0.10   | 
|                                                          | Diluted                                    |                                       | $     | 0.14   |                  |  | $   | 0.06         |  |  | $            | 0.29   |  |  | $     | 0.10   | 
|Shares used in computing net income per common
    share: |                                            |                                       |       |        |                  |  |     |              |  |  |              |        |  |  |       |       
|                                                          | Basic                                      |                                       |       | 10,674 |                  |  |     | 10,059       |  |  |              | 10,651 |  |  |       | 10,054 | 
|                                                          | Diluted                                    |                                       |       | 11,545 |                  |  |     | 10,658       |  |  |              | 11,453 |  |  |       | 10,619 | 

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

3



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##### 



MOLDFLOW CORPORATION



CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS


|                                                                                      |                                                             |                                           |        |        |              |   |        |        |     | 
|------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------- | ------ | ------ | ------------ | - | ------ | ------ | --- | 
|                                                                                      |                                                             |                                          
|                                                                                      |                                                             | Six Months Ended                          |       
|                                                                                      |                                                             |                                           |       
|                                                                                      |                                                             | December 25,                              |        |        | December 27, |  
|                                                                                      |                                                             | 2004                                      |        |        | 2003         |  
|                                                                                      |                                                             |                                           |        |        |              |  
|                                                                                      |                                                             |                                          
|                                                                                      |                                                             | (In thousands)                            |       
|                                                                                      |                                                             | (Unaudited)                               |       
|Cash flows from operating
    activities:                                             |                                                             |                                           |        |        |              |   |        |       
|Net income                                                                            |                                                             | $                                         | 3,354  |        |              | $ | 1,012  |       
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                             |                                           |        |        |              |   |        |       
|                                                                                      | Depreciation of fixed assets                                |                                           |        | 668    |              |   |        | 694    |    
|                                                                                      | Amortization of acquired intangible assets                  |                                           |        | 223    |              |   |        | 221    |    
|                                                                                      | Amortization of other intangible assets                     |                                           |        | 305    |              |   |        | 127    |    
|                                                                                      | Provisions for doubtful accounts                            |                                           |        | 59     |              |   |        | 41     |    
|                                                                                      | Foreign exchange losses                                     |                                           |        | 31     |              |   |        | 24     |    
|                                                                                      | Other non-cash charges to income                            |                                           |        |       |              |   |        | 5      |    
|Changes in operating assets and liabilities:                                          |                                                             |                                           |        |        |              |   |        |       
|                                                                                      | Accounts receivable                                         |                                           |        | (2,633 | )            |   |        | 359    |    
|                                                                                      | Inventories, prepaid expenses, and other current
    assets |                                           |        | 158    |              |   |        | 254    |    
|                                                                                      | Other assets                                                |                                           |        | (44    | )            |   |        | 99     |    
|                                                                                      | Accounts payable                                            |                                           |        | (542   | )            |   |        | 221    |    
|                                                                                      | Accrued expenses and other liabilities                      |                                           |        | 1,171  |              |   |        | (690   | )  
|                                                                                      | Deferred revenue                                            |                                           |        | (2,296 | )            |   |        | (2,306 | )  
|                                                                                      |                                                             |                                           |        |        |              |  
|                                                                                      |                                                             | Net cash provided by operating activities |        |        | 454          |   |        |        | 61  | 
|                                                                                      |                                                             |                                           |        |        |              |  
|Cash flows from investing
    activities:                                             |                                                             |                                           |        |        |              |   |        |       
|                                                                                      | Purchases of fixed assets                                   |                                           |        | (872   | )            |   |        | (682   | )  
|                                                                                      | Capitalization of software development costs                |                                           |        | (201   | )            |   |        | (220   | )  
|                                                                                      | Sales/maturities of marketable securities                   |                                           |        | 1,959  |              |   |        | 1,817  |    
|                                                                                      |                                                             |                                           |        |        |              |  
|                                                                                      |                                                             | Net cash provided by investing activities |        |        | 886          |   |        |        | 915 | 
|                                                                                      |                                                             |                                           |        |        |              |  
|Cash flows from financing
    activities:                                             |                                                             |                                           |        |        |              |   |        |       
|                                                                                      | Issuance of common stock                                    |                                           |        | 504    |              |   |        | 210    |    
|                                                                                      |                                                             |                                           |        |        |              |  
|                                                                                      |                                                             | Net cash provided by financing activities |        |        | 504          |   |        |        | 210 | 
|                                                                                      |                                                             |                                           |        |        |              |  
|Effect of exchange rate changes on cash and cash
    equivalents                      |                                                             |                                           | 1,412  |        |              |   | 1,450  |       
|                                                                                      |                                                             |                                           |        |        |              |  
|Net increase in cash and cash
    equivalents                                         |                                                             |                                           | 3,256  |        |              |   | 2,636  |       
|Cash and cash equivalents, beginning of period                                        |                                                             |                                           | 35,987 |        |              |   | 38,320 |       
|                                                                                      |                                                             |                                           |        |        |              |  
|Cash and cash equivalents, end of period                                              |                                                             | $                                         | 39,243 |        |              | $ | 40,956 |       
|                                                                                      |                                                             |                                           |        |        |              |  

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

4



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##### 



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 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, 2004 included in the Companys Annual Report
on Form 10-K. The June 30, 2004 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 25, 2004 are not necessarily indicative of the
results to be expected for any future period or the full fiscal
year. Certain prior year amounts in the condensed consolidated
statement of cash flows have been reclassified to conform to the
fiscal 2005 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:

|                                               |  |                   |           |                  |                   |   |       |        |                  |  |                |   |  |   |       | 
|---------------------------------------------- |  | ----------------- | --------- | ---------------- | ----------------- | - | ----- | ------ | ---------------- |  | -------------- | - |  | - | ----- | 
|                                               |  |                  
|                                               |  | Six Months Ended  |          
|                                               |  |                   |          
|                                               |  |                   |           |                 
|                                               |  | December 25, 2004 |           |                  | December 27, 2003 |  
|                                               |  |                   |           |                  |                   |  
|                                               |  |                   |           | Weighted Average |                   |   |       |        | Weighted Average | 
|                                               |  | Shares            |           |                  | Exercise Price    |   |       | Shares |                  |  | Exercise Price |  
|                                               |  |                   |           |                  |                   |   |       |        |                  |  |                |  
|Outstanding at beginning of period             |  |                   | 2,634,157 |                  |                   | $ | 9.77  |        |                  |  | 2,433,206      |   |  | $ | 9.33  | 
|Granted                                        |  |                   | 271,200   |                  |                   |   | 11.33 |        |                  |  | 435,180        |   |  |   | 9.93  | 
|Exercised                                      |  |                   | (73,585   | )                |                   |   | 5.23  |        |                  |  | (26,748        | ) |  |   | 2.77  | 
|Canceled                                       |  |                   | (39,332   | )                |                   |   | 12.60 |        |                  |  | (46,471        | ) |  |   | 13.94 | 
|                                               |  |                   |           |                  |                   |   |       |        |                  |  |                |  
|Outstanding at end of period                   |  |                   | 2,792,440 |                  |                   | $ | 10.00 |        |                  |  | 2,795,167      |   |  | $ | 9.41  | 
|                                               |  |                   |           |                  |                   |   |       |        |                  |  |                |  
|Options exercisable at end of period           |  |                   | 1,836,630 |                  |                   |   |       |        |                  |  | 1,347,861      |   |  |   |       | 
|Weighted average fair value of options granted |  |                   |           |                  |                   | $ | 7.52  |        |                  |  |                |   |  | $ | 6.86  | 
|Options available for future grants            |  |                   | 991,648   |                  |                   |   |       |        |                  |  | 1,158,859      |   |  |   |       | 

No compensation cost has been recognized for
employee stock-based awards for the three months and six months
ended December 25, 2004 and December 27, 2003. Had
compensation cost been determined based on

5



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##### 



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


the fair value of options 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 25,                          |       |      | December 27,     |   |      | December 25, |   |   | December 27, |      
|                             |                                                                                                                                             | 2004                                  |       |      | 2003             |   |      | 2004         |   |   | 2003         |      
|                             |                                                                                                                                             |                                       |       |      |                  |   |      |              |   |   |              |      
|                             |                                                                                                                                             |                                      
|                             |                                                                                                                                             | (In thousands, except per share data) |      
|Net income as reported       |                                                                                                                                             | $                                     | 1,609 |      |                  | $ | 595  |              |   | $ | 3,354        |       |  | $ | 1,012 |      
|Less:                        |                                                                                                                                             |                                       |       |      |                  |   |      |              |   |   |              |       |  |   |       |      
|                             | Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |                                       |       | 833  |                  |   |      | 1,108        |   |   |              | 1,774 |  |   |       | 1,304 |  
|                             |                                                                                                                                             |                                       |       |      |                  |   |      |              |   |   |              |      
|Pro forma net income (loss)  |                                                                                                                                             | $                                     | 776   |      |                  | $ | (513 | )            |   | $ | 1,580        |       |  | $ | (292  | )    
|                             |                                                                                                                                             |                                       |       |      |                  |   |      |              |   |   |              |      
|Net income (loss) per share: |                                                                                                                                             |                                       |       |      |                  |   |      |              |   |   |              |       |  |   |       |      
|                             | Basic  as reported                                                                                                                         |                                       | $     | 0.15 |                  |   | $    | 0.06         |   |   | $            | 0.31  |  |   | $     | 0.10  |  
|                             | Basic  pro forma                                                                                                                           |                                       | $     | 0.07 |                  |   | $    | (0.05        | ) |   | $            | 0.15  |  |   | $     | (0.03 | )
|                             | Diluted  as reported                                                                                                                       |                                       | $     | 0.14 |                  |   | $    | 0.06         |   |   | $            | 0.29  |  |   | $     | 0.10  |  
|                             | Diluted  pro forma                                                                                                                         |                                       | $     | 0.07 |                  |   | $    | (0.05        | ) |   | $            | 0.14  |  |   | $     | (0.03 | )

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

|                                |  |                    |      |   |                  |  |      |              |  |  |              |   |  |  |      |  
|------------------------------- |  | ------------------ | ---- | - | ---------------- |  | ---- | ------------ |  |  | ------------ | - |  |  | ---- | -
|                                |  |                    |      |  
|                                |  | Three Months Ended |      |   | Six Months Ended | 
|                                |  |                    |      |   |                  | 
|                                |  | December 25,       |      |   | December 27,     |  |      | December 25, |  |  | December 27, |  
|                                |  | 2004               |      |   | 2003             |  |      | 2004         |  |  | 2003         |  
|                                |  |                    |      |   |                  |  |      |              |  |  |              |  
|Dividend yield                  |  |                    |     |   |                  |  |     |              |  |  |             |   |  |  |     |  
|Volatility                      |  |                    | 82.9 | % |                  |  | 88.0 | %            |  |  | 86.2         | % |  |  | 90.0 | %
|Risk-free interest rate         |  |                    | 3.5  | % |                  |  | 3.0  | %            |  |  | 3.1          | % |  |  | 3.0  | %
|Expected option life (in years) |  |                    | 4.4  |   |                  |  | 4.6  |              |  |  | 4.5          |   |  |  | 4.7  |  



|   |                            
|-- | ---------------------------
|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 25,                          |        |     | December 27,     |   |        | December 25, |  |   | December 27, |    
|                                                                                    |               | 2004                                  |        |     | 2003             |   |        | 2004         |  |   | 2003         |    
|                                                                                    |               |                                       |        |     |                  |   |        |              |  |   |              |    
|                                                                                    |               |                                      
|                                                                                    |               | (In thousands, except per share data) |       
|Net income                                                                          |               | $                                     | 1,609  |     |                  | $ | 595    |              |  | $ | 3,354        |     |  | $ | 1,012  |    
|                                                                                    |               |                                       |        |     |                  |   |        |              |  |   |              |    
|Weighted average shares used in computing net
    income per common share  basic   |               |                                       | 10,674 |     |                  |   | 10,059 |              |  |   | 10,651       |     |  |   | 10,054 |    
|Effect of dilutive securities:                                                      |               |                                       |        |     |                  |   |        |              |  |   |              |     |  |   |        |    
|                                                                                    | Stock options |                                       |        | 871 |                  |   |        | 599          |  |   |              | 803 |  |   |        | 565 | 
|                                                                                    |               |                                       |        |     |                  |   |        |              |  |   |              |    
|Weighted average shares used in computing net
    income per common share  diluted |               |                                       | 11,545 |     |                  |   | 10,658 |              |  |   | 11,453       |     |  |   | 10,619 |    
|                                                                                    |               |                                       |        |     |                  |   |        |              |  |   |              |    
|Net income per common share  basic                                                 |               | $                                     | 0.15   |     |                  | $ | 0.06   |              |  | $ | 0.31         |     |  | $ | 0.10   |    
|Net income per common share  diluted                                               |               | $                                     | 0.14   |     |                  | $ | 0.06   |              |  | $ | 0.29         |     |  | $ | 0.10   |    

6



---



##### 



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


Options to purchase 534,449 and
1,009,166 shares of common stock were not included in the
calculation of diluted net income per share for the three months
ended December 25, 2004 and December 27, 2003,
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 900,317 and
1,025,823 shares of common stock were not included in the
calculation of diluted net income per share for the six months
ended December 25, 2004 and December 27, 2003,
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.

At December 25, 2004, currency options and
collars designated as hedging instruments with notional amounts
of $2.4 million, $3.1 million and $2.4 million to
exchange Euros, Japanese yen and Australian dollars for U.S.
dollars, respectively, were outstanding. The fair values of
these instruments, as derived from dealer quotations, were
recorded as components of other current assets or other current
liabilities, depending on their valuation. At December 25,
2004, instruments with fair values of $241,000 were recorded as
components of other current assets. Net unrealized gains on
these instruments of $80,000 were included in accumulated other
comprehensive income. The Company expects these instruments to
affect earnings over the next six months. During the three-month
and six-month periods ended December 25, 2004, net gains of
$44,000 and $28,000, respectively, were recorded as components
of other income and expense. These amounts were comprised of
$31,000 and $55,000, respectively, of premiums paid for new
instruments, net of $75,000 and $83,000 of gains, respectively,
on the effective portion of options that were settled. As of
December 25, 2004, there were no financial instruments or
derivatives outstanding that did not qualify for hedge
accounting.

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. 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
ended December 27, 2003, unrealized losses of $43,000 and
$64,000 were recognized on the ineffective portion of the
options and collars designated as hedging instruments. As of
December 27, 2003, there were no financial instruments or
derivatives outstanding that did not qualify for hedge
accounting.

