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Article by DailyStocks_admin    (02-27-08 07:27 AM)

The Daily Magic Formula Stock for 02/26/2008 is Moldflow Corp. According to the Magic Formula Investing Web Site, the ebit yield is 11% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview

Moldflow Corporation is a Delaware corporation, incorporated in 1997. Our business is focused on providing computer aided engineering (“CAE”) software solutions that enable plastics designers and manufacturers to predict and solve manufacturing related challenges prior to production. Our solutions and services help companies manufacture less expensive and more reliable products by increasing the effectiveness of their product and mold designs as well as improving efficiencies across their manufacturing processes.

We develop, market and support a broad range of CAE software applications. Our products are used by global companies involved in the development and production of plastic parts to speed their products to market, decrease manufacturing costs, improve production through greater reliability and quality, and reduce costly design and manufacturing errors. We believe we have the widest and most advanced range of software solutions and proprietary technologies to address the challenges that arise in each phase of the process of designing and manufacturing injection molded plastic parts. Our products are complemented by our experienced service and technical support organizations, as well as resellers and other strategic partners who provide consulting and ancillary product offerings to customers worldwide.

On June 30, 2007, we completed the sale of substantially all of the assets of our Manufacturing Solutions (“MS”) division, including our Altanium, Shotscope and Celltrack product lines. The Moldflow Plastics Xpert (“MPX”) software product, which had been previously part of the MS division, was retained by Moldflow as this software-focused product line was more closely aligned with our Design Analysis Solutions (“DAS”) business. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we are reporting the MS division as a discontinued operation in the consolidated financial statements for all periods presented. See Note 3 to our consolidated financial statements, Discontinued Operations , for further discussion of the MS division divestiture. Unless indicated otherwise, both current and historical amounts provided throughout this Form 10-K relate solely to our continuing operations.

Our Products

Participants in all aspects of the creation process of plastic parts, including part designers, mold designers, manufacturing engineers and injection molding machine operators, use our products. Our products provide functionality across a broad spectrum of the discrete product development and manufacture processes. Our products help part and mold designers and plastics engineers eliminate much of the guesswork involved in the design of parts and molds and help them design products that will be manufactured at lower cost and correctly the first time.

We believe our products are the world’s most widely used CAE products in the plastics injection molding industry because they address the broadest range of manufacturing issues and design geometry types. Our solutions consist of a scalable set of products with capabilities that include entry-level part and mold design validation as well as in-depth design and process optimization, allowing users to achieve optimal time to market and part quality at the lowest possible cost.

Moldflow Plastics Advisers ®

Our Moldflow Plastics Advisers (“MPA ® ”) series provides part and mold designers with applications that permit them to quickly check the ultimate manufacturability of their designs at an early stage in the design process. MPA allows companies to consider manufacturing constraints at the same time as form, fit and function. MPA products are designed to be easy to learn and use and do not require extensive training or plastics expertise. MPA users can work directly from 3D solid computer-aided design (“CAD”) models, saving significant preparation time. Intuitive result displays and detailed design advice help users to quickly optimize part and mold designs. The MPA series consists of two primary products, Part Adviser tm and Mold Adviser tm . Part Adviser is a user-friendly application, which enables product designers without expertise in designing plastic parts to address key manufacturing concerns in the preliminary design stage. Mold Adviser extends the capabilities of Part Adviser to allow users to create and simulate plastic flow through single cavity, multi-cavity and family molds. Optional Mold Adviser add-on modules allow users to simulate more phases of the injection molding process and evaluate molded part performance and cooling circuit design. Both of these products eliminate the need to design plastic parts and molds through trial and error efforts, enabling the designer to create product and mold designs more quickly and efficiently.

Moldflow Plastics Insight ®

The Moldflow Plastics Insight (“MPI ® ”) series of products contains our broadest set of predictive capabilities for injection molding and is typically used by highly specialized design engineers. The MPI products are modular and are designed to address the most important physical aspects of injection molding such as plastics flow, cooling time and warpage; as well as specialized injection molding processes such as reactive molding, gas injection molding and microchip encapsulation. Many of our customers invest in multiple modules to solve the full range of problems they may encounter when taking a plastic part from design to manufacture. All applications in the MPI series use an integrated environment, which permits users to easily import all of the most commonly used types of computer-generated models, select and compare material grades, prepare models for analysis, sequence a series of analysis jobs, undertake advanced analysis post-processing and enhance collaboration with team members. In these applications, we believe that we offer the broadest integration with existing CAD products in the plastics CAE industry.

