UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: September 25, 2004

Commission File Number: 000-30027

Moldflow Corporation

430 Boston Post Road, Wayland, MA 01778
(Address of principal executive offices, including zip code)

(508) 358-5848
(Registrant’s telephone number, including area code)

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

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

     There were 10,665,660 shares of our common stock, par value $0.01, outstanding on November 1, 2004.

MOLDFLOW CORPORATION

FORM 10-Q
For the Quarter Ended September 25, 2004

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

MOLDFLOW CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

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

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MOLDFLOW CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF INCOME

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

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MOLDFLOW CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

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

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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 period ended September 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:

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     No compensation cost has been recognized for employee stock-based awards for the three months ended September 25, 2004 and September 27, 2003. Had compensation cost been determined based on the fair value at the grant dates, the Company’s net income would have been the pro forma amounts indicated in the table below.

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

3. Net Income Per Common Share

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

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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 September 25, 2004, currency options and collars designated as hedging instruments with notional amounts of $3.1 million, $4.3 million and $3.3 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 September 25, 2004, instruments with fair values of $166,000 were recorded as components of other current assets. Net unrealized gains on these instruments of $41,000 were included in accumulated other comprehensive income. The Company expects these instruments to affect earnings over the next nine months. During the three months ended September 25, 2004 a net charge of $16,000 was recorded as a component of other income and expense, comprised of $24,000 of premiums paid for new instruments, net of $8,000 of gains on the effective portion of options that were settled.

     At September 27, 2003, currency options and collars designated as hedging instruments with notional amounts of $1.5 million, $4.5 million and $1.8 million to exchange Euros, Japanese yen and Australian dollars for U.S. dollars, respectively, were outstanding. At September 27, 2003, the total fair values of all currency options and collars held by the Company of $157,000 and $268,000 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 $95,000 were included in accumulated other comprehensive income. During the three months ended September 27, 2003, net losses of $80,000 were recorded as components of other income and expense on the effective portion of options that were settled. For the three months ended September 27, 2003, an unrealized loss of $21,000 was recognized on the ineffective portion of the options and collars dedesignated as hedging instruments.

5. Acquired Intangible Assets

     Intangible assets acquired in the Company’s business combinations include goodwill, customer base, developed technology, 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:

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MOLDFLOW CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

     Acquired intangible asset amortization for three months ended September 25, 2004 and September 27, 2003 was $115,000 and $111,000, respectively. The following table summarizes the expected remaining amortization of acquired intangible assets as of September 25, 2004:

6. Inventories

     Inventories consisted of the following:

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. Eligible development costs of $201,000 were capitalized in the three months ended September 25, 2004. Development costs eligible for capitalization in the three months ended September 27, 2003 were not significant. 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:

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

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MOLDFLOW CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

foreign currency translation adjustments. Other comprehensive income also includes unrealized gains and losses on the Company’s hedging instruments and unrealized gains and losses on the Company’s marketable securities.

     The following table presents the calculation of comprehensive income:

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 three months ended September 25, 2004 and the remaining liability at the period end included in accrued expenses in the Company’s condensed consolidated balance sheet:

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

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MOLDFLOW CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

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

10. Credit Facilities

     In January 2004, the Company completed the renewal of its unsecured $5.0 million working capital credit facility with a domestic bank. The terms of the facility, which expires December 2, 2004, are substantially the same as those of the previous facility. The available borrowing base of the facility is subject to a calculation that is based upon eligible accounts receivable. Advances may be in the form of loans, letters of credit, foreign exchange contracts or other cash management lines. Loans against the facility bear interest at the bank’s prime rate. The facility includes certain restrictive covenants, all of which the Company was in compliance with as of September 25, 2004. These covenants include certain liquidity and profitability measures and restrictions that limit the ability of the Company to merge, acquire or sell certain assets without prior approval from the bank. As of September 25, 2004, the Company had employed $865,000 of the available borrowing base through outstanding foreign exchange contracts and letters of credit. These advances do not incur interest charges. As of September 25, 2004, there were no loans advanced against the facility and the remaining available borrowing base was $4.1 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 September 25, 2004.

     Certain subsidiaries of the Company have established other credit facilities, totaling $223,000 at September 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 one of these facilities are secured by a $107,000 term deposit and the assets of an Australian subsidiary of the Company. There were no advances against these facilities as of September 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 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 fiscal 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

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MOLDFLOW CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

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 revenues, 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.

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MOLDFLOW CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

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:

     Revenue from unaffiliated customers in Japan for the three months ended September 25, 2004 and September 27, 2003 was $2.9 million and $2.4 million (21% and 25% of total revenue), respectively. Substantially all of the revenue in the Americas region is derived from the United States.

