Overview:

ANSYS, Inc.'s (hereafter the "Company" or "ANSYS") results for the three months ended September 30, 2008 reflect a revenue increase of 30.0%, and basic and diluted earnings per share growth of 25.0% and 26.1%, respectively, as compared to the three months ended September 30, 2007. ANSYS' results for the nine months ended September 30, 2008 reflect a revenue increase of 25.1%, and basic and diluted earnings per share growth of 45.6% and 42.4%, respectively, as compared to the nine months ended September 30, 2007. These results were most significantly impacted by the July 2008 acquisition of Ansoft. The results of operations include the results of Ansoft for the period from the date of acquisition (July 31, 2008) through September 30, 2008. The Company experienced higher revenues in 2008 from both the Ansoft acquisition and from license and maintenance growth in the Company's other products and services. These revenues were partially offset by increased intangible amortization costs and increased operating expenses, including higher salaries and related headcount costs, as well as the additional costs associated with the Ansoft business. Additionally, in connection with the acquisition of Ansoft on July 31, 2008, the Company borrowed $355.0 million (incurring interest expense). The Company's financial position includes $212.4 million in cash and short-term investments, and working capital of $111.8 million as of September 30, 2008.

ANSYS develops and globally markets engineering simulation software and services widely used by engineers and designers across a broad spectrum of industries, including aerospace, automotive, manufacturing, electronics, biomedical and defense. Headquartered at Southpointe in Canonsburg, Pennsylvania, the Company and its subsidiaries employ approximately 1,700 people as of September 30, 2008 and focus on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation. The Company distributes its ANSYS® suite of simulation technologies through a global network of channel partners and direct sales offices in strategic, global locations. It is the Company's intention to continue to maintain this mixed sales and distribution model.

The Company licenses its technology to businesses, educational institutions and governmental agencies. Growth in the Company's revenue is affected by the strength of global economies, general business conditions, customer budgetary constraints, currency exchange rate fluctuations and the competitive position of the Company's products. The Company believes that the features, functionality and integrated multiphysics capabilities of its software products are as strong as they have ever been. However, the software business is generally characterized by long sales cycles. These long sales cycles increase the difficulty of predicting sales for any particular quarter. As a result, the Company believes that its overall performance is best measured by fiscal year results rather than by quarterly results.

The Company's management considers the intense competition and price pressure that it faces in the short and long term by focusing on expanding the breadth, depth, ease of use and quality of the technologies, features, functionality and integrated multiphysics capabilities of its software products as compared to its competitors, investing in research and development to develop new and innovative products and increase the capabilities of its existing products, supplying new products and services, focusing on customer needs, training, consultation and support, and enhancing its distribution channels. From time to time, the Company also considers acquisitions to supplement its product offerings and distribution channels.

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three and nine months ended September 30, 2008 and 2007, and with the Company's audited financial statements and notes thereto for the year ended December 31, 2007 filed on the annual report on Form 10-K with the Securities and Exchange Commission. The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to fair value of stock awards, bad debts, contract revenue, valuation of goodwill, valuation of intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates on historical experience, estimated future cash flows 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 value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, the following statements, as well as statements that contain such words as "anticipates," "intends," "believes," "plans" and other similar expressions:

• The Company's intentions related to investments in global sales and marketing, research and development, its global business infrastructure and in complementary companies, products, services and technologies

• Increased exposure to volatility of foreign exchange rates

• Plans related to future capital spending

• The Company's intentions regarding its mixed sales and distribution model

• The sufficiency of existing cash and cash equivalent balances to meet future working capital, capital expenditure and debt service requirements

• Management's assessment of the ultimate liabilities arising from various investigations, claims and legal proceedings

• The Company's statements regarding the strength of its software products

• The Company's statements regarding its short-term investments in the event an immediate cash need arises

• The Company's statements regarding license and maintenance revenue growth

• The Company's estimates regarding income tax provisions and statements regarding potential tax benefits relating to research credits

• The Company's estimates regarding reported revenue

• The Company's expectations regarding future claims related to indemnification obligations

• The Company's expectations regarding the impact of the acquisition of Ansoft, including its impact on operational efficiency, costs, and products

• The Company's estimates regarding the allocation of the purchase price for Ansoft and value of deferred revenue

• The Company's estimates regarding expected interest expense on the term loan

• The expected adverse impact from recent currency exchange rate fluctuations

Forward-looking statements should not be unduly relied upon because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the Company's control. The Company's actual results could differ materially from those set forth in forward-looking statements. Certain factors that might cause such a difference include risks and uncertainties detailed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in the 2007 Form 10-K Annual Report to Stockholders and any such changes to these factors have been included within Part II, Item 1A of this quarterly report on Form 10-Q.