7



---



##### 



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)




|   |                           
|-- | --------------------------
|5. | Acquired Intangible Assets

Intangible assets acquired in the Companys
business combinations include goodwill, customer base, developed
technology, customer order backlog 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 this amortization is
included as a component of the Companys cost of product
revenue on the condensed consolidated statement of income. A
portion of the acquired intangible assets is recorded in the
accounts of a French subsidiary of the Company 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 25, 2004 |       |       | June 30, 2004 |   |        |         
|                            |                        |                   |       |       |               |   |        |         
|                            |                        | Gross             |       |       |               |   | Net    |          |   | Gross |          |     |  |              | Net   |       |          | Weighted- |       
|                            |                        | Carrying          |       |       | Accumulated   |   |        | Carrying |   |       | Carrying |     |  | Accumulated  |       |       | Carrying |           |        | Average  |  
|                            |                        | Amount            |       |       | Amortization  |   |        | Amount   |   |       | Amount   |     |  | Amortization |       |       | Amount   |           |        | Use Life |  
|                            |                        |                   |       |       |               |   |        |          |   |       |          |     |  |              |       |       |          |           |        |          |  
|                            |                        |                   |       |      
|                            |                        | (In thousands)    |       |       |              
|Acquired intangible assets: |                        |                   |       |       |               |   |        |          |   |       |          |     |  |              |       |       |          |           |        |          |   |   |       |     |  |  |  |          
|                            | Customer base          |                   | $     | 997   |               |   | $      | (309     | ) |       | $        | 688 |  |              | $     | 987   |          |           | $      | (226     | ) |   | $     | 761 |  |  |  | 6.7 years | 
|                            | Developed technology   |                   |       | 1,675 |               |   |        | (796     | ) |       |          | 879 |  |              |       | 1,675 |          |           |        | (724     | ) |   |       | 951 |  |  |  | 5.8 years | 
|                            | Customer order backlog |                   |       | 40    |               |   |        | (40      | ) |       |          |    |  |              |       | 40    |          |           |        | (33      | ) |   |       | 7   |  |  |  | 0.5 years | 
|                            | Non-compete agreements |                   |       | 1,424 |               |   |        | (1,222   | ) |       |          | 202 |  |              |       | 1,411 |          |           |        | (1,144   | ) |   |       | 267 |  |  |  | 3.5 years | 
|                            |                        |                   |       |       |               |   |        |          |   |       |          |     |  |              |       |       |          |           |        |          |  
|Total                       |                        | $                 | 4,136 |       |               | $ | (2,367 | )        |   | $     | 1,769    |     |  | $            | 4,113 |       |          | $         | (2,127 | )        |   | $ | 1,986 |     |  |  |  |          
|                            |                        |                   |       |       |               |   |        |          |   |       |          |     |  |              |       |       |          |           |        |          |  

Acquired intangible asset amortization for the
three months ended December 25, 2004 and December 27, 2003
was $108,000 and $110,000, respectively. Acquired intangible
asset amortization for the six months ended December 25,
2004 and December 27, 2003 was $223,000 and $221,000,
respectively.

The following table summarizes the expected
remaining amortization of acquired intangible assets as of
December 25, 2004:

|                                  |  |                |       | 
|--------------------------------- |  | -------------- | ----- | 
|                                  |  | Expected       |      
|                                  |  | Amortization   |      
|                                  |  | Expense        |      
|                                  |  |                |      
|                                  |  | (In thousands) |      
|Fiscal Year                       |  |                |       | 
|2005 (remainder)                  |  | $              | 209   | 
|2006                              |  |                | 346   | 
|2007                              |  |                | 314   | 
|2008                              |  |                | 298   | 
|2009                              |  |                | 246   | 
|Thereafter                        |  |                | 356   | 
|                                  |  |                |      
|Total future amortization expense |  | $              | 1,769 | 
|                                  |  |                |      

8



---



##### 



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)




|   |            
|-- | -----------
|6. | Inventories

Inventories consisted of the following:

|               |  |                |       |  |          |   |       | 
|-------------- |  | -------------- | ----- |  | -------- | - | ----- | 
|               |  | December 25,   |       |  | June 30, |  
|               |  | 2004           |       |  | 2004     |  
|               |  |                |       |  |          |  
|               |  |               
|               |  | (In thousands) |      
|Raw materials  |  | $              | 859   |  |          | $ | 708   | 
|Finished goods |  |                | 459   |  |          |   | 538   | 
|               |  |                |       |  |          |  
|               |  | $              | 1,318 |  |          | $ | 1,246 | 
|               |  |                |       |  |          |  



|   |                           
|-- | --------------------------
|7. | 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 the product is available for general release to customers.
Software development costs eligible for capitalization were not
significant for the three months ended December 25, 2004.
In the six months ended December 25, 2004, $201,000 of
costs were capitalized. Development costs capitalized in the
three months and six months ended December 27, 2003 were
zero and $220,000, respectively. All such costs have been
included in other non-current assets in the Companys
condensed consolidated balance sheet and are being amortized to
cost of product revenue over their estimated useful lives, which
range from three to five years.

A summary of capitalized software development
costs follows:

|                                |  |                |       |  |          |   |       | 
|------------------------------- |  | -------------- | ----- |  | -------- | - | ----- | 
|                                |  | December 25,   |       |  | June 30, |  
|                                |  | 2004           |       |  | 2004     |  
|                                |  |                |       |  |          |  
|                                |  |               
|                                |  | (In thousands) |      
|Gross carrying amount           |  | $              | 2,328 |  |          | $ | 2,127 | 
|Less  accumulated amortization |  |                | 726   |  |          |   | 503   | 
|                                |  |                |       |  |          |  
|Net carrying amount             |  | $              | 1,602 |  |          | $ | 1,624 | 
|                                |  |                |       |  |          |  



|   |                     
|-- | --------------------
|8. | 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 (loss) also includes
unrealized gains and losses on the Companys hedging
instruments and unrealized gains and losses on the
Companys marketable securities.

9



---



##### 



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 25,       |       |       | December 27,     |   |       | December 25, |   |   | December 27, |      
|                                   |                                                                                               | 2004               |       |       | 2003             |   |       | 2004         |   |   | 2003         |      
|                                   |                                                                                               |                    |       |       |                  |   |       |              |   |   |              |      
|                                   |                                                                                               |                   
|                                   |                                                                                               | (In thousands)     |      
|Net income                         |                                                                                               | $                  | 1,609 |       |                  | $ | 595   |              |   | $ | 3,354        |       |  | $ | 1,012 |      
|Other comprehensive income (loss): |                                                                                               |                    |       |       |                  |   |       |              |   |   |              |       |  |   |       |      
|                                   | Changes in fair value of marketable securities,
    net of related tax effect                 |                    |       | (6    | )                |   |       | (3           | ) |   |              | 5     |  |   |       | (9    | )
|                                   | Changes in value of financial instruments
    designated as hedges, net of related tax effect |                    |       | 39    |                  |   |       | 44           |   |   |              | 74    |  |   |       | (77   | )
|                                   | Foreign currency translation adjustment                                                       |                    |       | 1,247 |                  |   |       | 1,204        |   |   |              | 1,871 |  |   |       | 1,501 |  
|                                   |                                                                                               |                    |       |       |                  |   |       |              |   |   |              |      
|                                   | Other comprehensive income                                                                    |                    |       | 1,280 |                  |   |       | 1,245        |   |   |              | 1,950 |  |   |       | 1,415 |  
|                                   |                                                                                               |                    |       |       |                  |   |       |              |   |   |              |      
|Comprehensive income               |                                                                                               | $                  | 2,889 |       |                  | $ | 1,840 |              |   | $ | 5,304        |       |  | $ | 2,427 |      
|                                   |                                                                                               |                    |       |       |                  |   |       |              |   |   |              |      



|   |                    
|-- | -------------------
|9. | Restructuring Plans

January 2004
Plan

In January 2004, the Company initiated a
corporate restructuring plan (the January 2004 plan)
related to its January 2004 acquisition of American MSI
Corporation (AMSI). The January 2004 plan included
the termination of three employees from sales and management
positions in the United States and Italy. As a result of the
January 2004 plan, the Company recorded charges and related
accruals of $508,000 in its third fiscal quarter of 2004. These
charges were recorded as restructuring costs in the
Companys consolidated statement of operations. All
significant activities under the January 2004 plan were
completed as of March 27, 2004, except for cash payments of
the remaining liabilities.

The following table presents activity against the
restructuring liability during the six months ended
December 25, 2004 and the remaining liability at the period
end included in accrued expenses in the Companys condensed
consolidated balance sheet:

|                             |  |                |      |  
|---------------------------- |  | -------------- | ---- | -
|                             |  | Employee       |     
|                             |  | Severance      |     
|                             |  | Costs          |     
|                             |  |                |     
|                             |  | (In thousands) |     
|Balance at June 30, 2004     |  | $              | 205  |  
|Cash payments                |  |                | (168 | )
|                             |  |                |     
|Balance at December 25, 2004 |  | $              | 37   |  
|                             |  |                |     

April 2002
Plan

In April 2002, the Company enacted a corporate
restructuring plan (the April 2002 plan) to resize
the Company 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, except for cash payments of the
remaining liabilities. As a result of the April 2002 plan, the
Company recorded pre-tax charges and related accruals in fiscal
2002 of

10



---



##### 



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


$1.3 million. The remaining accrual balances
as of December 25, 2004 relate to long-term contractual
obligations from facility commitments that will be paid over
five years.

The following table presents activity against the
restructuring liability during the six months ended
December 25, 2004 and the remaining liability at the period
end.

|                                              |  |                |     |  
|--------------------------------------------- |  | -------------- | --- | -
|                                              |  | Lease          |    
|                                              |  | Termination    |    
|                                              |  | Costs          |    
|                                              |  |                |    
|                                              |  | (In thousands) |    
|Balance at June 30, 2004                      |  | $              | 546 |  
|Cash payments                                 |  |                | (54 | )
|Foreign exchange impact and other adjustments |  |                | 35  |  
|                                              |  |                |    
|Balance at December 25, 2004                  |  | $              | 527 |  
|                                              |  |                |    

Of this amount, $413,000 has been included in
other long-term liabilities and $114,000 has been included in
accrued expenses.



|    |                  
|--- | -----------------
|10. | Credit Facilities

In January 2005, 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 February 2, 2007, 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 previous facility included
certain restrictive covenants, all of which the Company was in
compliance with as of December 25, 2004. These covenants
included certain liquidity and profitability measures and
restrictions that limited the ability of the Company to merge,
acquire or sell certain assets without prior approval from the
bank. As of December 25, 2004, the Company had employed
$710,000 of the available borrowing base of the previous
facility through outstanding foreign exchange contracts and
letters of credit. These advances do not incur interest charges.
As of December 25, 2004, there were no loans advanced
against the facility and the remaining available borrowing base
was $4.3 million.

Certain subsidiaries of the Company have
established unsecured 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 and are guaranteed by the Company. There
were no advances against these facilities as of
December 25, 2004.

Certain subsidiaries of the Company have
established other credit facilities, totaling $251,000 at
December 25, 2004, 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 these facilities are unsecured. There were no
advances against these facilities as of December 25, 2004.



|    |                                   
|--- | ----------------------------------
|11. | Segment and Geographic Information

Segment
Information

The Company operates in one industry 
computer software and hardware products for the plastics part
and mold design and manufacturing industry. Until the end of
fiscal 2004, the Company was managed and

11



---



##### 



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


operated as one business unit with two product
lines. A single management team that reported to the chief
operating decision maker comprehensively managed the entire
business.

In its third fiscal quarter of 2004, the Company
announced a plan to reorganize into two separate business units:
the Design Analysis Solutions unit and the Manufacturing
Solutions unit. The reorganization was substantially complete at
the end of fiscal 2004, resulting in two reportable segments as
defined by SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. Under
this revised organizational structure, there are significant
functions, and therefore costs, that are considered corporate
expenses and are not allocated to the reportable segments for
the purposes of assessing performance and making operating
decisions. These unallocated corporate expenses include certain
marketing, development and general and administrative costs.
Allocated expenses include direct costs associated with selling,
supporting, developing and marketing the products and services
sold by each reporting unit, as well as amortization of acquired
intangible assets. The basis of allocation of all such costs and
expenses includes significant judgment and estimation.

Asset information by reportable segment is not
reported as the Company does not accumulate such information
internally. The Company had no customers from which it derived
more than 10% of the total revenue of either reporting unit for
the fiscal periods presented.

|                    |                           |                    |   |        |                  |  |   |              |  |  |              |        |  |  |   |        | 
|------------------- | ------------------------- | ------------------ | - | ------ | ---------------- |  | - | ------------ |  |  | ------------ | ------ |  |  | - | ------ | 
|                    |                           |                    |   |       
|                    |                           | Three Months Ended |   |        | Six Months Ended | 
|                    |                           |                    |   |        |                  | 
|                    |                           | December 25,       |   |        | December 27,     |  |   | December 25, |  |  | December 27, |       
|                    |                           | 2004               |   |        | 2003             |  |   | 2004         |  |  | 2003         |       
|                    |                           |                    |   |        |                  |  |   |              |  |  |              |       
|                    |                           |                   
|                    |                           | (In thousands)     |  
|Revenue:            |                           |                    |   |        |                  |  |   |              |  |  |              |        |  |  |   |       
|Product revenue:    |                           |                    |   |        |                  |  |   |              |  |  |              |        |  |  |   |       
|                    | Design Analysis Solutions |                    | $ | 6,159  |                  |  | $ | 4,124        |  |  | $            | 11,377 |  |  | $ | 7,550  | 
|                    | Manufacturing Solutions   |                    |   | 3,403  |                  |  |   | 989          |  |  |              | 6,112  |  |  |   | 1,917  | 
|                    |                           |                    |   |        |                  |  |   |              |  |  |              |       
|                    | Total product revenue     |                    |   | 9,562  |                  |  |   | 5,113        |  |  |              | 17,489 |  |  |   | 9,467  | 
|                    |                           |                    |   |        |                  |  |   |              |  |  |              |       
|Services revenue:   |                           |                    |   |        |                  |  |   |              |  |  |              |        |  |  |   |       
|                    | Design Analysis Solutions |                    |   | 6,019  |                  |  |   | 5,108        |  |  |              | 11,432 |  |  |   | 9,950  | 
|                    | Manufacturing Solutions   |                    |   | 676    |                  |  |   | 410          |  |  |              | 1,318  |  |  |   | 725    | 
|                    |                           |                    |   |        |                  |  |   |              |  |  |              |       
|                    | Total services revenue    |                    |   | 6,695  |                  |  |   | 5,518        |  |  |              | 12,750 |  |  |   | 10,675 | 
|                    |                           |                    |   |        |                  |  |   |              |  |  |              |       
|Total revenue:      |                           |                    |   |        |                  |  |   |              |  |  |              |        |  |  |   |       
|                    | Design Analysis Solutions |                    |   | 12,178 |                  |  |   | 9,232        |  |  |              | 22,809 |  |  |   | 17,500 | 
|                    | Manufacturing Solutions   |                    |   | 4,079  |                  |  |   | 1,399        |  |  |              | 7,430  |  |  |   | 2,642  | 
|                    |                           |                    |   |        |                  |  |   |              |  |  |              |       
|                    | Total revenue             |                    | $ | 16,257 |                  |  | $ | 10,631       |  |  | $            | 30,239 |  |  | $ | 20,142 | 
|                    |                           |                    |   |        |                  |  |   |              |  |  |              |       
|Costs and expenses: |                           |                    |   |        |                  |  |   |              |  |  |              |        |  |  |   |       
|                    | Design Analysis Solutions |                    | $ | 5,212  |                  |  | $ | 4,753        |  |  | $            | 9,475  |  |  | $ | 9,242  | 
|                    | Manufacturing Solutions   |                    |   | 4,141  |                  |  |   | 2,282        |  |  |              | 7,915  |  |  |   | 4,366  | 
|                    | Unallocated               |                    |   | 4,962  |                  |  |   | 2,964        |  |  |              | 8,990  |  |  |   | 5,462  | 
|                    |                           |                    |   |        |                  |  |   |              |  |  |              |       
|                    | Total costs and expenses  |                    | $ | 14,315 |                  |  | $ | 9,999        |  |  | $            | 26,380 |  |  | $ | 19,070 | 
|                    |                           |                    |   |        |                  |  |   |              |  |  |              |       