     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 September 25, 2004.

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MOLDFLOW CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

     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:

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 September 25, 2004, the Company had no outstanding capital lease obligations. Future minimum operating lease commitments as of September 25, 2004 were as follows:

     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.

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 September 25, 2004 were as follows:

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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. Following that, beginning on page 17, we discuss our Results of Operations for the three months ended September 25, 2004 compared to the three months ended September 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” beginning on page 27. Readers should not place undue reliance on our forward-looking statements. We do not undertake any obligation to update any of our forward-looking statements to reflect events occurring after the date of this report.

Business Overview

     Our goal is to be the world’s leading provider of software and hardware solutions for the optimization and automation of plastics-focused manufacturing by offering 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 cheaper 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

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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 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 needs for optimizing and automating the set-up, temperature, flow, control and monitoring of the primary equipment and other process 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 manufacturing process.

     Expanding our geographic coverage is a key element of our growth strategy. We believe that the rapidly growing 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.

     We believe that increases in our efficiency and productivity will allow us to increase investment in our growth initiatives while improving our profitability. We are managing our business with a goal to achieve annual operating margins in the 16% to 22% target range by the second half of fiscal year 2005. This goal is based upon current generally accepted accounting principles and makes no attempt to consider the effect of future changes to those principles. In the longer term, we will continue to balance operating margin targets with revenue growth opportunities.

     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.

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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 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 Moldflow Plastics Xpert 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.

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Overview of Results of Operations for the Three Months Ended September 25, 2004

  Financial highlights included:

•

growth in revenues to $14.0 million in the first quarter of 2005 from $9.5 million in the first quarter of 2004,

•

growth in earnings to $0.15 per diluted share in the first quarter of 2005 from $0.04 per diluted share in the first quarter of 2004, and

•

cash generated from operations of $1.2 million in the fiscal quarter, compared to $287,000 in the same quarter of the previous year.

  Summary of operating performance:

     Our total revenue was 47% higher in the three months ended September 25, 2004 as compared to the three months ended September 27, 2003, primarily as a result of growth in our Design Analysis Solutions product sales in our European and our 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 the first quarter of fiscal 2005, 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 first quarter of fiscal 2004. Had currency exchange rates for the first quarter of fiscal 2005 been the same as the first quarter of fiscal 2004, our total revenue in the three months ended September 25, 2004 would have increased 41% from the three months ended September 27, 2003.

     Our operating expenses, including amortization of acquired intangible assets, increased $1.1 million in the three months ended September 25, 2004 but declined as a percentage of revenue as compared to the three months ended September 27, 2003. The dollar increase is due primarily to higher variable costs based on current sales performance as well as costs of personnel added in our acquisition of AMSI. Our operating margins are very sensitive to changes in revenue, given the relatively fixed nature of most of our operating expenses, which consist primarily of employee-related expenditures, facilities costs and depreciation and amortization expense. In future periods, employee-related expenditures will increase substantially when we are required to record compensation expense related to employee stock option grants.

     In the three months ended September 25, 2004, we generated $1.2 million of cash from our operating activities as compared to $287,000 in the three months ended September 27, 2003. We finished the quarter with $52.8 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:

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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

•

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

     Total revenue increased 47%, or $4.5 million, to $14.0 million for the three months ended September 25, 2004, from $9.5 million for the three months ended September 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 increased approximately 41%.

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

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

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Product revenue

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

     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 and hot runner process controllers, 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. In addition, we receive royalty payments from developers of other software products related to the bundling of our software with

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their design software programs. We record these payments as revenue as well, but such amounts have not been significant to date.

     In the three months ended September 25, 2004, our product revenue increased by $3.6 million, or 82%, to $7.9 million, from $4.4 million in September 27, 2003. This 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 approximately 90 new customers in the first quarter of fiscal 2005, compared to approximately 100 new customers in the same period of fiscal 2004. Sales to new customers represented 32% of total product revenue in the three months ended September 25, 2004, compared to 25% of total product revenue in the three months ended September 27, 2003. We believe that this increase is a result of a number of factors, including the release of new products that appeal to a wider range of potential customers and the impact of annual trade shows and user groups that generate new customer leads.

     Pricing of individual products within our product families 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”) increased by $1.8 million, or 52%, to $5.2 million in the three months ended September 25, 2004 when compared to the three months ended September 27, 2003, due mostly to strong sales results in Germany, France, Japan and Korea. 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.

     Within the last nine months, we released MPA version 7.0 and MPI version 5.0, both of which introduce new complementary add-on modules to our previous products. 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 first quarter of fiscal 2004. In addition, over the last two quarters, we 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 Design Analysis Solutions product revenue.

