For further information, refer to the financial statements and footnotes thereto included in the Company's 2004 annual report.

The Company has a supply agreement with VistaPrint Limited pursuant to which the Company is VistaPrint Limited's exclusive North American supplier of printed products through August 30, 2005. This agreement, which replaced an agreement that extended to 2011 and whereby MOD-PAC charged VistaPrint on a cost plus one-third mark-up basis, sets prices on a unit basis and provides a framework for pricing products covered by any renewals or extensions through August 2007.

For the second quarter of 2005 revenues were $16.3 million compared with $11.4 million in 2004, an increase of 43.0%. This increase of $4.9 million was mainly due to a $3.6 million increase in short run commercial printing revenue and a $1.2 million increase in net sales for the custom folding carton product line. The increase in short run commercial printing revenue was due to $1.8 million of amortization revenue related to the $22 million advanced payment received from VistaPrint in September of 2004 and $1.8 million of printed product shipments to VistaPrint customers. About 40% of the increase in custom folding carton sales is attributable to new accounts added since the first quarter of 2004 while the balance of the increase, 60%, is attributable to increased volume with existing customers.

For the first six months of 2005 revenues were $32.5 million compared with $23.0 million in 2004, an increase of 41.3%. This increase of $9.5 million was mainly due to a $6.8 million increase in short run commercial printing revenue and a $2.7 million increase in net sales for the custom folding carton product line. The increase in short run commercial printing revenue was due to $3.7 million of amortization revenue related to the $22 million advanced payment received from VistaPrint in September of 2004 and $3.1 million of printed product shipments to VistaPrint customers. About 40% of the increase in custom folding carton sales is attributable to new accounts added since the first quarter of 2004 while the balance of the increase, 60%, is attributable to increased volume with existing customers

Cost of products sold, as a percentage of revenues, for the second quarter of 2005 were 71.5% compared to 76.0% for the second quarter of 2004, a decrease of 4.5%. This ratio benefited 9.1% from the impact of the VistaPrint fee amortization. This benefit was offset by unfavorable increases in labor costs including benefits, and product mix. The impact from labor and benefits is mainly a result of increased headcount.

Cost of products sold, as a percentage of revenues, for the first six months of 2005 were 70.6% compared to 75.0% for the second quarter of 2004, a decrease of 4.4%. This ratio benefited 9.0% from the impact of the VistaPrint fee amortization. This benefit was offset by unfavorable increases in labor costs including benefits, manufacturing supplies, and unfavorable product mix. The impact from labor and benefits is mainly a result of increased headcount. The impact from the cost of manufacturing supplies is primarily due to increased material costs.

Selling, general, and administrative costs increased $0.9 million for the 2005 second quarter to $2.8 million from $1.9 million in 2004 due to a $0.5 million increase in sales and marketing costs mainly associated with the launch of our new commercial printing product line under the PrintLizard brand. The balance of the increase, $0.4 million, is related to increased depreciation, increased professional service fees, and severance expense related to the resignation of the Chief Financial Officer in May 2005.

Selling, general, and administrative costs increased $1.6 million for the first six months of 2005 to $5.4 million from $3.8 million in 2004 due to a $1.0 million increase in sales and marketing costs mainly associated with the launch of our new commercial printing product line under the PrintLizard brand. The balance of the increase, $0.6 million, is related to increased depreciation, increased professional service fees, and severance expense related to the resignation of the Chief Financial Officer in May 2005.

Interest income (expense) for the second quarter of 2005 increased to $16,000 from $(93,000) in the second quarter of 2004. This was a result of retiring all of our bank debt in the third quarter of 2004 with a portion of the proceeds from the advances payment of VistaPrint.

Interest income (expense) for the first six months of 2005 increased to $34,000 from $(194,000) in the second quarter of 2004. This was a result of retiring all of our bank debt in the third quarter of last year with a portion of the proceeds from the advances payment of VistaPrint

Net income for the second quarter of 2005 was $0.7 million, up $0.2 million or 45.9%, from the 2004 first six months: diluted earnings per share were $0.18 compared to $.12, an increase of 50%. These increases are due to the fluctuations discussed above.

The Company's capital expenditures of $3.0 million for the first six months of 2005 were down by $1.0 million from 2004 level. The Company expects to hold capital expenditures to the $5 million range in 2005.

The Company has an outstanding authorization from its Board to repurchase up to 191,117 shares at July 2, 2005. The closing price of the Company's common stock as of April 2, 2005 was $16.31. At this price the repurchase of 191,117 shares would require $3,117,118.

We have a $6 million dollar line of credit facility available to us. At July 2, 2005 there are no borrowings on this line of credit. Interest on the line of credit is either 1.0% over LIBOR or the prime rate, at the Company's option.

We believe that cash on hand of $1.4 million at July 2, 2005, temporary investments of $5.5 million, cash flow from operations, and the $6 million available on the line of credit are sufficient to meet our cash requirements for

There has been no change in market risks since December 31, 2004.

As a result of short cycle times, the Company does not have any long-term commitments to purchase production raw materials or sell products that would present significant risks due to price fluctuations. Raw paper stock is available to us from multiple domestic sources; as a result, we believe the risk of supply interruptions due to such things as strikes at the source of supply or to logistics systems is limited.

Risks due to fluctuation in interest rates are not material to the Company at July 2, 2005 because of no exposure to floating rate debt and limited market risk on its $5.5 million of temporary investments because interest is reset to market rates every 35 days.

Since May of 2003, over 90% of the Company's power needs are met through natural gas. The Company has investigated supply contracts of various lengths; currently it has no supply arrangements for fixed prices. Historically, the price of natural gas has fluctuated widely. Although the Company is concerned about cost and has from time to time acquired contracts for natural gas its main concern is availability. The Company monitors the availability of natural gas, considering such factors as amount in storage, gas production data and transportation data, so that it can take appropriate action if concerns about availability occur. The Company has investigated and tested a back-up power source in the form of a rented transportable diesel powered generator. Although such generators are generally available the Company cannot be assured that a generator adequate to meet the Company's needs will be available if and when such need should arise.

The preparation of financial statements in accordance with generally accepted accounting policies requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In developing such estimates, management evaluates the facts known to it at the time and applies such facts within the framework of certain critical accounting policies that govern valuation allowances of the Company's assets. These policies include determining the need for a valuation allowance with respect to doubtful accounts receivable, lower of cost or market reserves related to the Company's inventories, depreciation allowances and impairment reserves with respect to the Company's long-lived assets and valuation allowances with respect to the realizability of deferred tax assets. Often, management must make certain assumptions about the future when applying these policies. Management uses past experience in developing such assumptions about the future. Actual experience will be different than the assumptions made and differences could result in material adjustments to management's estimates.

Specifically, and with respect to deferred tax assets, MOD-PAC has a gross deferred tax asset of $2.1 million related primarily to the difference in the timing of the recognition of the $22 million VistaPrint advanced payment for financial statement purposes versus income tax return reporting. This deferred tax asset is considered by management to be realizable because of the predictability of the future taxable income from this advanced payment.

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than January 1, 2006, which is when we expect to adopt it.

In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB NO. 43, Chapter 4." The amendments made by this statement clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 2004. The Company believes the adoption of this standard will not have a material impact on its results of operations or financial position.

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