Moldflow Plastics Xpert

Our Moldflow Plastics Xpert (“MPX ® ”) product is integrated with injection molding machines to optimize their operation and to monitor and control the manufacturing process. MPX addresses common manufacturing issues such as machine set-up, process optimization and production part quality monitoring and control. Results generated by our MPA and MPI products can be input directly into our MPX product to reduce machine set-up time and enhance the efficiency of the injection molding machine.

Major Customers

No single customer accounted for more than 10% of our revenue during fiscal 2007, 2006 or 2005.

Sales and Marketing

As of June 30, 2007, our direct sales organization consisted of a total of 50 sales representatives. Our sales representatives operated out of offices located in China, France, Germany, Italy, Japan, Korea, the Netherlands, Spain, Sweden, Taiwan, India, the United Kingdom, Singapore and the United States. See Note 20 to our consolidated financial statements, Geographic Information . In fiscal 2007, 2006 and 2005, approximately 81%, 82% and 81%, respectively, of our revenue from customers was attributed to countries outside of the United States. Sales of our products may be subject to seasonal variations, particularly in our first fiscal quarter and, to a lesser extent, our third fiscal quarter, in many of the markets in which we sell our products.

To augment our direct sales force we also sell our products through marketing and distribution arrangements with third-party value-added resellers and software vendors. We have agreements with several design software vendors, including Parametric Technology Corporation, Unigraphics Solutions and SolidWorks, a subsidiary of Dassault Systems, to either include our products as part of an integrated application in their solid modeling design systems or resell certain of our products.

Backlog

We generally ship our products within 30 days of acceptance of a customer order and execution of the appropriate license documentation. The amount of unshipped product orders vary from time to time and the amount of such orders at the end of any particular period is not material to our business.

Customer Support and Other Services

Customer Support and Training

We provide customer training on our products and technical support to our customers, which they may access twenty four hours a day. Our customers may access customer support either through our telephone hotline or our self-service website. In addition, our product development staff is available to solve more complex problems that our customer support personnel are unable to solve quickly. We have an established curriculum of training courses provided by us or by our partners, leading to certification in the use of our products.

Consulting Services

In addition to traditional customer support services, we also provide consulting services to customers who lack employees with the expertise necessary to take advantage of the full capability of our products. We employ design engineers who use our products on behalf of our customers to optimize their part design and production processes. We view providing consulting services as complementary to our core business of selling sophisticated software solutions. Accordingly, we provide consulting services typically in cases where we believe that providing these services will help build relationships with future customers for our products.

Material Testing Services

Our material testing group provides testing services to our customers who are seeking accurate, reliable material data on new or existing grades of polymers, measured under a wide range of practical molding conditions. Our proprietary material database contains information on more than 8,100 plastic materials. We conduct material testing at our facilities located near Melbourne, Australia, and in Ithaca, New York, both of which utilize state-of-the-art equipment, including injection molding machines. The research and testing conducted at these facilities provides essential data for our full line of software applications.

Competition

The CAE market, into which our products are sold is highly competitive. We compete with many companies engaged in selling software solutions to companies involved in product development and manufacturing. Our products face competition from CAD and CAE companies, materials vendors and independent engineering consultants. In addition, new competitors may become evident as we introduce new products into the marketplace.

The entrance of new competitors would likely intensify competition in all or a portion of the markets in which we compete. Some of our current and possible future competitors have greater financial, technical, marketing and other resources than we do, and some have well-established relationships with our current and potential customers. Competitors may form alliances and rapidly acquire significant market share. Moreover, competition may increase as a result of software industry consolidation.

Research and Development

Our product development strategy focuses on on-going development and innovation of new technologies to increase our customers’ productivity and provide solutions that our customers can integrate into their existing environments. Our product development activities take place in our research centers located in the United States, Australia and the United Kingdom. We have linked the information systems of each of these facilities to provide a continuous development environment, enabling product development to be undertaken twenty-four hours per day.