Results of Operations

Three Months Ended September 30, 2008 Compared to Three Months Ended
September 30, 2007

Revenue:



                                             Three Months Ended
                                               September 30,             Change
      (in thousands, except percentages)      2008         2007      Amount       %
      Revenue:
      Lease licenses                       $    44,880   $ 39,080   $  5,800     14.8
      Perpetual licenses                        35,346     22,019     13,327     60.5
      Software licenses                         80,226     61,099     19,127     31.3
      Maintenance                               35,764     26,478      9,286     35.1
      Service                                    6,257      6,457       (200 )   (3.1 )
      Maintenance and service                   42,021     32,935      9,086     27.6
      Total revenue                        $   122,247   $ 94,034   $ 28,213     30.0

The increase in software license revenue was the result of overall growth in both lease and perpetual license sales, as well as the addition of Ansoft-related revenue of $7.9 million for the period from the acquisition (July 31, 2008) through September 30, 2008.

The increase in maintenance revenue was primarily the result of annual maintenance subscriptions sold in connection with new perpetual license sales in recent quarters and Ansoft-related maintenance revenue of $2.6 million for the period from the acquisition (July 31, 2008) through September 30, 2008.

The decrease in service revenue was primarily the result of reduced revenue from engineering consulting services. This decrease was partially offset by service revenue of $700,000 related to the Company's biennial users' conference.

With respect to revenue, on average, for the third quarter of 2008, the U.S. Dollar was approximately 3.2% weaker, when measured against the Company's primary foreign currencies, than for the third quarter of 2007. The U.S. Dollar weakened against the Euro, Chinese Renminbi, Swedish Krona and the Japanese Yen while it strengthened against the British Pound, Indian Rupee and the Canadian Dollar. The overall weakening resulted in increased revenue and operating income during the 2008 third quarter, as compared with the corresponding 2007 third quarter, of approximately $1.6 million and $800,000, respectively.

A substantial portion of the Company's license and maintenance revenue is derived from annual lease and maintenance contracts. These contracts are generally renewed on an annual basis and have a high rate of customer renewal. In addition to the recurring revenue base associated with these contracts, a majority of customers purchasing new perpetual licenses also purchase related annual maintenance contracts. As a result of the significant recurring revenue base, the Company's license and maintenance revenue growth rate in any period does not necessarily correlate to the growth rate of new license and maintenance contracts sold during that period. To the extent the rate of customer renewal for lease and maintenance contracts remains at current levels, incremental lease contracts and maintenance contracts sold with new perpetual licenses will result in license and maintenance revenue growth.

International and domestic revenues, as a percentage of total revenue, were 69.7% and 30.3%, respectively, for the quarter ended September 30, 2008 and 65.4% and 34.6%, respectively, for the quarter ended September 30, 2007.

In valuing deferred revenue on the Ansoft balance sheet as of the acquisition date, the Company applied the fair value provisions of Emerging Issues Task Force Issue No. 01-3, "Accounting in a Business Combination for Deferred Revenue of an Acquiree" ("EITF No. 01-3"). In accordance with EITF No. 01-3, acquired deferred revenue of $7.5 million was recorded on the opening balance sheet. This amount was approximately $23.5 million lower than the historical carrying value. Although this purchase accounting requirement had no impact on the Company's business or cash flow, the Company's reported revenue under accounting principles generally accepted in the United States ("GAAP"), primarily for the first 12 months post-acquisition, is less than would have been reported by Ansoft, absent the acquisition. The impact on reported revenue for the quarter ended September 30, 2008 was $800,000 for lease license revenue and $5.8 million for maintenance revenue. The expected impact on reported revenue for the quarter ending December 31, 2008 is approximately $8.0 million. The expected impact on reported revenue for the year ending December 31, 2009 is approximately $7.9 million.

Cost of Sales and Gross Profit:



                                                 Three Months Ended September 30,
                                                    2008                  2007              Change
                                                          % of                 % of
(in thousands, except percentages)            Amount     Revenue    Amount    Revenue    Amount     %
Cost of sales:
Software licenses                            $   2,508       2.1   $  2,236       2.4   $    272   12.2
Amortization                                     8,120       6.6      5,395       5.7      2,725   50.5
Maintenance and service                         13,959      11.4     11,760      12.5      2,199   18.7
Total cost of sales                             24,587      20.1     19,391      20.6      5,196   26.8
Gross profit                                 $  97,660      79.9   $ 74,643      79.4   $ 23,017   30.8

The change in cost of sales is primarily due to the following:

• Ansoft-related total cost of sales was $3.1 million for the period from the acquisition (July 31, 2008) through September 30, 2008. Cost of goods sold was $400,000, software and trademark amortization was $2.3 million and cost of services sold was $300,000.