     We sold 118 seats of DAS products in the three months ended September 25, 2004, compared to 134 seats of these products in the three months ended September 27, 2003.

  Manufacturing Solutions Product Revenue

     Product revenue from our Manufacturing Solutions (“MS”) products increased by $1.8 million, or 192%, to $2.7 million in the three months ended September 25, 2004 compared to $928,000 in the three months ended September 27, 2003. This increase was due primarily to sales of hot runner process controllers, a product line that was acquired in our January 2004 acquisition of AMSI.

     We sold 180 seats of our MS products in the three months ended September 25, 2004 compared to 90 seats of MS products in the three months ended September 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 43% of our total revenue in the three months ended September 25, 2004, compared to 54% of our total revenue in the three months ended September 27, 2003. Revenues derived from

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services increased by 17% in the first quarter of fiscal 2005. 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 September 25, 2004, services revenue from the DAS business unit was $5.4 million and services revenue from the MS business unit was $642,000.

Cost of Revenue

  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 $1.8 million in the three months ended September 25, 2004, compared to $638,000 in the three months ended September 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 $320,000 of compensation and other employee costs when compared to the previous year. Direct material increased almost $800,000 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 approximately $80,000 compared to the same period of the prior year, due to newly 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 $1.3 million in the three months ended September 25, 2004, compared to $629,000 in the three months ended September 27, 2003. The significant increase in these expenses 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.

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Research and Development

     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.

     In accordance with SFAS No. 86, research and development costs of $201,000 were capitalized in the three months ended September 25, 2004. Similar costs were insignificant in the three months ended September 27, 2003. All such capitalized costs are being amortized to cost of product revenue over the estimated economic life of the related products, which range from three to five years. As we plan to release several new products and enhancements over the remainder of the fiscal year, we expect to capitalize a similar amount of software development costs in each of the remaining quarters of fiscal 2005.

     Net of amounts capitalized for software development, our research and development expenses were $1.6 million in the three months ended September 25, 2004, compared to $1.6 million in the three months ended September 27, 2003. The increase was primarily attributable to a $52,000 increase in third-party research programs.

  Selling and Marketing

     We sell our products primarily through our direct sales force and indirect distribution channels. Selling and marketing expenses consist primarily of salaries, commissions 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 $4.7 million in the three months ended September 25, 2004, compared to $4.2 million in the three months ended September 27, 2003. The increase from the previous year was primarily a result of a $550,000 increase in employee compensation costs, a result of staff added in the acquisition of AMSI as

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well as commissions paid on increased revenues, a $140,000 increase in marketing promotional activities and a $170,000 increase in third-party commissions related to hot runner process controller sales. 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 included in cost of services revenue. This organizational change reduced our selling and marketing expenses by $450,000 as compared to the previous fiscal year and increased cost of services revenue by a corresponding amount.

  General and Administrative

     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 $2.5 million in the three months ended September 25, 2004, compared to $1.9 million in the three months ended September 27, 2003. The increase in general and administrative expenses was due primarily to a $120,000 increase in compensation expense, which included the impact of personnel added as a result of the AMSI acquisition, a $106,000 increase in Sarbanes-Oxley compliance and preparation costs, a $100,000 increase in employee costs, including costs associated with hiring new staff and training, and a $70,000 increase in audit and tax service fees.

  Amortization of Acquired Intangible Assets

     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.

     Amortization of acquired intangible assets was $79,000 in the three months ended September 25, 2004, compared to $111,000 in the three months ended September 27, 2003. The reduction in amortization expense reflects the completion of amortization of certain intangible assets that reached the end of their estimated useful life.

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  Interest Income

     Interest income includes interest income earned on invested cash balances. Our interest income was $346,000 in the three months ended September 25, 2004, which was not significantly different from that of the same period of the previous fiscal year.

  Other Income (Loss), Net

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

     Our other losses of $58,000 in the three months ended September 25, 2004 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 first fiscal quarter of 2005, our actual income tax rate was 21% on pre-tax income of $2.2 million. The difference between the effective income tax rate of the first fiscal quarter of 2005 and the full year estimate was due to a one-time benefit 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 32%, 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. 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 claims, acquisitions of other companies or other similar 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 approximately $9.8 million, which amount was subject to an average effective tax rate of 30% 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.

     We have established a valuation allowance against net deferred tax assets, consisting principally of net operating loss carryforwards in certain jurisdictions including the United States, because we believe that it is more likely than not that the tax assets in those jurisdictions will not be realized prior to their expiration. At September 25, 2004, we had total net deferred tax assets of $396,000, net of a tax asset valuation allowance of $1,284,000 and deferred tax liabilities of $884,000. Realization of our net deferred tax assets is dependent on our ability to generate future taxable income in the related tax jurisdictions. We believe that sufficient taxable income will be earned in the future to realize these assets.