In addition to our internal product development efforts, we fund or participate in a wide assortment of external research and development projects, often conducted by world-leading experts in their fields. In many cases, through these projects, we gain access to fundamental research with comprehensive experimental results. Often the researchers agree to restrictions on publishing rights in order to pursue topics of mutual interest.

As of June 30, 2007, our product development staff had 50 employees, many of whom hold advanced degrees and have industry experience in engineering, mathematics, computer science or related disciplines. In fiscal 2007, 2006 and 2005, our research and development expenses were $8.0 million, $7.4 million and $7.3 million, respectively, which is net of certain software development costs required to be capitalized under generally accepted accounting principles. Costs of $340,000, $496,000 and $201,000 were capitalized in fiscal 2007, 2006 and 2005, respectively. See Note 6 to our consolidated financial statements, Software Development Costs , for a discussion of our treatment of software development costs. Continued investment in research and development is a key component of our strategy and is required in order for us to remain competitive.

Proprietary Rights

Our software products and trademarks, including our company name, product names and logos, are proprietary. We rely on a combination of patent protection, trade secrets, copyright and trademark laws, license agreements, nondisclosure and other contractual provisions and technical measures to protect the proprietary technology contained in our products. Despite these measures, there can be no assurance that the laws of all relevant jurisdictions will afford adequate protection to our products and other intellectual property.

The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. While we have not, to date, had any material claims of this type asserted against us, there can be no assurance that someone will not assert such claims against us with respect to existing or future products or other intellectual property or that, if asserted, we would prevail in such claims. In the event a lawsuit of this type is filed, it could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not we ultimately prevail.

Due to the rapid pace of innovation within our industry, factors such as the technological and creative skills of our personnel are as important to establishing and maintaining a technology leadership position within the industry as are the various legal protections surrounding our technology. We require certain employees and consultants to sign a confidentiality and non-competition agreement. Under these agreements, our employees agree not to disclose trade secrets or confidential information and agree not to engage in or be connected with any business that is competitive with our business while employed by us, and in some cases, for specified periods thereafter. Despite these precautions, misappropriation of our technology may occur. In addition, we believe that software piracy is an ongoing problem to us, and many other software vendors. We are unable to measure the impact that this has on our business. Further, patent, trademark, copyright and trade secret protection may not be available for our products in every country.

There can be no assurance that third parties will not assert infringement claims against us in the future. Certain of our products also contain technology developed and licensed from third parties. We may likewise be susceptible to infringement claims with respect to these third-party technologies.

Compliance with Environmental Provisions

Our capital expenditures, earnings and competitive position are not materially affected by compliance with federal, state and local environmental provisions which have been enacted or adopted to regulate the distribution of materials into the environment.

Employees

As of June 30, 2007, we had 267 employees associated with our continuing operations, 86 of whom resided in the United States, 51 of whom resided in Australia and 130 of whom resided in other countries. None of our employees are subject to a collective bargaining agreement. We consider our relationship with our employees to be good.

CEO BACKGROUND

Robert P. Schechter has served as a Director of the Company since January 2000. Mr. Schechter has served as Chairman and Chief Executive Officer of NMS Communications, a provider of hardware and software solutions for the communications industry, since March 1996 and as its President and Chief Executive Officer since April 1995. Mr. Schechter also serves as a director of Avici Systems, a provider of routing systems and Unica Corporation, a software company. Mr. Schechter holds degrees from Rensselaer Polytechnic Institute and The Wharton School of the University of Pennsylvania.

A. Roland Thomas has served as a Director of the Company or its predecessors since November 1989 and the Company’s President and Chief Executive Officer since June 2002. Prior to that, Mr. Thomas served as the Company’s Vice President of Research and Development from January 1997 through June 2002. Prior to January 1997, he served in various other positions with the Company since 1982. Mr. Thomas holds a Bachelor of Mechanical Engineering degree from the Royal Melbourne Institute of Technology.