• Increase in amortization of $1.0 million due to amortization that began during the third quarter of 2008 on certain trademarks which were reconsidered to have a finite useful life of ten years

• Increase in incentive compensation and headcount-related costs of $800,000

• Increase in facilities and information technology maintenance and consulting contracts of $600,000

• Increase in depreciation expense of $400,000

The improvement in the gross profit was a result of the increase in revenue offset by a smaller increase in related cost of sales. These contributions to gross profit were partially offset by the adverse impact of the amortization of certain trademarks. The Company reconsidered the indefinite lives associated with certain trademarks due to the July 31, 2008 acquisition of Ansoft. The Company determined that such trademarks had a remaining finite useful life of ten years and therefore amortization began July 31, 2008. As a result, the Company expects to see an adverse impact on gross profit in current and future periods.

Operating Expenses:



                                                 Three Months Ended September 30,
                                                    2008                  2007              Change
                                                          % of                 % of
(in thousands, except percentages)            Amount     Revenue    Amount    Revenue    Amount     %
Operating expenses:
Selling, general and administrative          $  36,071      29.5   $ 26,596      28.3   $  9,475   35.6
Research and development                        20,282      16.6     14,198      15.1      6,084   42.9
Amortization                                     3,011       2.5      2,239       2.4        772   34.5
Total operating expenses                     $  59,364      48.6   $ 43,033      45.8   $ 16,331   37.9

Selling, General and Administrative: Ansoft-related selling, general and administrative costs were $6.2 million for the period from the acquisition (July 31, 2008) through September 30, 2008. Expenses increased $1.5 million during the third quarter of 2008 as a result of salary and headcount-related costs, including incentive compensation. In addition, depreciation expense increased $500,000, and facilities and information technology maintenance costs and stock-based compensation expense each increased $400,000 as compared to the prior year quarter.

The Company anticipates that it will make investments throughout the remainder of 2008 in its global sales and marketing organization and its global business infrastructure to enhance major account sales activities and to support both its worldwide sales distribution and marketing strategies, and the growth of the business in general.

Research and Development: Ansoft-related research and development costs were $3.0 million for the period from the acquisition (July 31, 2008) through September 30, 2008. Expenses increased $1.6 million during the third quarter of 2008 as a result of salary and incentive compensation costs. In addition, equipment costs and consulting fees each increased by $400,000, and stock-based compensation expense increased $300,000 as compared to the prior year quarter.

The Company has traditionally invested significant resources in research and development activities and intends to continue to make significant investments in this area, particularly as it relates to ongoing integration and evolution of its portfolio of software technologies.

Amortization: Ansoft-related amortization expense was $900,000 for the period from the acquisition (July 31, 2008) through September 30, 2008.

Interest Expense: The Company's long-term debt incurred interest expense, including the amortization of debt financing costs, of $3.0 million during the quarter ended September 30, 2008, as compared to $1.6 million for the quarter ended September 30, 2007. The higher interest costs for the 2008 period are primarily a result of a higher average outstanding debt balance, partially offset by a lower weighted-average effective interest rate of 4.63% compared to 5.83% in the prior year quarter.

Interest Income: Interest income increased as a result of additional funds invested in the 2008 period as compared to the 2007 period.

Other Expense, net: The Company recorded other expense of $273,000 during the quarter ended September 30, 2008 as compared to other expense of $337,000 for the quarter ended September 30, 2007. The net change was a result of the following two factors:

Foreign Currency Transaction - During the quarter ended September 30, 2008, the Company had a net foreign exchange loss of $270,000 as compared with a loss of $290,000 in the prior year comparable quarter. During the third quarter of 2008, Ansoft recorded $490,000 in foreign exchange losses. These losses were offset by foreign exchange gains of $260,000 recorded by the Company's India subsidiaries caused by the weakening of the Indian Rupee against the U.S. Dollar on intercompany receivable balances from the Company's U.S. parent. As the Company's presence in foreign locations continues to expand, the Company, for the foreseeable future, will have increased exposure to volatility of foreign exchange rates.

Other - Expenses from other non-operating transactions increased $40,000 during the quarter ended September 30, 2008 as compared to the quarter ended September 30, 2007.

Income Tax Provision: The Company recorded income tax expense of $10.8 million and had income before income tax provision of $36.6 million for the quarter ended September 30, 2008. This represents an effective tax rate of 29.5% in the 2008 third quarter. During the quarter ended September 30, 2007, the Company recorded income tax expense of $12.3 million and had income before income tax provision of $30.9 million. The Company's effective tax rate was 39.6% in the 2007 third quarter.