12



---



##### 



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


|                                           |                              |                    |   |        |                  |  |   |              |   |  |              |        |   |  |   |        |  
|------------------------------------------ | ---------------------------- | ------------------ | - | ------ | ---------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------ | -
|                                           |                              |                    |   |       
|                                           |                              | Three Months Ended |   |        | Six Months Ended | 
|                                           |                              |                    |   |        |                  | 
|                                           |                              | December 25,       |   |        | December 27,     |  |   | December 25, |   |  | December 27, |       
|                                           |                              | 2004               |   |        | 2003             |  |   | 2004         |   |  | 2003         |       
|                                           |                              |                    |   |        |                  |  |   |              |   |  |              |       
|                                           |                              |                   
|                                           |                              | (In thousands)     |  
|Segment income (loss) from
    operations: |                              |                    |   |        |                  |  |   |              |   |  |              |        |   |  |   |       
|                                           | Design Analysis Solutions    |                    | $ | 6,966  |                  |  | $ | 4,479        |   |  | $            | 13,334 |   |  | $ | 8,258  |  
|                                           | Manufacturing Solutions      |                    |   | (62    | )                |  |   | (883         | ) |  |              | (485   | ) |  |   | (1,724 | )
|                                           | Unallocated                  |                    |   | (4,962 | )                |  |   | (2,964       | ) |  |              | (8,990 | ) |  |   | (5,462 | )
|                                           |                              |                    |   |        |                  |  |   |              |   |  |              |       
|                                           | Total income from operations |                    | $ | 1,942  |                  |  | $ | 632          |   |  | $            | 3,859  |   |  | $ | 1,072  |  
|                                           |                              |                    |   |        |                  |  |   |              |   |  |              |       

Geographic
Information

The Company licenses and sells its products to
customers throughout the world. Sales and marketing operations
outside the United States are conducted principally through the
Companys foreign sales subsidiaries in Europe and Asia.
The Companys research and development centers are located
in Australia, the United States, France and the United Kingdom.
Geographic information regarding the Companys operations
was as follows:

|                             |                 |                    |   |        |                  |  |   |              |   |  |              |        |   |  |   |        |  
|---------------------------- | --------------- | ------------------ | - | ------ | ---------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------ | -
|                             |                 |                    |   |       
|                             |                 | Three Months Ended |   |        | Six Months Ended | 
|                             |                 |                    |   |        |                  | 
|                             |                 | December 25,       |   |        | December 27,     |  |   | December 25, |   |  | December 27, |       
|                             |                 | 2004               |   |        | 2003             |  |   | 2004         |   |  | 2003         |       
|                             |                 |                    |   |        |                  |  |   |              |   |  |              |       
|                             |                 |                   
|                             |                 | (In thousands)     |  
|Revenue:                     |                 |                    |   |        |                  |  |   |              |   |  |              |        |   |  |   |       
|                             | Asia/ Australia |                    | $ | 4,843  |                  |  | $ | 3,361        |   |  | $            | 9,470  |   |  | $ | 7,130  |  
|                             | Americas        |                    |   | 5,193  |                  |  |   | 2,310        |   |  |              | 10,236 |   |  |   | 4,652  |  
|                             | Europe          |                    |   | 6,221  |                  |  |   | 4,960        |   |  |              | 10,533 |   |  |   | 8,360  |  
|                             |                 |                    |   |        |                  |  |   |              |   |  |              |       
|                             | Total           |                    | $ | 16,257 |                  |  | $ | 10,631       |   |  | $            | 30,239 |   |  | $ | 20,142 |  
|                             |                 |                    |   |        |                  |  |   |              |   |  |              |       
|Percentage of total revenue: |                 |                    |   |        |                  |  |   |              |   |  |              |        |   |  |   |       
|                             | Asia/ Australia |                    |   | 30     | %                |  |   | 32           | % |  |              | 31     | % |  |   | 35     | %
|                             | Americas        |                    |   | 32     |                  |  |   | 22           |   |  |              | 34     |   |  |   | 23     |  
|                             | Europe          |                    |   | 38     |                  |  |   | 46           |   |  |              | 35     |   |  |   | 42     |  
|                             |                 |                    |   |        |                  |  |   |              |   |  |              |       
|                             | Total           |                    |   | 100    | %                |  |   | 100          | % |  |              | 100    | % |  |   | 100    | %
|                             |                 |                    |   |        |                  |  |   |              |   |  |              |       

Revenue from unaffiliated customers in Japan for
the three months ended December 25, 2004 and
December 27, 2003 was $2.9 million and
$2.2 million (18% and 20% of total revenue), respectively.
Revenue from unaffiliated customers in Japan for the six months
ended December 25, 2004 and December 27, 2003 was
$5.9 million and $4.6 million (19% and 23% of total
revenue), respectively. Substantially all of the revenue in the
Americas region is derived from the United States.

13



---



##### 



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


|                   |  |                |       |  |          |   |       | 
|------------------ |  | -------------- | ----- |  | -------- | - | ----- | 
|                   |  | December 25,   |       |  | June 30, |  
|                   |  | 2004           |       |  | 2004     |  
|                   |  |                |       |  |          |  
|                   |  |               
|                   |  | (In thousands) |      
|Fixed assets, net: |  |                |       |  |          |   |       | 
|Asia/ Australia    |  | $              | 2,111 |  |          | $ | 1,675 | 
|Americas           |  |                | 1,216 |  |          |   | 1,262 | 
|Europe             |  |                | 626   |  |          |   | 565   | 
|                   |  |                |       |  |          |  
|Total consolidated |  | $              | 3,953 |  |          | $ | 3,502 | 
|                   |  |                |       |  |          |  

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



|    |                                                          
|--- | ---------------------------------------------------------
|12. | Contingencies, Commitments and Guarantor
    Arrangements

The following is a summary of agreements and
provisions the Company has determined are within the scope of
Financial Accounting Standards Board Interpretation
(FIN) No. 45 Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34.

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 indemnities to various lessors in connection with
facility leases; indemnities to customers related to performance
of services subcontracted to other providers; indemnities to
vendors that guarantee expenses incurred by employees of the
Company and 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. 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 25, 2004.

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 from
90 days to two years 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 presents
changes to the accrued warranty liability:

|                               |  |                    |     |   |                  |   |    |              |  |   |              |   |  |   |    | 
|------------------------------ |  | ------------------ | --- | - | ---------------- | - | -- | ------------ |  | - | ------------ | - |  | - | -- | 
|                               |  |                    |     |  
|                               |  | Three Months Ended |     |   | Six Months Ended |  
|                               |  |                    |     |   |                  |  
|                               |  | December 25,       |     |   | December 27,     |   |    | December 25, |  |   | December 27, |  
|                               |  | 2004               |     |   | 2003             |   |    | 2004         |  |   | 2003         |  
|                               |  |                    |     |   |                  |   |    |              |  |   |              |  
|                               |  |                   
|                               |  | (In thousands)     |    
|Balance at beginning of period |  | $                  | 294 |   |                  | $ | 42 |              |  | $ | 254          |   |  | $ | 42 | 
|Additions                      |  |                    |    |   |                  |   | 5  |              |  |   | 55           |   |  |   | 5  | 
|Settlements                    |  |                    | (14 | ) |                  |   |   |              |  |   | (29          | ) |  |   |   | 
|                               |  |                    |     |   |                  |   |    |              |  |   |              |  
|Balance at end of period       |  | $                  | 280 |   |                  | $ | 47 |              |  | $ | 280          |   |  | $ | 47 | 
|                               |  |                    |     |   |                  |   |    |              |  |   |              |  

14



---



##### 



MOLDFLOW CORPORATION


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)




| |                  
| | -----------------
| | Lease Commitments

The Company leases certain of its office space,
autos and equipment under noncancelable operating leases, which
expire at various dates through 2012. At December 25, 2004,
the Company had no outstanding capital lease obligations. Future
minimum operating lease commitments as of December 25, 2004
were as follows:

|                 |  |                |       | 
|---------------- |  | -------------- | ----- | 
|                 |  | Operating      |      
|Fiscal Year      |  | Leases         |      
|                 |  |                |      
|                 |  | (In thousands) |      
|2005 (remainder) |  | $              | 1,226 | 
|2006             |  |                | 1,777 | 
|2007             |  |                | 914   | 
|2008             |  |                | 627   | 
|2009             |  |                | 621   | 
|Thereafter       |  |                | 1,308 | 
|                 |  |                |      
|                 |  | $              | 6,473 | 
|                 |  |                |      

Future minimum operating lease commitments
include the full cash commitment for a leased facility in the
United Kingdom. The Companys April 2002 restructuring plan
included a reduction in the use of this facility, resulting in a
charge of $606,000 at that time.

In January 2005, the Company entered into a
seven-year operating lease agreement for a facility that will
serve as the Companys new corporate headquarters in
Framingham, Massachusetts. Future operating lease commitments
under this agreement are approximately $3.1 million.



| |                     
| | --------------------
| | Purchase Commitments

The Company has various contractual obligations
for the purchase of goods or services that are enforceable and
legally binding on the part of the Company. Future purchase
commitments as of December 25, 2004 were as follows:

|                 |  |                |       | 
|---------------- |  | -------------- | ----- | 
|                 |  | Purchase       |      
|Fiscal Year      |  | Commitments    |      
|                 |  |                |      
|                 |  | (In thousands) |      
|2005 (remainder) |  | $              | 930   | 
|2006             |  |                | 412   | 
|Thereafter       |  |                | 5     | 
|                 |  |                |      
|                 |  | $              | 1,347 | 
|                 |  |                |      

15



---



##### 








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

We begin Managements Discussion and
Analysis of Financial Condition and Results of Operations
(MD&A) with a review of our overall strategy and
the strategy for our two business units to give the reader a
view of the goals of our business and the direction in which our
business and products are moving. This is followed by a
discussion of the Critical Accounting Policies that we believe
are important to understanding the assumptions and judgments
incorporated in our reported financial results. We then discuss
our Results of Operations for the three and six months ended
December 25, 2004 compared to the three and six months
ended December 27, 2003. We then provide an analysis of
changes in our balance sheet and cash flows, and discuss our
financial commitments in the sections entitled Liquidity
and Capital Resources, Contractual Obligations
and Off-Balance Sheet Financing Arrangements.

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. 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 goal is to be the worlds leading
provider of software and hardware solutions for the optimization
and automation of plastics-focused manufacturing. We offer
customers a broad range of solutions to improve the way they
design and produce parts and molds through powerful and robust
technology-based products and services. Our focus is to help
customers manufacture less expensive and more reliable plastic
products by increasing the effectiveness of their designs and
their manufacturing operations and improving efficiencies across
the entire design-through-manufacture process.

We believe that our key competitive strength is
our extensive domain knowledge in the fields of materials
science and characterization, numerical methods and predictive
modeling through simulation and analysis, coupled with our
expertise in packaging and delivering this knowledge to our
customers in easy-to-use software and hardware applications. 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 of our products are developed by commercial
contractors. Because of the strong body of intellectual property
and knowledge that we have created over the course of twenty-six
years in serving the plastics design and manufacturing market,
we have become the leading provider of highly sophisticated
predictive software applications for the plastics design
engineering and manufacturing communities.

Plastics are pervasive throughout a broad range
of vertical industry applications including the automotive,
electronics, packaging, medical products and consumer goods
industries. These industries are generally large and growing.
Because the supply chains that support the design and production
of plastic parts in these industries are often fragmented and
comprised of multiple companies in various geographies around
the globe, we have developed a wide range of applications that
can be used by participants at all stages of the plastics value
chain to optimize their process and reduce their costs. Our
strategy is to deliver our deep domain expertise in plastics
packaged in software and system solutions that address the
specific issues of the

16



---



##### 



participants in each of these stages and increase
our penetration of these industries by making our products
available through a combination of direct and independent sales
representatives, resellers and engineering consultants around
the globe.


For the design of plastic parts and molds, our
strategy is to provide products which enable analysis-driven
design, in the earliest stages of product development, by making
analysis technology more integral to the design process. In
doing so, we seek to make our technology available to a wider
audience of potential users in mainstream design markets,
including those engineers who are not specialists in plastics
design. By building upon our existing technology categories, we
bring powerful solutions which are easy to learn and use,
providing low cost of deployment and rapid return on investment.

For manufacturers of plastic parts, our strategy
is to offer a range of products which address the need for
optimizing, automating and monitoring the setup of the primary
equipment while controlling and monitoring the temperature, flow
of materials and other elements in the manufacturing process.
Our solutions include applications which provide real-time
business performance management information that enables
companies to manage their manufacturing operations throughout
the production process. Because of our extensive knowledge of
the material properties of plastics and the physics involved in
the process of converting raw plastic to finished goods, we can
assist companies to obtain higher production yields, reduced
cycle times, improved process reliability and better part
quality.

Our growth strategy derives from these strengths.
We continue to increase the business value of our design
analysis solutions and manufacturing solutions for our customers
in a number of ways. We improve the performance and
functionality of existing products with each new release. We
develop products addressing specific vertical market needs in
each of the target market segments of our business. In the
design phase, for example, we provide applications which address
the process of microchip encapsulation, a process which is
involved in the manufacture of semiconductors. In the
manufacturing phase, we offer solutions to the die cast market,
a conversion process that is similar to the plastics injection
molding process.

Expanding our geographic coverage is a key
element of our growth strategy. We believe that the rapidly
developing economies in China and other developing countries
present significant longer-term growth opportunities for our
business. Our ability to conduct research and development at
various locations throughout the world allows us to optimize
product development and lower costs. International development,
however, also involves significant costs and challenges,
including whether we can adequately protect our intellectual
property and derive significant revenue in areas where laws
regarding intellectual property are not in place or not
effectively enforced.

A significant part of our growth strategy is
based upon building on the customer loyalty that we have
achieved and the large installed base that we have built. We
receive approximately 60% to 70% of our overall revenue from
repeat customers. We deliver product releases on a regular and
timely basis which incorporate significant functionality
improvements to ensure that our customers have access to the
latest technology developments. We focus on customer
satisfaction through programs aimed at involving our customers
in the future direction of our products, enhancing their ease of
use and user experience and providing multiple points of contact
within the company to ensure that their needs are met.

Our uses of cash include capital expenditures to
support our operations and our product development, mergers and
acquisitions, and investments in growth initiatives. We continue
to evaluate merger and acquisition opportunities to the extent
they support our strategy and our growth objectives.

17



---



##### 



Design Analysis Solutions

The Design Analysis Solutions business unit
serves the product, part and mold tooling design market. Our
strategy is to provide powerful and sophisticated solutions that
enable our customers to optimize the design of parts and molds
in order to reduce the time to market, improve the reliability
of the production process, improve part quality and lower the
cost of manufacture for parts once in production.

Our primary offerings are our Moldflow Plastics
Advisers (MPA) for part and mold design optimization
and our Moldflow Plastics Insight (MPI) for in-depth
simulation for part and mold design validation and optimization.