Frank W. Haydu III has served as a Director of the Company since October 2001. Since November 2001, Mr. Haydu has served as a Managing Director of Valuation Perspectives, Inc., a financial services consulting practice and since August 2005, has served in a consulting capacity at Source Precision Medicine, a life sciences medical supplier. Until May 2001, Mr. Haydu served as the Chairman of Haydu & Lind, LLC, a senior living development company. Mr. Haydu also serves as a director of CombinatoRx, Inc., iParty Corp. and several private companies. Mr. Haydu holds a Bachelor of Arts degree in economics from Muhlenberg College.

Roger E. Brooks has served as a Director of the Company since October 1998. Since March 2004, Mr. Brooks has served as the President of Pantheon Guitars, a builder of acoustic guitars. Since May 2005, Mr. Brooks also has served as Chairman of Abierto Networks LLC, a communications solution provider to the convenience store industry. Previously he served as an independent consultant assisting small and medium sized companies on matters of strategy and financing. Prior to that he served as the President and Chief Executive Officer and a Director of Intelligent Controls, Inc., an electronics and software manufacturer serving the energy industry, from May 1998 to July 2002, at which time he left the company when it was sold.

Mr. Brooks holds a Bachelor of Economics degree from the University of Connecticut and a Masters of Business degree from New York University.

Robert J. Lepofsky has served as a Director of the Company since December 2003. Mr. Lepofsky is President, Chief Executive Officer and a Director of Brooks Automation, Inc., a global leader in factory automation solutions for the semiconductor industry, effective October 1, 2007. Prior to that, Mr. Lepofsky was the Chairman of Westcliff Capital Group, a private holding company. Mr. Lepofsky served as Interim President and Chief Executive Officer of Ensign-Bickford from January 2005 through November 2006. From January 2005, to October 2005, he was a non-executive Chairman of the Board of Helix Technology Corporation, a publicly held producer of innovative vacuum systems for the semiconductor industry, and from January 1989 to December 2004, he was President and Chief Executive Officer of Helix. Mr. Lepofsky is a director of Avantair, Inc., a provider of fractional airline shares. Mr. Lepofsky holds a Bachelor of Science degree from Drexel Institute of Technology.

COMPENSATION

Our Directors who are also employees receive no additional compensation for their services as Directors. Our compensation program for non-employee Directors is reviewed from time to time by our Board of Directors, which is responsible for approving any changes to the compensation program that it deems advisable. In the process of evaluating the compensation paid to the non-employee Directors, the Compensation Committee evaluated publicly available survey data, reviewed the Board compensation practices at the peer group of companies used to evaluate executive compensation and consulted with Pearl Meyers & Partners, an independent consulting firm, with respect to current market practices at software and other technology companies. During Fiscal 2007 the Board of Directors, in accordance with the recommendations of the Compensation Committee, approved a change in the cash portion of the compensation of the non-employee Directors in order to reflect current market practices and the additional time spent by the Directors at both the Board of Directors and Committee meetings. Each non-employee Director received an annual retainer of $25,000 with no additional payments for attendance at meetings. In addition, the Lead Director received an additional annual retainer of $20,000, the Chair of the Audit Committee received an additional annual retainer of $15,000 and the Chair of each of the Compensation Committee and the Nominating and Corporate Governance Committee received an additional annual retainer of $10,000. The annual retainers were paid quarterly in equal installments.

Taking into consideration the advice of the Compensation Committee after its review of current market practices, the Board of Directors also determined to modify the equity-based portion of the compensation awarded to the non-employee Directors, so that members of the Board of Directors will maintain a meaningful equity interest in the Company. Thus, the Board moved from the prior practice of granting stock options on a yearly basis to a practice of issuing restricted stock units on a yearly basis. Restricted stock units require that the Director hold the units until he steps off the Board, or until a change of control, encouraging long-term ownership.

On the fifth business day following the 2006 Annual Meeting of Shareholders held on November 17, 2006, each non-employee Director received an award of restricted stock units valued at two times the annual retainer, with one-third of such restricted stock units vesting on each of the first, second and third anniversaries of the date of grant. Mr. Brooks therefore received grants worth $90,000, Mr. Haydu, $80,000 and each of Mr. Schechter and Lepofsky, $70,000.