During the third quarter of 2008, the Company filed its 2007 U.S. federal and state income tax returns. In conjunction with the completion of these returns, the Company adjusted its estimate for 2007 taxes to reflect the actual results and recorded a net tax benefit of $1.2 million. The effect of this adjustment reduced the third quarter 2008 effective tax rate from 32.7% to 29.5%. During the third quarter of 2007, the Company filed its 2006 U.S. federal and state tax returns. In conjunction with the completion of these returns, the Company adjusted its estimate for 2006 taxes to reflect the actual results and recorded additional tax expense of $162,000. The effect of this adjustment increased the third quarter 2007 effective tax rate from 39.1% to 39.6%.

As compared to the federal and state combined statutory rate, these rates are favorably impacted by lower tax rates in many of the Company's foreign jurisdictions, Section 199 manufacturing deductions, deferred tax benefits related to non-deductible intangible assets acquired in business acquisitions, and research and experimentation credits in foreign jurisdictions. These rates are also impacted by charges or benefits associated with the Company's uncertain tax positions. The U.S. government recently approved the research and experimentation credit for 2008. The Company expects to record an additional tax benefit in the fourth quarter of 2008 of approximately $1.0 - $2.0 million related to this credit.

Because the credit was not approved as of September 30, 2008, the Company's third quarter 2008 results do not include a research credit in the United States. The Company currently expects that the effective tax rate will be in the range of 34% - 36% for the year ending December 31, 2008.

Net Income: The Company's net income in the third quarter of 2008 was $25.8 million as compared to net income of $18.7 million in the third quarter of 2007. Diluted earnings per share was $0.29 in the third quarter of 2008 and $0.23 in the third quarter of 2007. The weighted average shares used in computing diluted earnings per share were 90.1 million in the third quarter of 2008 and 81.2 million in the third quarter of 2007.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Revenue:



                                             Nine Months Ended
                                               September 30,             Change
      (in thousands, except percentages)     2008        2007       Amount        %
      Revenue:
      Lease licenses                       $ 131,613   $ 109,312   $ 22,301      20.4
      Perpetual licenses                      96,164      68,411     27,753      40.6
      Software licenses                      227,777     177,723     50,054      28.2
      Maintenance                             96,942      75,985     20,957      27.6
      Service                                 18,319      20,396     (2,077 )   (10.2 )
      Maintenance and service                115,261      96,381     18,880      19.6
      Total revenue                        $ 343,038   $ 274,104   $ 68,934      25.1

The increase in software license revenue was the result of overall growth in both lease and perpetual license sales, as well as the addition of Ansoft-related revenue of $7.9 million for the period from the acquisition (July 31, 2008) through September 30, 2008.

The increase in maintenance revenue was primarily the result of annual maintenance subscriptions sold in connection with new perpetual license sales in recent quarters and Ansoft-related maintenance revenue of $2.6 million for the period from the acquisition (July 31, 2008) through September 30, 2008.

The decrease in service revenue was primarily the result of decreased revenue from engineering consulting services. This decrease was partially offset by service revenue of $700,000 related to the Company's biennial users' conference.

With respect to revenue, on average, for the nine-month period of 2008, the U.S. Dollar was approximately 7.7% weaker, when measured against the Company's primary foreign currencies, than for the nine-month period of 2007. The U.S. Dollar weakened against the Euro, Chinese Renminbi, Canadian Dollar, Swedish Krona and the Japanese Yen, while it strengthened against the British Pound and Indian Rupee. The overall weakening resulted in increased revenue and operating income during the 2008 nine-month period, as compared with the corresponding 2007 period, of approximately $10.8 million and $4.4 million, respectively.

International and domestic revenues, as a percentage of total revenue, were 68.8% and 31.2%, respectively, for the nine months ended September 30, 2008 and 65.6% and 34.4%, respectively, for the nine months ended September 30, 2007.

In accordance with EITF No. 01-3, acquired deferred revenue of $7.5 million was recorded on the Ansoft opening balance sheet. This amount was approximately $23.5 million lower than the historical carrying value. The Company's reported revenue under GAAP, primarily for the first 12 months post-acquisition, is less than would have been reported by Ansoft, absent the acquisition. The impact on reported revenue for the quarter and nine months ended September 30, 2008 was $800,000 for lease license revenue and $5.8 million for maintenance revenue. The expected impact on reported revenue for the quarter ending December 31, 2008 is approximately $8.0 million. The expected impact on reported revenue for the year ending December 31, 2009 is approximately $7.9 million. Additionally, acquired deferred revenue of $31.5 million was recorded on the Fluent opening balance sheet. This amount was $20.1 million lower than the historical carrying value. The impact on reported revenue was $1.8 million for the nine months ended September 30, 2007; there was no impact for the nine months ended September 30, 2008.

Cost of Sales and Gross Profit:



                                          Nine Months Ended September 30,
                                            2008                  2007               Change
. . .