Manufacturing Solutions

The Manufacturing Solutions business unit serves
the plastics-focused discrete manufacturing sector. Our strategy
is to provide powerful integrated solutions that enable our
customers to optimize and automate the set-up of an injection
molding machine, monitor and control the injection molding
process, control the temperature and flow of plastic into the
mold and monitor and report on the process and production at
both the machine and plant-wide level. These products enable
customers to improve the reliability of their production
process, improve their production yield and efficiency and
reduce their costs of production by reducing material usage and
cycle times.

Our primary offerings are our Moldflow Plastics
Xpert (MPX) for process set-up, optimization and
control, our Shotscope process monitoring and control
application, our Altanium system for temperature and process
control and our Celltrack product, formerly known as MMS/
Production Monitoring, for monitoring and reporting on the
operations across the factory floor. Our Manufacturing Solutions
products are an integration of our internally developed MPX
product with Shotscope, Celltrack and Altanium, all of which
were initially developed by companies we have acquired.

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

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 revenue recognition, bad
debts, inventories, income taxes, warranty obligations,
intangible assets, and 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, asset valuation
allowances, acquisition accounting, impairment of acquired
intangible assets, goodwill and other long-lived assets, income
tax accounting, restructuring charges, hedge accounting,
capitalization of software development costs and stock option
accounting. 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, 2004.

18



---



##### 



Overview of Results of Operations for the
Three Months and Six Months Ended December 25,
2004



| |                                   
| | ----------------------------------
| | Financial Highlights
    included:



| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | growth in revenues to $16.3 million in the
    second quarter of fiscal 2005 from $10.6 million in the
    second quarter of fiscal 2004,                    
|
| |  | growth in earnings to $0.14 per diluted share in
    the second quarter of fiscal 2005 from $0.06 per diluted share
    in the second quarter of fiscal 2004,
|
| |  | growth in revenues to $30.2 million in the
    first half of fiscal 2005 from $20.1 million in the first
    half of fiscal 2004,                            
|
| |  | growth in earnings to $0.29 per diluted share in
    the first half of fiscal 2005 from $0.10 per diluted share in
    the first half of fiscal 2004, and    
|
| |  | cash provided from operations of $454,000 in the
    first half of fiscal 2005, compared to $61,000 in the first half
    of fiscal 2004.                    



| |                                      
| | -------------------------------------
| | Summary of Operating
    Performance:

|                                                                       |  |                                            |        |  |         |  |        |              |  |   |         |  |  |  |     |  
|---------------------------------------------------------------------- |  | ------------------------------------------ | ------ |  | ------- |  | ------ | ------------ |  | - | ------- |  |  |  | --- | -
|                                                                       |  | Three                                      |        |  |         |  | Three  |              |  |  
|                                                                       |  | Months                                     |        |  |         |  | Months |              |  |  
|                                                                       |  | Ended                                      |        |  | As a %  |  |        | Ended        |  |   | As a %  | 
|                                                                       |  | December 25,                               |        |  | of      |  |        | December 27, |  |   | of      | 
|                                                                       |  | 2004                                       |        |  | Revenue |  |        | 2003         |  |   | Revenue | 
|                                                                       |  |                                            |        |  |         |  |        |              |  |   |         | 
|                                                                       |  |                                           
|                                                                       |  | (In thousands, except for percentage data) |       
|Revenue                                                                |  | $                                          | 16,257 |  |         |  | 100    | %            |  | $ | 10,631  |  |  |  | 100 | %
|Cost of revenue                                                        |  |                                            | 3,525  |  |         |  | 22     |              |  |   | 1,539   |  |  |  | 14  |  
|Operating expenses, including amortization of
    acquired intangibles |  |                                            | 10,790 |  |         |  | 66     |              |  |   | 8,460   |  |  |  | 80  |  
|                                                                       |  |                                            |        |  |         |  |        |              |  |   |         | 
|Income from operations                                                 |  | $                                          | 1,942  |  |         |  | 12     | %            |  | $ | 632     |  |  |  | 6   | %
|                                                                       |  |                                            |        |  |         |  |        |              |  |   |         | 

|                                                                       |  |                                            |        |  |         |  |            |              |  |   |         |  |  |  |     |  
|---------------------------------------------------------------------- |  | ------------------------------------------ | ------ |  | ------- |  | ---------- | ------------ |  | - | ------- |  |  |  | --- | -
|                                                                       |  | Six Months                                 |        |  |         |  | Six Months |              |  |  
|                                                                       |  | Ended                                      |        |  | As a %  |  |            | Ended        |  |   | As a %  | 
|                                                                       |  | December 25,                               |        |  | of      |  |            | December 27, |  |   | of      | 
|                                                                       |  | 2004                                       |        |  | Revenue |  |            | 2003         |  |   | Revenue | 
|                                                                       |  |                                            |        |  |         |  |            |              |  |   |         | 
|                                                                       |  |                                           
|                                                                       |  | (In thousands, except for percentage data) |       
|Revenue                                                                |  | $                                          | 30,239 |  |         |  | 100        | %            |  | $ | 20,142  |  |  |  | 100 | %
|Cost of revenue                                                        |  |                                            | 6,662  |  |         |  | 22         |              |  |   | 2,806   |  |  |  | 14  |  
|Operating expenses, including amortization of
    acquired intangibles |  |                                            | 19,718 |  |         |  | 65         |              |  |   | 16,264  |  |  |  | 81  |  
|                                                                       |  |                                            |        |  |         |  |            |              |  |   |         | 
|Income from operations                                                 |  | $                                          | 3,859  |  |         |  | 13         | %            |  | $ | 1,072   |  |  |  | 5   | %
|                                                                       |  |                                            |        |  |         |  |            |              |  |   |         | 

Total revenue in our second quarter and first six
months of fiscal 2005 increased 53% and 50%, respectively, from
the comparable periods of fiscal 2004. The increase in both
periods was primarily as a result of growth in our Design
Analysis Solutions product sales in our European and Asia/
Australia regions and also due to sales of hot runner process
controllers, the main product of American MSI Corporation
(AMSI), a company which we acquired in January 2004.
In both the three-month and six-month periods ended
December 25, 2004, the value of the U.S. dollar relative to
the currencies of some of the other countries in which we
conduct business was weaker than that of the comparable periods
of fiscal 2004. Had the currency exchange rates of both periods
of fiscal 2005 been the same as the comparable periods of fiscal
2004, our total revenue for the three-month and six-month
periods ended December 25, 2004 would have increased 47%
and 44%, respectively, from the prior year.

Cost of revenue in our second quarter and first
six months of fiscal 2005 increased 129% and 137%, respectively,
from the comparable periods of fiscal 2004. The increase in both
periods was primarily a result of higher direct material costs
associated with our hot runner process controllers and the costs
of distribution personnel added in our acquisition of AMSI.

19



---



##### 



Operating expenses, including amortization of
acquired intangible assets, in our second quarter and first six
months of fiscal 2005 increased 28% and 21%, respectively, from
the comparable periods of fiscal 2004. The increase in both
periods was primarily due to the cost of personnel added in our
acquisition of AMSI, higher variable sales costs related to the
current sales performance, increased professional service fees
including those related to our Sarbanes-Oxley compliance effort
and the decline in value of the U.S. dollar relative to the
local currencies in which we incur expenses. Beginning in July
2005, our employee-related expenditures will increase
substantially when we are required by accounting standard
changes to record compensation expense related to employee stock
option grants.

In the six months ended December 25, 2004,
we generated $454,000 of cash from our operating activities as
compared to $61,000 in the six months ended December 27,
2003. We finished the first half of fiscal 2005 with
$52.9 million of cash and marketable securities, compared
to $51.7 million of cash and marketable securities as of
June 30, 2004. We have no long-term debt.

Results of Operations

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

|                           |                                            |                            |   |     |                  |  |   |              |    |  |              |     |    |  |   |     |    | 
|-------------------------- | ------------------------------------------ | -------------------------- | - | --- | ---------------- |  | - | ------------ | -- |  | ------------ | --- | -- |  | - | --- | -- | 
|                           |                                            |                            |   |    
|                           |                                            | Three Months Ended         |   |     | Six Months Ended | 
|                           |                                            |                            |   |     |                  | 
|                           |                                            | December 25,               |   |     | December 27,     |  |   | December 25, |    |  | December 27, |    
|                           |                                            | 2004                       |   |     | 2003             |  |   | 2004         |    |  | 2003         |    
|                           |                                            |                            |   |     |                  |  |   |              |    |  |              |    
|Revenue:                   |                                            |                            |   |     |                  |  |   |              |    |  |              |     |    |  |   |    
|                           | Product                                    |                            |   | 59  | %                |  |   | 48           | %  |  |              | 58  | %  |  |   | 47  | % 
|                           | Services                                   |                            |   | 41  |                  |  |   | 52           |    |  |              | 42  |    |  |   | 53  |   
|                           |                                            |                            |   |     |                  |  |   |              |    |  |              |    
|                           | Total revenue                              |                            |   | 100 | %                |  |   | 100          | %  |  |              | 100 | %  |  |   | 100 | % 
|                           |                                            |                            |   |     |                  |  |   |              |    |  |              |    
|Costs and expenses:        |                                            |                            |   |     |                  |  |   |              |    |  |              |     |    |  |   |    
|                           | Cost of product revenue                    |                            |   | 12  | %                |  |   | 6            | %  |  |              | 12  | %  |  |   | 6   | % 
|                           | Cost of services revenue                   |                            |   | 10  |                  |  |   | 9            |    |  |              | 10  |    |  |   | 8   |   
|                           | Research and development                   |                            |   | 13  |                  |  |   | 14           |    |  |              | 12  |    |  |   | 16  |   
|                           | Selling and marketing                      |                            |   | 34  |                  |  |   | 44           |    |  |              | 34  |    |  |   | 44  |   
|                           | General and administrative                 |                            |   | 19  |                  |  |   | 20           |    |  |              | 19  |    |  |   | 20  |   
|                           | Amortization of acquired intangible assets |                            |   |    |                  |  |   | 1            |    |  |              |    |    |  |   | 1   |   
|                           |                                            |                            |   |     |                  |  |   |              |    |  |              |    
|                           |                                            | Total costs and expenses   |   |     | 88               |  |   |              | 94 |  |              |     | 87 |  |   |     | 95 | 
|                           |                                            |                            |   |     |                  |  |   |              |    |  |              |    
|                           | Income from operations                     |                            |   | 12  |                  |  |   | 6            |    |  |              | 13  |    |  |   | 5   |   
|Interest income            |                                            |                            | 2 |     |                  |  | 3 |              |    |  | 2            |     |    |  | 3 |    
|Other income (loss), net   |                                            |                            |  |     |                  |  |  |              |    |  |             |     |    |  |  |    
|                           |                                            |                            |   |     |                  |  |   |              |    |  |              |    
|                           |                                            | Income before income taxes |   |     | 14               |  |   |              | 9  |  |              |     | 15 |  |   |     | 8  | 
|Provision for income taxes |                                            |                            | 5 |     |                  |  | 3 |              |    |  | 4            |     |    |  | 3 |    
|                           |                                            |                            |   |     |                  |  |   |              |    |  |              |    
|                           | Net income                                 |                            |   | 9   | %                |  |   | 6            | %  |  |              | 11  | %  |  |   | 5   | % 
|                           |                                            |                            |   |     |                  |  |   |              |    |  |              |    



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

We generate revenue from three principal sources:



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | license fees for our packaged software,                                                                        
|
| |  | product fees for our collaborative manufacturing
    management systems and hot runner process controllers, and

20



---



##### 





| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | services revenue derived from maintenance and
    support related to our products, consulting, implementation,
    training and material testing.

Total revenue increased 53%, or
$5.7 million, to $16.3 million for the three months
ended December 25, 2004, from $10.6 million for the
three months ended December 27, 2003. On a constant
currency basis, which excludes the impact of changes in foreign
exchange rates from those of the previous year, total revenue
for the three-month period increased approximately 47%. For the
six months ended December 25, 2004, total revenue increased
50%, or $10.1 million, to $30.2 million from
$20.1 million in the comparable period of the previous
fiscal year. On a constant currency basis, total revenue for the
six-month period increased approximately 44%.

The following table sets forth our total revenue
for the three-month and six-month periods ended
December 25, 2004 and December 27, 2003:

|         |          |                    |   |        |                  |  |   |              |  |  |              |        |  |  |   |        | 
|-------- | -------- | ------------------ | - | ------ | ---------------- |  | - | ------------ |  |  | ------------ | ------ |  |  | - | ------ | 
|         |          |                    |   |       
|         |          | Three Months Ended |   |        | Six Months Ended | 
|         |          |                    |   |        |                  | 
|         |          | December 25,       |   |        | December 27,     |  |   | December 25, |  |  | December 27, |       
|         |          | 2004               |   |        | 2003             |  |   | 2004         |  |  | 2003         |       
|         |          |                    |   |        |                  |  |   |              |  |  |              |       
|         |          |                   
|         |          | (In thousands)     |  
|Revenue: |          |                    |   |        |                  |  |   |              |  |  |              |        |  |  |   |       
|         | Product  |                    | $ | 9,562  |                  |  | $ | 5,113        |  |  | $            | 17,489 |  |  | $ | 9,467  | 
|         | Services |                    |   | 6,695  |                  |  |   | 5,518        |  |  |              | 12,750 |  |  |   | 10,675 | 
|         |          |                    |   |        |                  |  |   |              |  |  |              |       
|         | Total    |                    | $ | 16,257 |                  |  | $ | 10,631       |  |  | $            | 30,239 |  |  | $ | 20,142 | 
|         |          |                    |   |        |                  |  |   |              |  |  |              |       

The following table sets forth our total revenue
by geographic region for the three-month and six-month periods
ended December 25, 2004 and December 27, 2003:

|                             |                 |                                            |   |        |                  |  |   |              |   |  |              |        |   |  |   |        |  
|---------------------------- | --------------- | ------------------------------------------ | - | ------ | ---------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------ | -
|                             |                 |                                            |   |       
|                             |                 | Three Months Ended                         |   |        | Six Months Ended | 
|                             |                 |                                            |   |        |                  | 
|                             |                 | December 25,                               |   |        | December 27,     |  |   | December 25, |   |  | December 27, |       
|                             |                 | 2004                                       |   |        | 2003             |  |   | 2004         |   |  | 2003         |       
|                             |                 |                                            |   |        |                  |  |   |              |   |  |              |       
|                             |                 |                                           
|                             |                 | (In thousands, except for percentage data) |  
|Revenue:                     |                 |                                            |   |        |                  |  |   |              |   |  |              |        |   |  |   |       
|                             | Asia/ Australia |                                            | $ | 4,843  |                  |  | $ | 3,361        |   |  | $            | 9,470  |   |  | $ | 7,130  |  
|                             | Americas        |                                            |   | 5,193  |                  |  |   | 2,310        |   |  |              | 10,236 |   |  |   | 4,652  |  
|                             | Europe          |                                            |   | 6,221  |                  |  |   | 4,960        |   |  |              | 10,533 |   |  |   | 8,360  |  
|                             |                 |                                            |   |        |                  |  |   |              |   |  |              |       
|                             | Total           |                                            | $ | 16,257 |                  |  | $ | 10,631       |   |  | $            | 30,239 |   |  | $ | 20,142 |  
|                             |                 |                                            |   |        |                  |  |   |              |   |  |              |       
|Percentage of total revenue: |                 |                                            |   |        |                  |  |   |              |   |  |              |        |   |  |   |       
|                             | Asia/ Australia |                                            |   | 30     | %                |  |   | 32           | % |  |              | 31     | % |  |   | 35     | %
|                             | Americas        |                                            |   | 32     |                  |  |   | 22           |   |  |              | 34     |   |  |   | 23     |  
|                             | Europe          |                                            |   | 38     |                  |  |   | 46           |   |  |              | 35     |   |  |   | 42     |  
|                             |                 |                                            |   |        |                  |  |   |              |   |  |              |       
|                             | Total           |                                            |   | 100    | %                |  |   | 100          | % |  |              | 100    | % |  |   | 100    | %
|                             |                 |                                            |   |        |                  |  |   |              |   |  |              |       