The number of units was determined with reference to the closing price of the Company’s Common Stock on the date of grant. The restricted stock units require the Directors to defer receipt of their vested shares of the Company’s Common Stock until the earlier of a change of control of the Company as defined in the Company’s 2000 Option Plan (the “Option Plan”) or until termination of his or her service as a Director. The vesting of the restricted stock units automatically accelerates upon a change of control of the Company. In accordance with the terms of the Option Plan, newly appointed Directors will continue to receive an initial stock option award in connection with their appointment to the Board of Directors.

MANAGEMENT DISCUSSION FROM LATEST 10K
Corporate Strategy Overview

Our goal is to be the leading global provider of software optimization solutions for the design and manufacture of plastic parts. We help companies manufacture less expensive and more reliable products by increasing the effectiveness of their product and mold design process and manufacturing operations as well as improving efficiencies across their entire design-through-manufactur e 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 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-nine years in serving the product design, engineering and manufacturing markets, we have become the leading provider of highly sophisticated predictive software applications for the plastics design, engineering and manufacturing communities. Our growth strategy is derived from these strengths.

We continue to increase the business value of our products for our customers by improving the performance and functionality of existing products with each new release, and developing products addressing specific vertical market needs in each of our target market segments. In the design phase, for example, we provide applications that address the process of microchip encapsulation, a process which is involved in the manufacture of semiconductors.

Expanding our geographic coverage is a key element of our growth strategy. We believe that the rapidly growing economies in China, India, Eastern Europe, South America and other developing regions 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 directed toward increasing customer loyalty and further developing opportunities within our large installed customer base. We receive approximately 65% to 75% of our overall revenue from existing customers. We deliver product releases on a regular 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. These efforts encourage our existing customers to both renew their annual maintenance contracts and purchase additional licenses.

Historically, we have generated cash through our ongoing operating and financing activities. Our uses of cash include capital expenditures to support our operations and product development, investments in growth initiatives, and repurchases of our outstanding common stock. We have also used cash to acquire other companies or strategic assets. We continue to evaluate merger and acquisition opportunities to the extent they support our strategy and growth objectives.

Discontinued Operations

On June 25, 2007, we announced that we had reached a definitive agreement to sell our Manufacturing Solutions (“MS”) division to Husky Injection Molding Systems Ltd. (the “Buyer”) for $7.0 million in cash, subject to a post-closing net asset value adjustment. On June 30, 2007 the sale was completed for an adjusted purchase price of $7.1 million, net of the post-closing adjustment and costs associated with the transaction. Pursuant to the sale agreement, $1.0 million of these proceeds were placed in escrow. As we do not expect the escrow to settle within the next twelve months, this balance was recorded as an other non-current asset on our consolidated balance sheet as of June 30, 2007. Due to the timing of the closing of the sale, the remaining proceeds were recorded as a receivable and included as an other current asset on our consolidated balance sheet. We recognized a net loss on the sale of the MS division of $869,000.

The post-closing net asset value adjustment will reflect the fair value of the assets and liabilities acquired at the date of closing. At June 30, 2007, we estimated that these post-closing adjustments would result in additional proceeds of $744,000. On August 31, 2007, we received a notice from the Buyer disputing certain portions of the estimated post-closing adjustment totaling $441,000. We believe the original estimated adjustment that was recorded is appropriate and will work with the Buyer through the resolution process defined by the sale agreement.

Prior to its divestiture, the MS division had revenues of $13.5 million in fiscal year 2007, $16.6 million in fiscal 2006 and $16.9 million in fiscal year 2005. The net loss from discontinued operations for the fiscal year 2007 was $11.5 million, primarily relating to the impairment of goodwill recorded in our third fiscal quarter. Net losses of the discontinued operations were $4.3 million and $1.5 million in fiscal 2006 and fiscal 2005, respectively.

In accordance with Statement of Accounting Standards (“SFAS”) No. 144, we are reporting the MS division as a discontinued operation in the consolidated financial statements for all periods presented throughout this Annual Report on Form 10-K. Unless indicated otherwise, the discussion and amounts provided in this “Results of Operations” section and elsewhere in this Form 10-K relate solely to our continuing operations.

Reporting Periods

Our fiscal year end is June 30. References to 2007, 2006 or 2005 mean the fiscal year ended June 30, unless otherwise indicated.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). In connection with the preparation of these financial statements, we make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosures.