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Liquidity and Capital Resources

     Historically, we have financed our operations and met our capital expenditure requirements primarily through funds generated from operations, sales of our capital stock and borrowings from lending institutions. As of September 25, 2004, our primary sources of liquidity consisted of our total cash and cash equivalents balance of $38.9 million, our marketable securities balance of $13.9 million and our credit facilities. In January 2004, we renewed our primary $5.0 million unsecured working capital credit facility. The available borrowing base of the facility is subject to a calculation that is based upon eligible accounts receivable. Advances may be in the form of loans, letters of credit, foreign exchange contracts or other cash management lines. The facility includes restrictive covenants, all of which we were in compliance with at September 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 September 25, 2004, we had employed $865,000 of available borrowings through outstanding foreign exchange contracts and letters of credit. The remaining available borrowings were $4.1 million. In addition to our primary working capital line of credit, we also utilize domestic and foreign banking institutions to provide liquidity to our subsidiaries. We also have relationships with other banking institutions in order to facilitate foreign currency and hedging transactions. As of September 25, 2004, we had no outstanding debt.

     At September 25, 2004, our marketable securities consisted of corporate bonds and U.S. government securities with maturities at date of purchase in excess of three months. Investments in marketable securities are made in accordance with our corporate investment policy. The primary objective of this policy is the preservation of capital. Investments are limited to high quality corporate debt, government securities, municipal debt securities, money market funds and similar instruments. The policy establishes maturity limits, liquidity requirements and concentration limits. At September 25, 2004, we were in compliance with this internal policy.

     Operating activities generated $1.2 million of cash in the three months ended September 25, 2004 and $287,000 of cash in the three months ended September 27, 2003. In both periods, this was a result of our net income adjusted for certain non-cash charges and expenses, such as depreciation and amortization. Cash was also provided in both periods by reductions in accounts receivable balances and reductions in other current assets, including prepaid expenses. These increases were partially offset by cash used to reduce accounts payable and accrued expenses. 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 $1.0 million of cash in the first quarter of fiscal 2005 and $1.6 million in the same period of the previous year. In the first quarter of fiscal 2005, maturities and sales of our marketable securities generated $1.7 million of cash, offsetting $527,000 of fixed asset purchases and $201,000 of capitalized software development costs. In fiscal 2004, maturities and sales of our marketable securities generated $1.9 million of cash, offsetting $310,000 of fixed asset purchases.

     Net cash of $265,000 and $169,000 was provided by financing activities in the first quarter of fiscal 2005 and 2004, respectively. In both periods, this cash was generated by exercises of stock options 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 the first quarter of fiscal 2005 or the first quarter of fiscal 2004.

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     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, primarily for the purchase of fixed assets. 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 totalled $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 September 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 September 25, 2004.

Off-Balance Sheet Financing Arrangements

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

Recent Accounting Pronouncements

     In March 2004, the Financial Accounting Standards Board (“FASB”) issued an Exposure Draft for a Proposed Statement of Financial Accounting Standards, “Share-Based Payment.” This proposed Statement addresses the accounting for transactions in which a company receives employee services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. This proposed Statement would also eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally would require that such transactions be accounted for using a fair-value-based method. The FASB has nearly completed its deliberations and is expected to release a final statement by the end of our second quarter of fiscal 2005. During its deliberations to address the comment letters, the FASB has preliminarily indicated that the effective date for this statement would be for periods beginning after June 15, 2005, which would be the first quarter of our fiscal 2006. We are currently assessing the impact of this proposed 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.

Restructuring

January 2004 Plan

     In January 2004, we initiated a corporate restructuring plan (the “January 2004 plan”) related to our 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, we recorded charges and related accruals of $508,000 in our third quarter of fiscal 2004. These charges were recorded as restructuring costs in our 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 the restructuring charges incurred, cash paid to settle the related obligations and the remaining liability included in accrued expenses in our condensed consolidated balance sheet:

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April 2002 Plan

     In April 2002, we 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. As a result of the April 2002 plan, we recorded pre-tax charges and related accruals in fiscal 2002 of $1.3 million. The remaining accrual balances as of September 27, 2003 relate to long-term contractual obligations from facility commitments that will be paid over five years. The following table presents the balance of the accrued restructuring charges:

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 recent reorganization of our sales, marketing and support staff along business unit lines may result in disruption in our sales.

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

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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 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 will result in lower gross margins and may result 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,

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•		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,
•		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.

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.