21



---



##### 



Product
revenue

The following table sets forth our product
revenue by product group and geography for the three-month and
six-month periods ended December 25, 2004 and
December 27, 2003:

|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |     |   |  |   |       |  
|------------------------------------ | ------------------------- | ------------------------------------------ | - | ---------- | ----------- |  | - | ------------ |  |  | ---- | --- | - |  | - | ----- | -
|                                     |                           |                                            |   |            |             | 
|                                     |                           |                                            |   | Increase   |             |  |  
|                                     |                           |                                            |   | (Decrease) |             |  |  
|                                     |                           | Three Months                               |   |            | Compared to |  |   | Three Months | 
|                                     |                           | Ended                                      |   |            | Prior Year  |  |   | Ended        | 
|                                     |                           | December 25,                               |   |            |             |  |   | December 27, | 
|                                     |                           | 2004                                       |   |            | $           |  |   | %            |  |  | 2003 |    
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|                                     |                           |                                           
|                                     |                           | (In thousands, except for percentage data) |  
|Asia/Australia product revenue:      |                           |                                            |   |            |             |  |   |              |  |  |      |     |   |  |   |      
|                                     | Design Analysis Solutions |                                            | $ | 2,759      |             |  | $ | 1,114        |  |  |      | 68  | % |  | $ | 1,645 |  
|                                     | Manufacturing Solutions   |                                            |   | 39         |             |  |   | 31           |  |  |      | 388 |   |  |   | 8     |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|                                     | Total                     |                                            |   | 2,798      |             |  |   | 1,145        |  |  |      | 86  |   |  |   | 1,653 |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|Americas product revenue:            |                           |                                            |   |            |             |  |   |              |  |  |      |     |   |  |   |      
|                                     | Design Analysis Solutions |                                            |   | 812        |             |  |   | 508          |  |  |      | 167 |   |  |   | 304   |  
|                                     | Manufacturing Solutions   |                                            |   | 2,612      |             |  |   | 2,168        |  |  |      | 488 |   |  |   | 444   |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|                                     | Total                     |                                            |   | 3,424      |             |  |   | 2,676        |  |  |      | 358 |   |  |   | 748   |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|Europe product revenue:              |                           |                                            |   |            |             |  |   |              |  |  |      |     |   |  |   |      
|                                     | Design Analysis Solutions |                                            |   | 2,588      |             |  |   | 413          |  |  |      | 19  |   |  |   | 2,175 |  
|                                     | Manufacturing Solutions   |                                            |   | 752        |             |  |   | 215          |  |  |      | 40  |   |  |   | 537   |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|                                     | Total                     |                                            |   | 3,340      |             |  |   | 628          |  |  |      | 23  |   |  |   | 2,712 |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|Total product revenue:               |                           |                                            |   |            |             |  |   |              |  |  |      |     |   |  |   |      
|                                     | Design Analysis Solutions |                                            |   | 6,159      |             |  |   | 2,035        |  |  |      | 49  |   |  |   | 4,124 |  
|                                     | Manufacturing Solutions   |                                            |   | 3,403      |             |  |   | 2,414        |  |  |      | 244 |   |  |   | 989   |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|                                     | Total                     |                                            | $ | 9,562      |             |  | $ | 4,449        |  |  |      | 87  | % |  | $ | 5,113 |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|Percentage of total product revenue: |                           |                                            |   |            |             |  |   |              |  |  |      |     |   |  |   |      
|                                     | Design Analysis Solutions |                                            |   | 64         | %           |  |   |              |  |  |      |     |   |  |   | 81    | %
|                                     | Manufacturing Solutions   |                                            |   | 36         |             |  |   |              |  |  |      |     |   |  |   | 19    |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|                                     | Total                     |                                            |   | 100        | %           |  |   |              |  |  |      |     |   |  |   | 100   | %
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    

|                                |                           |                                            |   |            |             |  |  |              |   |  |      |      |   |  |   |       | 
|------------------------------- | ------------------------- | ------------------------------------------ | - | ---------- | ----------- |  |  | ------------ | - |  | ---- | ---- | - |  | - | ----- | 
|                                |                           |                                            |   |            |             | 
|                                |                           |                                            |   | Increase   |             |  | 
|                                |                           |                                            |   | (Decrease) |             |  | 
|                                |                           | Six Months                                 |   |            | Compared to |  |  | Six Months   |  
|                                |                           | Ended                                      |   |            | Prior Year  |  |  | Ended        |  
|                                |                           | December 25,                               |   |            |             |  |  | December 27, |  
|                                |                           | 2004                                       |   |            | $           |  |  | %            |   |  | 2003 |     
|                                |                           |                                            |   |            |             |  |  |              |   |  |      |     
|                                |                           |                                           
|                                |                           | (In thousands, except for percentage data) |  
|Asia/Australia product revenue: |                           |                                            |   |            |             |  |  |              |   |  |      |      |   |  |   |      
|                                | Design Analysis Solutions |                                            | $ | 5,491      |             |  |  | 1,688        |   |  |      | 44   | % |  | $ | 3,803 | 
|                                | Manufacturing Solutions   |                                            |   | 39         |             |  |  | 31           |   |  |      | 288  |   |  |   | 8     | 
|                                |                           |                                            |   |            |             |  |  |              |   |  |      |     
|                                | Total                     |                                            |   | 5,530      |             |  |  | 1,179        |   |  |      | 45   |   |  |   | 3,811 | 
|                                |                           |                                            |   |            |             |  |  |              |   |  |      |     
|Americas product revenue:       |                           |                                            |   |            |             |  |  |              |   |  |      |      |   |  |   |      
|                                | Design Analysis Solutions |                                            |   | 1,676      |             |  |  | 776          |   |  |      | 86   |   |  |   | 900   | 
|                                | Manufacturing Solutions   |                                            |   | 5,040      |             |  |  | 4,291        |   |  |      | 473  |   |  |   | 749   | 
|                                |                           |                                            |   |            |             |  |  |              |   |  |      |     
|                                | Total                     |                                            |   | 6,716      |             |  |  | 5,067        |   |  |      | 307  |   |  |   | 1,649 | 
|                                |                           |                                            |   |            |             |  |  |              |   |  |      |     
|Europe product revenue:         |                           |                                            |   |            |             |  |  |              |   |  |      |      |   |  |   |      
|                                | Design Analysis Solutions |                                            |   | 4,209      |             |  |  | 1,362        |   |  |      | 48   |   |  |   | 2,847 | 
|                                | Manufacturing Solutions   |                                            |   | 1,033      |             |  |  | (127         | ) |  |      | (11) |   |  |   | 1,160 | 
|                                |                           |                                            |   |            |             |  |  |              |   |  |      |     
|                                | Total                     |                                            |   | 5,242      |             |  |  | 1,235        |   |  |      | 31   |   |  |   | 4,007 | 
|                                |                           |                                            |   |            |             |  |  |              |   |  |      |     

22



---



##### 



|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |     |   |  |   |       |  
|------------------------------------ | ------------------------- | ------------------------------------------ | - | ---------- | ----------- |  | - | ------------ |  |  | ---- | --- | - |  | - | ----- | -
|                                     |                           |                                            |   |            |             | 
|                                     |                           |                                            |   | Increase   |             |  |  
|                                     |                           |                                            |   | (Decrease) |             |  |  
|                                     |                           | Six Months                                 |   |            | Compared to |  |   | Six Months   | 
|                                     |                           | Ended                                      |   |            | Prior Year  |  |   | Ended        | 
|                                     |                           | December 25,                               |   |            |             |  |   | December 27, | 
|                                     |                           | 2004                                       |   |            | $           |  |   | %            |  |  | 2003 |    
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|                                     |                           |                                           
|                                     |                           | (In thousands, except for percentage data) |  
|Total product revenue:               |                           |                                            |   |            |             |  |   |              |  |  |      |     |   |  |   |      
|                                     | Design Analysis Solutions |                                            |   | 11,377     |             |  |   | 3,827        |  |  |      | 51  |   |  |   | 7,550 |  
|                                     | Manufacturing Solutions   |                                            |   | 6,112      |             |  |   | 4,195        |  |  |      | 219 |   |  |   | 1,917 |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|                                     | Total                     |                                            | $ | 17,489     |             |  | $ | 8,022        |  |  |      | 85  | % |  | $ | 9,467 |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|Percentage of total product revenue: |                           |                                            |   |            |             |  |   |              |  |  |      |     |   |  |   |      
|                                     | Design Analysis Solutions |                                            |   | 65         | %           |  |   |              |  |  |      |     |   |  |   | 80    | %
|                                     | Manufacturing Solutions   |                                            |   | 35         | %           |  |   |              |  |  |      |     |   |  |   | 20    |  
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    
|                                     | Total                     |                                            |   | 100        | %           |  |   |              |  |  |      |     |   |  |   | 100   | %
|                                     |                           |                                            |   |            |             |  |   |              |  |  |      |    

Our product revenue includes both license fees
for our packaged software application products and product fees
for our manufacturing management systems and hot runner process
controllers. Typically, our customers pay an up-front, one-time
fee for our products. For our packaged software applications,
the amount of the fee depends upon the number and type of
software modules licensed and the number of the customers
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.
For sales of our other packaged software products, we generally
require a signed license agreement. For our manufacturing
management systems, the amount of the fee depends upon the
number and type of software modules licensed with the system, if
any, and the systems hardware components. We generally
require a signed license agreement for sales of our
manufacturing management systems that have significant
application software functionality. For our hot runner process
controllers, which do not have significant software application
functionality, the fee primarily depends on the systems
hardware components. 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
record these payments as revenue as well, but such amounts have
not been significant to date.

Product revenue for the second fiscal quarter
increased by $4.4 million, or 87%, to $9.6 million,
from $5.1 million in the comparable period of the previous
fiscal year. On a constant currency basis, which excludes the
impact of changes in foreign exchange rates from those of the
previous year, product revenue increased 80% from the same
period of fiscal 2004. The remainder of the increase was due to
the impact of our acquisition of AMSI, the introduction of new
Design Analysis Solutions products and our extended distribution
capabilities, which allowed us to reach a broader segment of the
mid-range design market.

We added 86 new customers in the second quarter
of fiscal 2005, compared to 122 new customers in the same period
of fiscal 2004. Sales to new customers represented 26% of total
product revenue in the three months ended December 25,
2004, compared to 49% of total product revenue in the three
months ended December 27, 2003.

Product revenue for the first six months of
fiscal 2005 increased by $8.0 million, or 85%, to
$17.5 million, from $9.5 million in the comparable
period of the previous fiscal year. The increase was a result of
the acquisition of AMSI, increased Design Analysis Solution
product sales and the declining value of the U.S. dollar
relative to most of the local currencies in which we generate
revenue, in particular the Euro and Japanese yen.

We added 178 new customers in the first half of
fiscal 2005, compared to 224 new customers in the comparable
period of fiscal 2004. Sales to new customers represented 29% of
total product revenue in the six months ended December 25,
2004, compared to 38% of total product revenue in the six months
ended December 27, 2003.

23



---



##### 



Pricing of individual products within our product
families of both our business units can vary greatly, and the
mix of products sold during a given period can significantly
impact our average selling price per seat. As such, we do not
believe that an average selling price per seat provides a
meaningful measure of our business.



| |                                              
| | ---------------------------------------------
| | Design Analysis Solutions Product
    Revenue

Product revenue from our Design Analysis
Solutions (DAS) products increased by
$2.0 million, or 49%, to $6.2 million in the three
months ended December 25, 2004 when compared to the three
months ended December 27, 2003. For the six-month period
ended December 25, 2004, DAS product revenue increased by
$3.8 million, or 51%, to $11.4 million when compared
to the six months ended December 27, 2003. The increase in
both periods was due mostly to strong sales results in Japan,
Korea and Europe, particularly in Germany and France. We believe
that this strong sales growth is the result of a number of
factors, including new product introductions and economic
recovery in certain of our key markets, including the European
automotive industry and the Asian electronics industry.

Within the last year, we released new versions of
our MPA and MPI products, which introduced new, add-on modules
to each of these product lines. We believe that these releases
have increased the appeal of the products to a broader base of
engineers, resulting in increased sales of these product
families relative to the previous fiscal year. In addition, we
recently introduced new software applications that are
integrated into third party products and designed to expand our
product offerings into additional market segments. We believe
that those releases increased our DAS product revenue relative
to the previous fiscal year.

We sold 129 seats of DAS products in the three
months ended December 25, 2004, compared to 115 seats of
these products in the three months ended December 27, 2003.
For the six-month period ended December 25, 2004, we sold
278 seats of DAS products compared to 249 seats of these
products in the six months ended December 27, 2003.



| |                                            
| | -------------------------------------------
| | Manufacturing Solutions Product
    Revenue

Product revenue from our Manufacturing Solutions
(MS) products increased by $2.4 million, or
244%, to $3.4 million in the three months ended
December 25, 2004 compared to $1.0 million in the
three months ended December 27, 2003. For the six-month
period ended December 25, 2004, product revenue from our MS
products increased by $4.2 million, or 219%, to
$6.1 million compared to $1.9 million in the six
months ended December 27, 2003. The increase in both
periods from the previous fiscal year was primarily due to sales
of hot runner process controllers, a product line that was
acquired in our January 2004 acquisition of AMSI.

We sold 295 seats of our MS products in the three
months ended December 25, 2004 compared to 223 seats of MS
products in the three months ended December 27, 2003. For
the six-month period ended December 25, 2004, we sold 475
seats of our MS products compared to 313 seats of MS products in
the six months ended December 27, 2003.



| |                 
| | ----------------
| | 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,
material testing services and repairs.

Services revenue accounted for approximately 41%
of our total revenue in the three months ended December 25,
2004, compared to 52% of our total revenue in the three months
ended December 27, 2003. Revenues derived from services
increased by 21% in the second quarter of fiscal 2005 when
compared to the second quarter of fiscal 2004. This increase was
primarily from the sale of maintenance contracts, which was the
result of growth in our installed customer base arising from
software license sales made during the reporting period and in
prior years. In the three months ended December 25, 2004,
services revenue from the DAS business unit was
$6.0 million and services revenue from the MS business unit
was $676,000. In the

24



---



##### 



three months ended December 27, 2003,
services revenue from the DAS business unit was
$5.1 million and services revenue from the MS business
unit was $410,000.