A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Critical accounting policies for us include: Revenue Recognition, Asset Valuation Allowances, Acquisition Accounting, Impairment Accounting, Income Tax Accounting, Capitalization of Software Development Costs, Stock Option Accounting and Restructuring. Management has reviewed these policies and related disclosures with the Audit Committee of our Board of Directors. A discussion of the Company’s analysis of the uncertainties involved in applying these policies at any given time or the variability that is reasonably likely to result from their application over time follows.

See Note 2 to our consolidated financials statements, Summary of Significant Accounting Policies , for a general discussion of the method of accounting we use to apply these critical accounting policies and other accounting policies that are significant to us.

Preparation of Financial Statements and Use of Estimates

The preparation of consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent liabilities. On an on-going basis, management evaluates its estimates, including those related to revenue recognition, investments, goodwill, intangible and other long-lived assets, bad debts, income taxes, warranties, contingencies, and litigation. Management bases its estimates on historical experience and on customary 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 significantly from these estimates.

A. Revenue Recognition

Our continuing operations generate revenue from two principal sources: license fees for packaged software products and service fees from maintenance and support contracts, consulting, implementation, training and material testing services. For revenue derived from license fees for packaged software products, we follow American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-9, “Modification of SOP No. 97-2 with Respect to Certain Transactions.” The application of all such guidance requires judgment, including whether or not sufficient evidence of a sales arrangement exits, whether or not the arrangement fee is fixed or determinable, whether or not legal title has passed to the customer, whether or not all significant contractual obligations have been satisfied and whether or not the collection of the related receivable is reasonably assured and free of contingencies. The amount of recognized and unrecognized revenue could be materially impacted by changes in these judgments.

In addition, maintenance and support contracts are often entered into at the same time as the sale of software licenses. We consider these to be multiple elements of a single arrangement. We use the residual method to recognize revenue from arrangements like these with one or more elements to be delivered at a future date, when evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements, such as maintenance services, is deferred and the remaining portion of the total arrangement fee is recognized as revenue, assuming all other revenue recognition criteria has been fulfilled. The deferred revenue related to these services is then recognized ratably over the related contract period or as the services are performed.

We determine vendor-specific objective evidence of the fair value (“VSOE”) of undelivered elements based on the prices that are charged when the same element is sold separately to customers. The fair value of maintenance and support services may also be determined based on the price to be paid upon renewal of that service in accordance with the optional renewal terms offered contractually to a customer. The determination of the existence of multiple elements and the sufficiency of evidence of fair value of those elements involves significant judgment, changes in which could materially impact the amount of recognized and unrecognized revenue. If sufficient evidence of the fair value of an undelivered element does not exist, all revenue from the arrangement is deferred and recognized upon delivery of that element or at the time that fair value can be established for the undelivered element.

B. Asset Valuation Allowances

We evaluate the adequacy of the allowance for doubtful accounts by analyzing historical bad debts, changes in customer concentrations, customer creditworthiness, changes in customer payment patterns and current economic trends. Changes in these factors may materially impact how we estimate the allowance for doubtful accounts and thus, the amount of earned revenue and income.

We also provide valuation allowances against deferred tax assets. We believe that the net deferred tax asset represents its best estimate, based upon the weight of available evidence, of the deferred tax asset that will be realized. If such evidence were to change, based upon near term operating results and longer term projections, the amount of the valuation allowance recorded against the gross deferred tax assets may be decreased or increased.

C. Acquisition Accounting

We allocate the purchase price of each acquired business to the assets acquired and liabilities assumed, if any, at their fair value on the date of acquisition. In all cases, any excess purchase price over amounts allocated to the assets acquired and liabilities assumed is recorded as goodwill. Valuation methodologies as well as the determination of subsequent amortization periods involve significant judgments and estimates.

D. Impairment of Acquired Intangible Assets, Goodwill and Other Long-Lived Assets

SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for a reporting unit.

E. Income Tax Accounting

SFAS No. 109, “Accounting for Income Taxes,” establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations, or cash flows.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”. FIN No. 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. This Interpretation also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 will require disclosure at the end of the annual reporting period of the nature of uncertain tax positions and related events if it is reasonably possible that those positions and events could change the associated recognized tax benefit within the next twelve months.

In addition, our effective tax rate estimates 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 tax rate, as well as the timing and extent of the realization of deferred tax assets, changes in tax law and potential acquisitions. Further, our tax rates may fluctuate within a fiscal year, including from quarter to quarter, due to items arising from discrete events, including settlement of tax audits and assessments, acquisitions of other companies, and changes in GAAP or other events.

F. Capitalization of Software Development Costs

We apply SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” which requires that costs associated with the development of computer software and related products be expensed prior to establishing technological feasibility, and capitalized thereafter until commercial release of the software products. Both the assessment of the amount of costs required to be capitalized and the determination of subsequent amortization periods involve significant judgments and estimates.

G. Stock Option Accounting

We apply SFAS No. 123(R), “Share-Based Payment,” which requires us to expense the fair value of stock options and other forms of share-based compensation granted to employees and directors. The impact of expensing employee and director stock awards on our earnings is material and is further described in Note 14 to our consolidated financial statements, Share-Based Compensation and Stock Plans . Share-based compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term of stock options, the expected volatility of our stock and expected dividends. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, share-based compensation expense and our results of operations could be materially impacted.

H. Restructuring

From time to time we may record charges resulting from restructuring our operations, including the consolidation of our operations, changes in our strategic plan, or managerial responses to declines in demand, increasing costs or other events. For these charges, we apply SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Under SFAS No. 146, costs associated with exit or disposal activities are determined and recognized at their fair value when the liability is incurred rather than at the date we commit to an exit or disposal plan.

The recognition of these restructuring charges require us to make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned exit activity. To the extent our actual restructuring results differ from our estimates and assumptions, we may be required to revise the estimates of future liabilities, requiring the recognition of additional restructuring charges or the reduction of liabilities already recognized. Restructuring charges may include such costs and charges as those related to employee severance, termination benefits, the write-off of assets, professional service fees and costs for future lease commitments on excess facilities, net of any estimated income from subleases. On a quarterly basis, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Corporate Strategy Overview

Our goal is to be the leading global provider of software optimization solutions for the design and manufacture of plastic parts. We help companies manufacture less expensive and more reliable products by increasing the effectiveness of their product and mold design process as well as improving efficiencies across their entire design-through-manufactur e 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 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 thirty years in serving the product design, engineering and manufacturing markets, we have become the leading provider of highly sophisticated predictive software applications for the plastics design, engineering and manufacturing communities. Our growth strategy is derived from these strengths.

We continue to increase the business value of our products for our customers by improving the performance and functionality of our products with each new release, and developing products addressing specific vertical market needs in each of our target market segments. In the design phase, for example, we provide applications that address the process of microchip encapsulation, a process which is involved in the manufacture of semiconductors.

Expanding our geographic coverage is a key element of our growth strategy. We believe that the rapidly growing economies in China, India, Eastern Europe, South America and other developing regions 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 directed toward increasing customer loyalty and further developing opportunities within our large installed customer base. We generally receive approximately 65% to 75% of our overall revenue from existing customers. We deliver product releases on a regular basis which incorporate significant functional improvements to ensure that our customers have access to the latest technological 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. These efforts encourage our existing customers to both renew their annual maintenance contracts and purchase additional licenses.

Our uses of cash include capital expenditures to support our operations and product development, investments in growth initiatives, and repurchases of our outstanding common stock. We have also used cash to acquire other companies or strategic assets. We continue to evaluate merger and acquisition opportunities to the extent they support our strategy and growth objectives.

Discontinued Operations

On June 30, 2007, we completed the sale of our Manufacturing Solutions (“MS”) division to Husky Injection Molding Systems Ltd. (the “Buyer”) for $7.0 million in cash. The purchase price was subject to a post-closing net asset value adjustment to reflect the fair value of the assets and liabilities acquired at the date of closing. At June 30, 2007, we estimated that these post-closing adjustments would result in additional proceeds of $744,000. In the first quarter of fiscal 2008, we agreed with the Buyer to a final post-closing adjustment of $584,000, resulting in an adjusted total purchase price of $7.6 million. The difference between the estimated adjustment and the actual adjustment, inclusive of associated legal costs, was recorded as an additional loss on the disposal of the discontinued operation in the three months ended September 30, 2007.