Services revenue accounted for approximately 42%
of our total revenue in the six months ended December 25,
2004, compared to 53% of our total revenue in the six months
ended December 27, 2003. Revenues derived from services
increased by 19% in the first half of fiscal 2005 due to growth
in our installed customer base. In the six months ended
December 25, 2004, services revenue from the DAS business
unit was $11.4 million and services revenue from the MS
business unit was $1.3 million. In the six months ended
December 27, 2003, services revenue from the
DAS business unit was $7.6 million and services
revenue from the MS business unit was $725,000.



| |                
| | ---------------
| | Cost of Revenue

|                                 |          |                                            |       |             |              |   |       |              |  |  |      |     |   |   |       |     | 
|-------------------------------- | -------- | ------------------------------------------ | ----- | ----------- | ------------ | - | ----- | ------------ |  |  | ---- | --- | - | - | ----- | --- | 
|                                 |          |                                            |       |             |              |  
|                                 |          |                                            |       | Increase    |              |   |      
|                                 |          |                                            |       | Compared to |              |   |      
|                                 |          | Three Months                               |       |             | Prior Fiscal |   |       | Three Months | 
|                                 |          | Ended                                      |       |             | Year         |   |       | Ended        | 
|                                 |          | December 25,                               |       |             |              |   |       | December 27, | 
|                                 |          | 2004                                       |       |             | $            |   |       | %            |  |  | 2003 |    
|                                 |          |                                            |       |             |              |   |       |              |  |  |      |    
|                                 |          |                                           
|                                 |          | (In thousands, except for percentage data) |      
|Cost of revenue:                 |          |                                            |       |             |              |   |       |              |  |  |      |     |   |   |       |    
|                                 | Product  |                                            | $     | 1,875       |              |   | $     | 1,270        |  |  |      | 210 | % |   | $     | 605 | 
|                                 | Services |                                            |       | 1,650       |              |   |       | 716          |  |  |      | 77  |   |   |       | 934 | 
|                                 |          |                                            |       |             |              |   |       |              |  |  |      |    
|                                 |          | $                                          | 3,525 |             |              | $ | 1,986 |              |  |  | 129  | %   |   | $ | 1,539 |    
|                                 |          |                                            |       |             |              |   |       |              |  |  |      |    
|As a percentage of total revenue |          |                                            | 22    | %           |              |   |       |              |  |  |      |     |   |   | 14    | %  

|                                 |          |                                            |       |             |              |   |       |              |  |  |      |     |   |   |       |       | 
|-------------------------------- | -------- | ------------------------------------------ | ----- | ----------- | ------------ | - | ----- | ------------ |  |  | ---- | --- | - | - | ----- | ----- | 
|                                 |          |                                            |       |             |              |  
|                                 |          |                                            |       | Increase    |              |   |      
|                                 |          |                                            |       | Compared to |              |   |      
|                                 |          | Six Months                                 |       |             | Prior Fiscal |   |       | Six Months   | 
|                                 |          | Ended                                      |       |             | Year         |   |       | Ended        | 
|                                 |          | December 25,                               |       |             |              |   |       | December 27, | 
|                                 |          | 2004                                       |       |             | $            |   |       | %            |  |  | 2003 |    
|                                 |          |                                            |       |             |              |   |       |              |  |  |      |    
|                                 |          |                                           
|                                 |          | (In thousands, except for percentage data) |      
|Cost of revenue:                 |          |                                            |       |             |              |   |       |              |  |  |      |     |   |   |       |      
|                                 | Product  |                                            | $     | 3,716       |              |   | $     | 2,473        |  |  |      | 199 | % |   | $     | 1,243 | 
|                                 | Services |                                            |       | 2,946       |              |   |       | 1,383        |  |  |      | 88  |   |   |       | 1,563 | 
|                                 |          |                                            |       |             |              |   |       |              |  |  |      |    
|                                 |          | $                                          | 6,662 |             |              | $ | 3,856 |              |  |  | 137  | %   |   | $ | 2,806 |      
|                                 |          |                                            |       |             |              |   |       |              |  |  |      |    
|As a percentage of total revenue |          |                                            | 22    | %           |              |   |       |              |  |  |      |     |   |   | 14    | %    



| |                        
| | -----------------------
| | 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 and amortization expense related to intangible assets
acquired in our acquisition of AMSI.

Our cost of product revenue was $1.9 million
in the three months ended December 25, 2004, compared to
$605,000 in the three months ended December 27, 2003. This
change was due principally to increased personnel costs and
direct material costs. In our acquisition of AMSI, we added 16
distribution personnel, resulting in an additional $288,000 of
compensation and other employee costs when compared to the
previous year. Direct material costs increased $855,000 from the
prior year, a result of sales of hot runner process controllers,
a product line that has a higher cost of material than that of
our other products. Amortization expense included in cost of
product revenue increased $89,000 compared to the same period of
the prior year

25



---



##### 



due to increased capitalized software development
costs and intangible technology assets acquired in our
acquisition of AMSI.


Our cost of product revenue was $3.7 million
in the six months ended December 25, 2004, compared to
$1.2 million in the six months ended December 27,
2003. Employees added in our acquisition of AMSI resulted in an
additional $606,000 of compensation and other employee costs
when compared to the previous year. Direct material costs
increased almost $1.6 million from the prior year, a result
of sales of hot runner process controllers. Amortization expense
included in cost of product revenue increased $124,000 compared
to the same period of the prior year due to increased
capitalized software development costs and intangible technology
assets acquired in our acquisition of AMSI.



| |                         
| | ------------------------
| | Cost of Services Revenue

Cost of services revenue consists primarily of
salary, fringe benefit and facility related costs of our
maintenance and support, consulting 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.

Our cost of services revenue was
$1.7 million in the three months ended December 25,
2004, compared to $934,000 in the three months ended
December 27, 2003. Our cost of services revenue was
$2.9 million in the six months ended December 25,
2004, compared to $1.6 million in the six months ended
December 27, 2003. The increase in both periods was due
primarily to the impact of an organizational change and
redirection of our technical sales staff from research and
development and sales functions to our post-sales and
implementation groups, the costs of which are included in cost
of services revenue. To a lesser extent, the increase was also a
result of the declining value of the U.S. dollar relative to the
local currencies in which we incur expenses.



| |                         
| | ------------------------
| | Research and Development

|                                 |  |                                            |       |             |              |   |     |              |  |  |      |   |  |   |       |  
|-------------------------------- |  | ------------------------------------------ | ----- | ----------- | ------------ | - | --- | ------------ |  |  | ---- | - |  | - | ----- | -
|                                 |  |                                            |       |             |              |  
|                                 |  |                                            |       | Increase    |              |   |    
|                                 |  |                                            |       | Compared to |              |   |    
|                                 |  | Three Months                               |       |             | Prior Fiscal |   |     | Three Months | 
|                                 |  | Ended                                      |       |             | Year         |   |     | Ended        | 
|                                 |  | December 25,                               |       |             |              |   |     | December 27, | 
|                                 |  | 2004                                       |       |             | $            |   |     | %            |  |  | 2003 |  
|                                 |  |                                            |       |             |              |   |     |              |  |  |      |  
|                                 |  |                                           
|                                 |  | (In thousands, except for percentage data) |      
|Research and development         |  | $                                          | 2,040 |             |              | $ | 505 |              |  |  | 33   | % |  | $ | 1,535 |  
|As a percentage of total revenue |  |                                            | 13    | %           |              |   |     |              |  |  |      |   |  |   | 14    | %

|                                 |  |                                            |       |             |              |   |     |              |  |  |      |   |  |   |       |  
|-------------------------------- |  | ------------------------------------------ | ----- | ----------- | ------------ | - | --- | ------------ |  |  | ---- | - |  | - | ----- | -
|                                 |  |                                            |       |             |              |  
|                                 |  |                                            |       | Increase    |              |   |    
|                                 |  |                                            |       | Compared to |              |   |    
|                                 |  | Six Months                                 |       |             | Prior Fiscal |   |     | Six Months   | 
|                                 |  | Ended                                      |       |             | Year         |   |     | Ended        | 
|                                 |  | December 25,                               |       |             |              |   |     | December 27, | 
|                                 |  | 2004                                       |       |             | $            |   |     | %            |  |  | 2003 |  
|                                 |  |                                            |       |             |              |   |     |              |  |  |      |  
|                                 |  |                                           
|                                 |  | (In thousands, except for percentage data) |      
|Research and development         |  | $                                          | 3,685 |             |              | $ | 557 |              |  |  | 18   | % |  | $ | 3,128 |  
|As a percentage of total revenue |  |                                            | 12    | %           |              |   |     |              |  |  |      |   |  |   | 16    | %

We employ a staff to develop 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. However,
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 the product is
available for general release to customers. All such capitalized
costs are amortized to cost of product revenue over the
estimated economic life of the related products, which ranges
from three to five years.

Our research and development expenses were
$2.0 million in the three months ended December 25,
2004 compared to $1.5 million in the three months ended
December 27, 2003, an increase of $505,000. A portion of
this increase is due to the capitalization of $220,000 of
research and development costs related to software

26



---



##### 



development efforts in the second fiscal quarter
of 2004. In the three months ended December 25, 2004, costs
eligible for capitalization were not significant, resulting in
an increase in the current period expense relative to that of
the prior year. The remainder of the increase in research and
development expenses was primarily attributable to a $237,000
increase in employee compensation costs, a result of our annual
salary increases, staff added in the acquisition of AMSI and
currency exchange rate movements.


Our research and development expenses were
$3.7 million in the six months ended December 25, 2004
compared to $3.1 million in the six months ended
December 27, 2003, an increase of $557,000. The increase
was primarily attributable to a $452,000 increase in employee
compensation costs, a result of our annual salary increases,
staff added in the acquisition of AMSI and currency exchange
rate movements and $104,000 of third-party research programs. In
accordance with SFAS No. 86, we capitalized $201,000
and $220,000 in the first six months of 2005 and 2004,
respectively. As we plan to release several new products and
enhancements over the remainder of the fiscal year, we expect to
capitalize software development costs in the remaining quarters
of fiscal 2005.



| |                      
| | ---------------------
| | Selling and Marketing

|                                 |  |                                            |       |             |              |   |     |              |  |  |      |   |  |   |       |  
|-------------------------------- |  | ------------------------------------------ | ----- | ----------- | ------------ | - | --- | ------------ |  |  | ---- | - |  | - | ----- | -
|                                 |  |                                            |       |             |              |  
|                                 |  |                                            |       | Increase    |              |   |    
|                                 |  |                                            |       | Compared to |              |   |    
|                                 |  | Three Months                               |       |             | Prior Fiscal |   |     | Three Months | 
|                                 |  | Ended                                      |       |             | Year         |   |     | Ended        | 
|                                 |  | December 25,                               |       |             |              |   |     | December 27, | 
|                                 |  | 2004                                       |       |             | $            |   |     | %            |  |  | 2003 |  
|                                 |  |                                            |       |             |              |   |     |              |  |  |      |  
|                                 |  |                                           
|                                 |  | (In thousands, except for percentage data) |      
|Selling and marketing            |  | $                                          | 5,611 |             |              | $ | 913 |              |  |  | 19   | % |  | $ | 4,698 |  
|As a percentage of total revenue |  |                                            | 35    | %           |              |   |     |              |  |  |      |   |  |   | 44    | %

|                                 |  |                                            |        |             |              |   |       |              |  |  |      |   |  |   |       |  
|-------------------------------- |  | ------------------------------------------ | ------ | ----------- | ------------ | - | ----- | ------------ |  |  | ---- | - |  | - | ----- | -
|                                 |  |                                            |        |             |              |  
|                                 |  |                                            |        | Increase    |              |   |      
|                                 |  |                                            |        | Compared to |              |   |      
|                                 |  | Six Months                                 |        |             | Prior Fiscal |   |       | Six Months   | 
|                                 |  | Ended                                      |        |             | Year         |   |       | Ended        | 
|                                 |  | December 25,                               |        |             |              |   |       | December 27, | 
|                                 |  | 2004                                       |        |             | $            |   |       | %            |  |  | 2003 |  
|                                 |  |                                            |        |             |              |   |       |              |  |  |      |  
|                                 |  |                                           
|                                 |  | (In thousands, except for percentage data) |       
|Selling and marketing            |  | $                                          | 10,306 |             |              | $ | 1,422 |              |  |  | 16   | % |  | $ | 8,884 |  
|As a percentage of total revenue |  |                                            | 34     | %           |              |   |       |              |  |  |      |   |  |   | 44    | %

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

Our selling and marketing expenses were
$5.6 million in the three months ended December 25,
2004, compared to $4.7 million in the three months ended
December 27, 2003. The increase from the previous year was
primarily a result of a $680,000 increase in employee
compensation costs, a result of staff added in the acquisition
of AMSI as well as commissions paid to our direct sales force on
increased revenues, a $105,000 increase in marketing promotional
activities, a $176,000 increase in commissions related to sales
through third-party manufacturers representatives and a
$110,000 increase in travel expense. These increases were
offset, in part, by the impact of our redirection in late fiscal
2004 of sales resources to customer support and implementation
activities, the cost of which is now included in cost of
services revenue. This organizational change reduced our selling
and marketing expenses by $270,000 as compared to the previous
fiscal year and increased cost of services revenue by a
corresponding amount.

Our selling and marketing expenses were
$10.3 million in the six months ended December 25,
2004, compared to $8.9 million in the six months ended
December 27, 2003. The increase from the previous year was
primarily a result of a $1.3 million increase in employee
compensation costs, a result of staff added in the acquisition
of AMSI as well as commissions paid to our direct sales force on
increased revenues, a $250,000 increase in marketing promotional
activities and a $342,000 increase in commissions related to
sales through third-party manufacturers representatives.
These increases were offset, in part, by the impact of our

27



---



##### 



redirection in late fiscal 2004 of sales
resources to customer support and implementation activities, the
cost of which is now included in cost of services revenue. This
organizational change reduced our selling and marketing expenses
by $725,000 as compared to the previous fiscal year and
increased cost of services revenue by a corresponding amount.




| |                           
| | --------------------------
| | General and Administrative

|                                 |  |                                            |       |             |              |   |     |              |  |  |      |   |  |   |       |  
|-------------------------------- |  | ------------------------------------------ | ----- | ----------- | ------------ | - | --- | ------------ |  |  | ---- | - |  | - | ----- | -
|                                 |  |                                            |       |             |              |  
|                                 |  |                                            |       | Increase    |              |   |    
|                                 |  |                                            |       | Compared to |              |   |    
|                                 |  | Three Months                               |       |             | Prior Fiscal |   |     | Three Months | 
|                                 |  | Ended                                      |       |             | Year         |   |     | Ended        | 
|                                 |  | December 25,                               |       |             |              |   |     | December 27, | 
|                                 |  | 2004                                       |       |             | $            |   |     | %            |  |  | 2003 |  
|                                 |  |                                            |       |             |              |   |     |              |  |  |      |  
|                                 |  |                                           
|                                 |  | (In thousands, except for percentage data) |      
|General and administrative       |  | $                                          | 3,066 |             |              | $ | 949 |              |  |  | 45   | % |  | $ | 2,117 |  
|As a percentage of total revenue |  |                                            | 19    | %           |              |   |     |              |  |  |      |   |  |   | 20    | %

|                                 |  |                                            |       |             |              |   |       |              |  |  |      |   |  |   |       |  
|-------------------------------- |  | ------------------------------------------ | ----- | ----------- | ------------ | - | ----- | ------------ |  |  | ---- | - |  | - | ----- | -
|                                 |  |                                            |       |             |              |  
|                                 |  |                                            |       | Increase    |              |   |      
|                                 |  |                                            |       | Compared to |              |   |      
|                                 |  | Six Months                                 |       |             | Prior Fiscal |   |       | Six Months   | 
|                                 |  | Ended                                      |       |             | Year         |   |       | Ended        | 
|                                 |  | December 25,                               |       |             |              |   |       | December 27, | 
|                                 |  | 2004                                       |       |             | $            |   |       | %            |  |  | 2003 |  
|                                 |  |                                            |       |             |              |   |       |              |  |  |      |  
|                                 |  |                                           
|                                 |  | (In thousands, except for percentage data) |      
|General and administrative       |  | $                                          | 5,576 |             |              | $ | 1,545 |              |  |  | 38   | % |  | $ | 4,031 |  
|As a percentage of total revenue |  |                                            | 19    | %           |              |   |       |              |  |  |      |   |  |   | 20    | %

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

Our general and administrative expenses were
$3.1 million in the three months ended December 25,
2004, compared to $2.1 million in the three months ended
December 27, 2003. The increase in general and
administrative expenses was due primarily to a $326,000 increase
in compensation expense, which included the impact of personnel
added as a result of the AMSI acquisition, a $116,000 increase
in Sarbanes-Oxley compliance and preparation costs, an $81,000
increase in employee costs, including costs associated with
hiring new staff and training and a $190,000 increase in audit,
tax and legal service fees.