We received $6.0 million of the purchase price in July 2007 and $584,000 in October 2007. Pursuant to the sale agreement, the remaining $1.0 million of the adjusted purchase price was placed in escrow. We expect the escrow to settle within the next twelve months and have recorded its balance as a current asset on our unaudited condensed consolidated balance sheet as of December 31, 2007.

In accordance with Statement of Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we are reporting the MS division as a discontinued operation in these condensed consolidated financial statements for all periods presented.

Critical Accounting Policies and Significant Judgments and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). In connection with the preparation of these financial statements, we make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosures.

A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Our critical accounting policies include: Revenue Recognition, Asset Valuation Allowances, Acquisition Accounting, Impairment Accounting (including the accounting treatment of discontinued operations), Income Tax Accounting, Capitalization of Software Development Costs, Share-based Compensation, and Restructuring. Management has reviewed these policies and related disclosures with the Audit Committee of our Board of Directors. We have revised our critical accounting policy related to income tax accounting as described below. For a detailed explanation of the judgments included in our other critical accounting policies refer to our Annual Report on Form 10-K for the year ended June 30, 2007.

Income Tax Accounting

SFAS No. 109, “Accounting for Income Taxes,” establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Significant judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations or cash flows.

We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”) on July 1, 2007. FIN 48 provides a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.

Under FIN 48, we first determine whether a tax authority would “more likely than not” sustain our tax position if it were to audit the position with full knowledge of all the relevant facts and other information. For those tax positions that meet this threshold, we measure the amount of tax benefit based on the largest amount of tax benefit that the enterprise has a greater than 50% chance of realizing in a final settlement with the relevant authority. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. We maintain a cumulative risk portfolio relating to all our uncertainties in income taxes in order to perform this analysis, but the evaluation of our tax position in connection with FIN 48 requires significant judgment and estimation in part because, in certain cases, tax law is subject to varied interpretation, and whether a tax position will ultimately be sustained may be uncertain. The actual outcome of our tax positions, if significantly different from our estimates, could materially impact the financial statements.

In addition, our effective tax rate estimates may be materially impacted by the amount of income taxes associated with our foreign earnings, which are typically taxed at rates different from that of the United States (“U.S.”) federal statutory tax rate, as well as the timing and extent of the realization of deferred tax assets, changes in tax law and potential acquisitions. Further, our tax rates may fluctuate within a fiscal year, including from quarter to quarter, due to items arising from discrete events, including settlement of tax audits and assessments, acquisitions of other companies, and changes in GAAP or other events.

Our product revenue primarily represents license fees for our packaged software application products. Typically, our customers pay an up-front, one-time fee for our products. The amount of the fee depends upon the number and type of software modules licensed and the number of the customer’s employees or other users who can access the software product simultaneously. 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 royalty payments and shipping and handling fees related to delivery of our products as components of product revenue, none of which have been significant to date.

Our service revenue is primarily derived 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 services, training of customers’ employees and material testing services.

Product revenue increased $1.3 million and $1.9 million in the three- and six-month periods ended December 31, 2007, respectively, compared to the same periods of the prior fiscal year. The increase in all periods was primarily due to strong sales results in Japan, Korea and China driven mainly by orders from large customers in the electronics industry. In the Americas, the decrease in product revenue for the six-month period ended December 31, 2007 was mainly due to a weakness in the U.S. automotive industry and the impact of an overall economic slowdown.

Service revenue increased $1.5 million and $2.5 million in the three- and six-month periods ended December 31, 2007, respectively compared to the same periods of the prior fiscal year. This increase was primarily from the sale of maintenance and support contracts across all geographic regions and is a reflection of long-term growth in our installed customer base arising from software license sales made during the current and previous reporting periods.

Changes in foreign currency exchange rates represented 7% and 5% of the increase in both product and service revenue in the three- and six-month periods ended December 31, 2007, respectively.

Cost of product revenue consists of amortization expense related to capitalized software development costs, and the cost of compact discs, related packaging material, duplication and shipping. 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.

Cost of product revenue for the three- and six-month periods ended December 31, 2007 remained relatively unchanged when compared to the same periods of the prior fiscal year.

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