Our general and administrative expenses were
$5.6 million in the six months ended December 25,
2004, compared to $4.0 million in the six months ended
December 27, 2003. The increase in general and
administrative expenses was due primarily to a $581,000 increase
in compensation expense, a $223,000 increase in Sarbanes-Oxley
compliance and preparation costs, a $181,000 increase in
employee costs, including costs associated with hiring new staff
and training and a $271,000 increase in audit, tax and legal
service fees.



| |                                               
| | ----------------------------------------------
| | Amortization of Acquired Intangible
    Assets

|                                           |  |                                            |    |             |              |   |     |              |  |  |      |    |  |   |     |  
|------------------------------------------ |  | ------------------------------------------ | -- | ----------- | ------------ | - | --- | ------------ |  |  | ---- | -- |  | - | --- | -
|                                           |  |                                            |    |             |              |  
|                                           |  |                                            |    | Decrease    |              |   |    
|                                           |  |                                            |    | Compared to |              |   |    
|                                           |  | Three Months                               |    |             | Prior Fiscal |   |     | Three Months | 
|                                           |  | Ended                                      |    |             | Year         |   |     | Ended        | 
|                                           |  | December 25,                               |    |             |              |   |     | December 27, | 
|                                           |  | 2004                                       |    |             | $            |   |     | %            |  |  | 2003 |   
|                                           |  |                                            |    |             |              |   |     |              |  |  |      |   
|                                           |  |                                           
|                                           |  | (In thousands, except for percentage data) |   
|Amortization of acquired intangible assets |  | $                                          | 73 |             |              | $ | (37 | )            |  |  | (34  | %) |  | $ | 110 |  
|As a percentage of total revenue           |  |                                            | 0  | %           |              |   |     |              |  |  |      |    |  |   | 1   | %

28



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|                                           |  |                                            |     |             |              |   |     |              |  |  |      |    |  |   |     |  
|------------------------------------------ |  | ------------------------------------------ | --- | ----------- | ------------ | - | --- | ------------ |  |  | ---- | -- |  | - | --- | -
|                                           |  |                                            |     |             |              |  
|                                           |  |                                            |     | Decrease    |              |   |    
|                                           |  |                                            |     | Compared to |              |   |    
|                                           |  | Six Months                                 |     |             | Prior Fiscal |   |     | Six Months   | 
|                                           |  | Ended                                      |     |             | Year         |   |     | Ended        | 
|                                           |  | December 25,                               |     |             |              |   |     | December 27, | 
|                                           |  | 2004                                       |     |             | $            |   |     | %            |  |  | 2003 |   
|                                           |  |                                            |     |             |              |   |     |              |  |  |      |   
|                                           |  |                                           
|                                           |  | (In thousands, except for percentage data) |    
|Amortization of acquired intangible assets |  | $                                          | 151 |             |              | $ | (70 | )            |  |  | (32  | %) |  | $ | 221 |  
|As a percentage of total revenue           |  |                                            | 0   | %           |              |   |     |              |  |  |      |    |  |   | 1   | %

These costs represent the amortization of
intangible assets, other than goodwill, recorded in connection
with our acquisitions. Those assets include customer base,
developed technology, customer order backlog and non-compete
agreements, which are amortized over their economic lives,
ranging from six months to seven years. The reduction in
amortization expense in the current fiscal year compared to the
previous fiscal year reflects the completion of amortization of
certain intangible assets that reached the end of their
estimated useful life.



| |                     
| | --------------------
| | Interest Income, Net

Interest income includes interest income earned
on invested cash balances.

Our interest income was $384,000 in the three
months ended December 25, 2004 compared to $290,000 in the
three months ended December 27, 2003. Our interest income
was $730,000 in the six months ended December 25, 2004
compared to $558,000 in the six months ended December 27,
2003.



| |                         
| | ------------------------
| | Other Income (Loss), Net

Other income (loss), net includes 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.

Our other income of $16,000 and other losses of
$42,000 in the three months and six months ended
December 25, 2004, respectively, were not significantly
changed since the previous fiscal year.



| |                           
| | --------------------------
| | Provision for Income Taxes

Our estimated annual effective income tax rate
for fiscal 2005 is 29%, compared to 37% in fiscal 2004. In the
second fiscal quarter of 2005, our actual income tax rate was
31% on pre-tax income of $2.3 million. The difference
between the effective income tax rate of the second fiscal
quarter of 2005 and the full year estimate was due to a one-time
benefit recorded in our first fiscal quarter of 2005 of $230,000
arising from the reduction of a valuation allowance recorded
against deferred tax assets of one of our subsidiaries. We
currently estimate that our income tax rate in each of the
remaining quarters of fiscal 2005 will be approximately 31%, and
that this will result in the estimated effective income tax rate
of approximately 29% for the fiscal year.

Our future effective tax rate may be materially
impacted by the amount of income taxes associated with our
foreign earnings, which are taxed at rates different from the
U.S. federal statutory rate, as well as the timing and extent of
the realization of deferred tax assets, changes in the tax law
and potential acquisitions. In connection with the American Jobs
Creation Act of 2004 (the Act), enacted in October
2004, we may be able to repatriate certain of our foreign
earnings in fiscal 2005 or fiscal 2006 at a reduced rate of tax
under the dividend reinvestment provisions of the Act. If we
elect to do so, we will be required to record a provision for
U.S. income tax purposes in our consolidated financial
statements when our management and directors approve and commit
to a dividend reinvestment plan. We are currently assessing the
impact, if any, that the Act will have on our future income tax
expense. Further, we believe that our tax rate may fluctuate
within a fiscal year, including from quarter to quarter, due to
potential items arising from discrete events, including
settlements of tax audits and assessments, acquisitions of other
companies or other events.

In the first quarter of 2005, one of our
Australian subsidiaries became subject to an audit by the local
taxing authority. The significant issues under review relate to
the deductibility of certain costs and our utilization of net
operating losses to reduce taxable income in the years between
fiscal 1994 and 2001 by

29



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##### 



approximately $10.6 million, which amount
was subject to an average effective tax rate of 35% over that
time period. We believe the positions taken on our tax returns
have merit and will be sustained upon audit. Accordingly, no
liabilities have been recorded in our consolidated balance sheet
related to this matter.


Liquidity and Capital Resources

|                                                                    |  |                |        |  |              |   |        | 
|------------------------------------------------------------------- |  | -------------- | ------ |  | ------------ | - | ------ | 
|                                                                    |  | Six Months     |        |  | Six Months   |  
|                                                                    |  | Ended          |        |  | Ended        |  
|                                                                    |  | December 25,   |        |  | December 27, |  
|                                                                    |  | 2004           |        |  | 2003         |  
|                                                                    |  |                |        |  |              |  
|                                                                    |  |               
|                                                                    |  | (In thousands) |       
|Cash provided by operating activities                               |  | $              | 454    |  |              | $ | 61     | 
|Cash provided by investing activities                               |  |                | 886    |  |              |   | 915    | 
|Cash provided by financing activities                               |  |                | 504    |  |              |   | 210    | 
|Effect of exchange rate changes on cash and cash
    equivalents    |  |                | 1,412  |  |              |   | 1,450  | 
|                                                                    |  |                |        |  |              |  
|Net increase in cash and cash equivalents                           |  |                | 3,256  |  |              |   | 2,636  | 
|Cash and cash equivalents, beginning of period                      |  |                | 35,987 |  |              |   | 38,320 | 
|                                                                    |  |                |        |  |              |  
|Cash and cash equivalents, end of period                            |  | $              | 39,243 |  |              | $ | 40,956 | 
|                                                                    |  |                |        |  |              |  
|Marketable securities, end of period                                |  | $              | 13,706 |  |              | $ | 12,004 | 
|                                                                    |  |                |        |  |              |  
|Cash, cash equivalents and marketable securities,
    end of period |  | $              | 52,949 |  |              | $ | 52,960 | 
|                                                                    |  |                |        |  |              |  

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 25,
2004, our primary sources of liquidity consisted of our total
cash and cash equivalents balance of $39.2 million, our
marketable securities balance of $13.7 million and our
credit facilities. In January 2005, 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.
Advances may be in the form of loans, letters of credit, foreign
exchange contracts or other cash management lines. The preceding
facility included restrictive covenants, all of which we were in
compliance with at December 25, 2004. These covenants
include liquidity and profitability measures and restrictions
that limit the ability of Moldflow to merge, acquire or sell
assets without prior approval from the bank. At
December 25, 2004, we had employed $710,000 of available
borrowings for outstanding foreign exchange contracts and
letters of credit and had an additional $4.3 million
available for borrowing. In addition to our primary working
capital line of credit, we also utilize domestic and foreign
banking institutions to provide liquidity to our subsidiaries
and to facilitate foreign currency and hedging transactions. As
of December 25, 2004, we had no outstanding debt.

Operating activities provided $454,000 of cash in
the six months ended December 25, 2004 and $61,000 of cash
in the six months ended December 27, 2003. In fiscal 2005,
cash of $4.6 million was provided by our net income
adjusted for certain non-cash charges and expenses, such as
depreciation and amortization, partially offset by net changes
in operating assets and liabilities which consumed
$4.2 million of cash. In fiscal 2004, cash of
$2.1 million was provided by our net income adjusted for
non-cash charges and expenses, partially offset by net changes
in operating assets and liabilities which consumed
$2.0 million of cash. In both periods, a large portion of
the net use of cash arising from changes in operating assets and
liabilities was due to a reduction in the balance of our
deferred revenue. Many of our European and Japanese customers
renew their maintenance contracts in January and April of each
year. As such, we experience seasonal decreases in our deferred
revenue in our first and second fiscal quarters, which, in turn,
reduces our cash generated from operations.

Investing activities provided $886,000 of cash in
the first half of fiscal 2005 and $915,000 in the same period of
the previous year. In the first half of fiscal 2005, sales and
maturities of marketable securities provided $2.0 million
of cash, which was partially offset by purchases of fixed assets
and the capitalization of software development costs which, in
total, consumed $1.1 million of cash. In the first half of
fiscal 2004, sales

30



---



##### 



and maturities of marketable securities provided
$1.8 million of cash, which was partially offset by
purchases of fixed assets and the capitalization of software
development costs which, in total, consumed $902,000 of cash.


Net cash of $504,000 and $210,000 was provided by
financing activities in the first half of fiscal 2005 and 2004,
respectively. In both periods, this cash was generated by
exercises of employee stock options for common stock and
proceeds received for common stock under our Employee Stock
Purchase Plan.

We are authorized to repurchase up to 500,000
shares of our common stock. We did not purchase any such shares
in fiscal 2004, nor have we purchased any such shares in the
first six months of fiscal 2005.

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 report. Capital
expenditure requirements for fiscal 2005 are expected to be
approximately $2.0 million. We also expect to continue to
capitalize costs related to our software development activities
in an annual amount similar to, or less than, those experienced
in the entire of fiscal 2004, which totaled $856,000. Long term
cash requirements, other than normal operating expenses, are
anticipated for the continued development of new products;
financing anticipated growth and the possible acquisition of
businesses, software products or technologies complementary to
our business. 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.

Contractual Obligations

The following table summarizes our significant
financial contractual obligations at December 25, 2004 and
the effect such obligations are expected to have on our
liquidity and cash flows in future periods. This table excludes
amounts already recorded on our balance sheet as current
liabilities at December 25, 2004.

|                            |       |                        |       |           |      |   |        |       |  |        |       |       |        |      |     |        |      |   |     |            |  |   |     |     |  |   |       |       | 
|--------------------------- | ----- | ---------------------- | ----- | --------- | ---- | - | ------ | ----- |  | ------ | ----- | ----- | ------ | ---- | --- | ------ | ---- | - | --- | ---------- |  | - | --- | --- |  | - | ----- | ----- | 
|                            |       |                       
|                            |       | Payments Due by Period |      
|                            |       |                        |      
|                            |       |                        |       | Remainder |      |   |       
|                            |       |                        |       | of Fiscal |      |   | Fiscal |       |  | Fiscal |       |       | Fiscal |      |     | Fiscal |      |   |    
|                            |       | Total                  |       |           | 2005 |   |        | 2006  |  |        | 2007  |       |        | 2008 |     |        | 2009 |   |     | Thereafter | 
|                            |       |                        |       |           |      |   |        |       |  |        |       |       |        |      |     |        |      |   |     |            | 
|                            |       |                       
|                            |       | (In thousands)         |      
|Operating lease obligations |       | $                      | 6,473 |           |      | $ | 1,226  |       |  | $      | 1,777 |       |        | $    | 914 |        |      | $ | 627 |            |  | $ | 621 |     |  | $ | 1,308 |      
|Purchase obligations(1)     |       |                        | 1,347 |           |      |   | 930    |       |  |        | 412   |       |        |      | 5   |        |      |   |    |            |  |   |    |     |  |   |      |      
|                            |       |                        |       |           |      |   |        |       |  |        |       |       |        |      |     |        |      |   |     |            | 
|                            | Total |                        | $     | 7,820     |      |   | $      | 2,156 |  |        | $     | 2,189 |        |      | $   | 919    |      |   | $   | 627        |  |   | $   | 621 |  |   | $     | 1,308 | 
|                            |       |                        |       |           |      |   |        |       |  |        |       |       |        |      |     |        |      |   |     |            | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the purposes of this table, contractual
    obligations for purchase of goods or services are defined as
    agreements that are enforceable and legally binding and that
    specify all significant terms, including: fixed or minimum
    quantities to be purchased; fixed, minimum or variable price
    provisions; and the approximate timing of the transaction.

In January 2005, we entered into a seven-year
operating lease for a facility that will serve as the
Companys new headquarters. Future operating lease
commitments are approximately $3.1 million.

Off-Balance Sheet Financing
Arrangements

We do not have any special purpose entities or
off-balance sheet financing arrangements.

Recent Accounting Pronouncements

In November 2004, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 151,
Inventory Costs. This Statement amends Accounting
Research Bulletin No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted
material. This Statement requires that those items be recognized
as current period charges regardless of whether they meet the
criterion of abnormal. In addition, this

31



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##### 



Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the
normal capacity of the production facilities.
SFAS No. 151 will be effective for our 2006 fiscal
year. We believe the adoption of this Statement will not have a
material impact on the results of our operations.


In December 2004, the FASB issued
SFAS No. 123(R), Share-Based Payment,
(FAS No. 123(R)) which revises
SFAS No. 123, Accounting for Stock-Based
Compensation and requires companies to expense the fair
value of employee stock options and other forms of stock-based
compensation. In addition to revising FAS 123,
FAS No. 123(R) supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement
No. 95, Statement of Cash Flows.
SFAS No. 123(R) will be effective for our 2006 fiscal
year. We are currently assessing the impact of this Statement on
our share-based compensation programs. However, we expect that
the requirement to expense stock options and other equity
interests that have been or will be granted to employees will
significantly increase our operating expenses and result in
lower earnings per share.

Impact of Inflation

We believe that our revenue and results of
operations have not been significantly impacted by inflation. We
do not believe that our revenue and results of operations will
be significantly impacted by inflation in future periods.

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.



| |                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business model is changing as we
    further develop and exploit our Manufacturing Solutions
    products, and our 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 products. In January 2004,
we completed the acquisition of AMSI, a provider of hot runner
process controllers, 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 Solutions products and one
on Manufacturing Solutions products. This change in
organizational structure may lead to further disruption in our
business operations, as we have split our direct sales force
into product-specific sales forces, each of which are reporting
directly to the responsible business unit leader. 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 is managed by the former
chief executive officer and sole stockholder of AMSI and our
ability to successfully integrate and further develop the AMSI
business will be dependent on our ability to retain this
employee.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | 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

32



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of this general economic slowdown, particularly
in the discrete manufacturing industry, could materially and
adversely affect us by decreasing our revenue as compared to
prior years, or by lowering our revenue growth.




| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are dependent on third parties such as
    resellers and distributors to distribute a substantial portion
    of our Manufacturing Solutions products.

Following the acquisition of AMSI, we now
distribute a substantial portion of our Manufacturing Solutions
products through a network of independent, regional channel
partners. In addition, we are adding more channel partners in
geographically dispersed locations in order to sell our products
to new customers. 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 are 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 our acquisition of AMSI. 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.



| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 because sales of our Manufacturing Solutions products
    and our services have resulted in lower gross margins and have
    resulted in a longer selling cycle, which effect 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 Solutions
    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,                                                                                                                                                                                                                             
|
| |  | introductions of new services or enhancements by
    us and our competitors and changes in our and our
    competitors pricing policies,                                                                                                                                                                                                                                                                                                                                    
|
| |  | our increased use of third parties such as
    distributors and resellers which may lessen the control we have
    over revenue and earnings during any particular period,                                                                                                                                                                                                                                                                                                   
|
| |  | 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
    yet be offset by losses in other tax jurisdictions,                                                                                                                                                                       
|
| |  | fluctuations in our tax rate from quarter to
    quarter due to the impact of discrete events, including the
    settlement of claims, the management of audits and other
    inquiries, the acquisition of other companies or other events,                                                                                                                                                                                                                                 

33



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##### 





| |   |                                             
| | - | --------------------------------------------
| |  | currency and exchange rate fluctuations, and
|
| |  | timing and integration of acquisitions.     

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.



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to comply with Section 404 of
    Sarbanes-Oxley Act of 2002 in a timely fashion may have a
    negative impact on investor confidence.

Under Section 404 of the Sarbanes-Oxley Act
of 2002, beginning with our Annual Report on Form 10-K for
our fiscal year ending June 30, 2005, we will be required
to assess the effectiveness of our internal controls over
financial reporting and report that our internal control over
financial reporting is effective. Our auditors must conduct an
audit to evaluate managements assessment of the
effectiveness of our internal control over financial reporting
and both attest that managements report is fairly stated
and express an opinion on the effectiveness of internal control
over financial reporting. To comply with Section 404, we
have undertaken certain actions including a schedule of
activities for the evaluation, test and remediation, if
necessary, of our internal controls. Although we believe that
our efforts will enable us to provide the required report and
our independent auditors to provide their affirmative
attestation and opinion as of fiscal 2005, we cannot be certain
as to the timing of completion of our evaluation, testing and
any required remediation due in large part to the fact that
there is no precedent available by which to measure compliance.
Although we believe we will be able to satisfy the requirements
of Section 404 in a timely fashion, if we are unable to do
so, we may be unable to assert that the internal controls over
financial reporting are effective, or our auditors may not be
able to render the required attestation concerning our
assessment and the effectiveness of the internal controls over
financial reporting. This may negatively impact investor
confidence in the accuracy and completeness of our financial
reports, which could have a material and adverse effect on our
stock price.



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | 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

34



---



##### 



depend in part on our ability to demonstrate the
cost-effectiveness, ease of use and technological advantages of
our products over competing products.


Our
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 process controllers 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 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, 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
fails 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 with an injection molding machine, the use
and technology of which are subject to a wide variety of
worldwide 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 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,                                                                                                                                      

35



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##### 





| |   |                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 software piracy, particularly
    in certain countries in Asia, may result in lost revenue in
    those countries or to customers with worldwide operations, and
|
| |  | the cost of enforcing 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
revenue is 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 be offset
    by tax benefits arising from losses in other jurisdictions,
|
| |  | lost revenue resulting from difficulties
    associated with enforcing agreements and collecting receivables
    through foreign legal systems,                                                                                                   
|
| |  | interruptions in our operations due to political
    and social conditions of the countries in which we conduct
    business,                                                                                                                     
|
| |  | 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 solutions for the design,
analysis and manufacture 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
    or manufacturing 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.
Our manufacturing operations are performed in the United States
and Ireland, using both in-house and contract manufacturing
facilities. The occurrence of a natural disaster or other
unanticipated

36



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##### 



catastrophe at any of these facilities could
cause interruptions in our operations and services. Extensive or
multiple interruptions in our operations at our development or
manufacturing facilities could severely disrupt our operations.




| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | 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.



| |                                                                         
| | ------------------------------------------------------------------------
| | 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. 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. In the first quarter of fiscal 2005, one of our Australian
subsidiaries became subject to an audit by the local taxing
authority. The significant issues under review relate to the
deductibility of certain costs and our utilization of net
operating losses to reduce taxable income in the years between
fiscal 1994 and 2001 by approximately $10.6 million, which
amount was subject to an average effective tax rate of 35% over
that time period. We believe the positions taken on our tax
returns have merit and will be sustained upon audit.
Accordingly, no liabilities have been recorded in our
consolidated balance sheet related to this matter.



| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | When we are required to expense options or
    other equity instruments granted under our employee stock plans
    as compensation, our net income and earnings per share will be
    significantly reduced.

In the past, we have used stock options as a key
component of our employee compensation packages. We believe that
stock options provide an incentive to our employees to maximize
long-term shareholder value and can encourage valued employees
to remain with the Company. In December 2004, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment related to accounting for the grant of employee
stock options and other equity instruments as an expense. When
we implement this standard, our net income and earnings per
share will be negatively impacted.



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 persons, including the shares
    received by the selling stockholder in connection with the
    acquisition of AMSI, a portion of which have been registered for
    resale on Form S-3 and could therefore be sold at any time,

37



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##### 





| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | technological innovations by competitors or in
    competing technologies,
|
| |  | a decrease in the demand for our common stock,                            
|
| |  | 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 and a
diversion of managements attention and resources and could
harm our business, financial condition and results of operations.




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 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.

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 and our invested
cash balances. During 2004, our consolidated cash balances were
impacted favorably by the strengthening of foreign currencies
relative to the U.S. dollar, particularly with respect to the
Australian dollar. At December 25, 2004, we had
$21.3 million of cash and cash equivalents invested in
foreign currency accounts. Our consolidated cash position will
continue to be impacted by changes in foreign currency exchange
rates. We engage in hedging transactions designed to reduce our
exposure to changes in currency exchange rates. However, we
cannot be sure that any efforts we make to hedge our exposure to
currency exchange rate changes will be successful.

Our invested cash balances are subject to
interest rate risk and, as a result, changes in interest rates
from time to time may affect our operating results. We invest
our excess cash balances in interest bearing instruments,
including government and corporate bonds. At December 25,
2004, the fair value and principal amounts of our bond portfolio
amounted to $13.7 million, with a yield to maturity of
2.35%. Our investments are limited to high grade corporate debt
securities, government issued debt, municipal debt securities,
money market funds and similar high quality instruments. In a
declining interest rate environment, we would experience a
decrease in interest income. The opposite holds true in a rising
interest rate environment. Our interest income will fluctuate
based upon changes in market interest rates and levels of cash
available for investment. We do not use derivative financial
instruments in our investment portfolio to manage interest rate
risk. However, given the relatively short maturities and
investment-grade quality of our marketable securities portfolio,
a sharp rise in interest rates should not have a material
adverse effect on the fair value of these instruments. These
instruments potentially expose us to credit risk; however, we
place our investments in instruments that meet high credit
quality standards, as specified in our investment policy
guidelines. However, those guidelines limit the amount of credit
exposure to any one issue, issuer or type of instrument.

In addition, our accounts receivable from our
customers expose us to credit risk. We believe that such credit
risk is limited due to the large number of customers comprising
our accounts receivable 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, our management, including
our Chief Executive Officer and Chief Financial Officer, have
evaluated 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

38



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##### 



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 25, 2004, 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 our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.


39



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##### 






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 2. | Unregistered Sales of Equity Securities and
    Use of Proceeds

(c) Purchases of Equity Securities by the
Issuer and Affiliated Purchasers

On December 19, 2001, the Board of Directors
authorized the Company to repurchase up to 500,000 shares of its
outstanding common stock. To date, the Company reacquired
244,165 for $1.4 million, at an average cost of $5.62 per
share. All such shares were reissued under the Companys
employee stock purchase plan and in connection with the
acquisition of American MSI Corporation in January 2004. The
Company did not make any purchases of its common stock during
the fiscal quarter ended December 25, 2004.






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

On November 18, 2004, the Company held its
Annual Meeting of Stockholders. The stockholders voted, either
in person or by proxy, to elect one Class III Director for
a three-year term. The results of the stockholder vote were as
follows:

|                 |  |     |           |  |         |  |   |          |  |  |         | 
|---------------- |  | --- | --------- |  | ------- |  | - | -------- |  |  | ------- | 
|NAME OF DIRECTOR |  | FOR |           |  | AGAINST |  |   | WITHHELD | 
|                 |  |     |           |  |         |  |   |          | 
|Frank Haydu, III |  |     | 9,138,859 |  |         |  |  |          |  |  | 620,161 | 



|        |                  
|------- | -----------------
|Item 5. | Other Information

Entry into Definitive Material
Agreements



| |                   
| | ------------------
| | Agreement to Lease

On January 28, 2005, Moldflow Corporation
(the Company) and 492 OCP, LLC (the
Landlord) executed and delivered an Agreement to
Lease (the Lease) concerning rentable space in the
building located at 492 Old Connecticut Path, Framingham,
Massachusetts (the Property). Upon completion, the
Company will move its headquarters from Wayland, Massachusetts
to the Property.

Under the Lease, the Company agreed to occupy the
Property commencing April 1, 2005 and terminating
March 31, 2012. In connection with the Lease, the Company
agreed to pay annual rent in the amount of $21.25 per
square foot on approximately 18,500 square feet of rentable
area during the first year of the Lease, which amount escalates
in accordance with the terms of the Lease for the remaining
six years of the Lease. Under the terms of the Lease, the
Company will receive an abatement of rent for five months
and the Company has an option to extend the Lease for an
additional term of five years.

The foregoing is a summary of the material
provisions of the Lease. This summary does not purport to be
complete and is qualified in its entirety by reference to the
terms of the Lease, which is filed as Exhibit 10.3 to this
Quarterly Report on Form 10-Q, and incorporated herein by
reference.



| |                              
| | -----------------------------
| | Renewal of Banking Facilities

On January 31, 2005, Silicon Valley Bank and
the Company executed a Loan Modification Agreement (the
Agreement) related to the credit facility with
Moldflow Corporation. The Agreement extended the term of the
existing credit facility through February 2, 2007. The
unsecured credit facility provides for maximum available
borrowing of $5.0 million and can be extended annually upon
mutual agreement. The credit facility contains covenants related
to the operation of the Companys business, all of which
the Company was in compliance with as of the date of the
Agreement.

40



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##### 



The foregoing is a summary of the material
features of the Loan Modification Agreement. This summary does
not purport to be complete and is qualified in its entirety by
reference to the terms of the Loan Modification Agreement, which
is filed as Exhibit 10.4 to this Quarterly Report on
Form 10-Q, and incorporated herein by reference.



|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits:

| |      |  |  |                                                                                                                                                                                                                                                                                
| | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1 |  |  | Employment Agreement dated as of January 10,
    2005 between Christopher L. Gorgone and Moldflow Corporation,
    previously filed as an exhibit to the Companys Current
    Report on Form 8-K filed on January 12, 2005, and
    incorporated herein by reference.         
| | 10.2 |  |  | Transitional Services Agreement dated as of
    January 10, 2005 between Suzanne E. MacCormack and Moldflow
    Corporation previously filed as an exhibit to the Companys
    Current Report on Form 8-K filed on January 12, 2005, and
    incorporated herein by reference.
| | 10.3 |  |  | Lease between Moldflow Corporation and
    492 OCP, LLC dated as of January 28, 2005.*                                                                                                                                                                                         
| | 10.4 |  |  | Loan Modification Agreement dated as of
    January 31, 2005 between Moldflow Corporation and Silicon
    Valley Bank.*                                                                                                                                                        
| | 31.1 |  |  | Certification of CEO.*                                                                                                                                                                                                                                                         
| | 31.2 |  |  | Certification of CFO.*                                                                                                                                                                                                                                                         
| | 32.1 |  |  | Section 1350 Certification of CEO.*(1)                                                                                                                                                                                                                                         
| | 32.2 |  |  | Section 1350 Certification of CFO.*(1)                                                                                                                                                                                                                                         



---



|    |                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Filed herewith.                                                                                                                                                                                                                                                                                                                       
|   
|(1) | This certification shall not be deemed
    filed for purposes of Section 18 of the
    Securities Exchange Act of 1934, or otherwise subject to the
    liability of that section, nor shall it be deemed incorporated
    by reference into any filing under the Securities Act of 1933 or
    the Securities Exchange Act of 1934.

(b) Reports on Form 8-K:

The Company filed a Form 8-K on
October 28, 2004, reporting under Items 1.02, 2.02,
5.02 and 9.01.

The Company filed a Form 8-K on
January 12, 2005, reporting under Items 1.01, 5.02 and
9.01.

The Company filed a Form 8-K on
January 27, 2005, reporting under Items 2.02 and 9.01.

41



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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 2, 2005

42