PTC 10Q 2008 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 29, 2008

Commission File Number: 0-18059

Parametric Technology Corporation

(Exact name of registrant as specified in its charter)


Massachusetts (State or other jurisdiction of incorporation or organization)		04-2866152 (I.R.S. Employer Identification Number)

140 Kendrick Street, Needham, MA 02494
(Address of principal executive offices, including zip code)

(781) 370-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

There were 115,147,267 shares of our common stock outstanding on May 2, 2008.

PARAMETRIC TECHNOLOGY CORPORATION

INDEX TO FORM 10-Q

For the Quarter Ended March 29, 2008


		Page
		Number
Part I—FINANCIAL INFORMATION
Item 1.	Unaudited Financial Statements:
	Consolidated Balance Sheets as of March 29, 2008 and September 30, 2007	1
	Consolidated Statements of Operations for the three and six months ended March 29, 2008 and March 31, 2007	2
	Condensed Consolidated Statements of Cash Flows for the six months ended March 29, 2008 and March 31, 2007	3
	Consolidated Statements of Comprehensive Income for the three and six months ended March 29, 2008 and March 31, 2007	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
Part II—OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 6.	Exhibits	33
Signature		34
Ex-10 Compensatory Arrangements with Directors
Ex-31.1 Certification of Chief Executive Officer
Ex-31.2 Certification of Chief Financial Officer
Ex-32 Certification of Periodic Financial Report

PART I—FINANCIAL INFORMATION

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)


	March 29,			September 30,
	2008			2007
*ASSETS*
Current assets:
Cash and cash equivalents	$	258,946		$	263,271
Accounts receivable, net of allowance for doubtful accounts of $4,095 and $3,869 at March 29, 2008 and September 30, 2007, respectively		181,385			217,101
Prepaid expenses		34,112			23,972
Other current assets (Note 1)		82,067			62,922
Deferred tax assets		27,728			27,365

Total current assets		584,238			594,631
Property and equipment, net		54,478			54,745
Goodwill		414,258			244,497
Acquired intangible assets, net		216,385			80,555
Deferred tax assets		67,409			69,969
Other assets		40,287			45,916

Total assets	$	1,377,055		$	1,090,313

*LIABILITIES AND STOCKHOLDERS’ EQUITY*
Current liabilities:
Revolving credit facility (Note 10)	$	164,444		$	—
Accounts payable		18,939			18,715
Accrued expenses and other current liabilities		58,760			55,138
Accrued compensation and benefits		67,612			80,595
Accrued income taxes		21,572			16,857
Deferred tax liabilities		4,070			—
Customer advances (Note 10)		46,638			40,297
Deferred revenue (Note 1)		278,683			218,740

Total current liabilities		660,718			430,342
Deferred tax liabilities		19,467			—
Deferred revenue (Note 1)		7,715			8,424
Other liabilities (Note 2)		66,893			57,040

Total liabilities		754,793			495,806


Commitments and contingencies (Note 10)

Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued		—			—
Common stock, $0.01 par value; 500,000 shares authorized; 115,056 and 114,704 shares issued and outstanding at March 29, 2008 and September 30, 2007, respectively		1,151			1,147
Additional paid-in capital		1,751,996			1,759,459
Accumulated deficit		(1,111,024	)		(1,132,565	)
Accumulated other comprehensive loss		(19,861	)		(33,534	)

Total stockholders’ equity		622,262			594,507

Total liabilities and stockholders’ equity	$	1,377,055		$	1,090,313

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

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)


	Three months ended					Six months ended
	March 29,			March 31,		March 29,		March 31,
	2008			2007		2008		2007
Revenue:
License	$	72,910		$	71,336	$	140,101	$	137,924
Service		184,883			156,760		358,934		311,839

Total revenue		257,793			228,096		499,035		449,763


Costs and expenses:
Cost of license revenue		6,599			4,211		11,346		7,771
Cost of service revenue		74,054			68,614		145,092		137,182
Sales and marketing		73,359			71,560		144,387		141,121
Research and development		45,734			40,153		87,282		78,137
General and administrative		20,808			20,711		44,359		39,634
Amortization of acquired intangible assets		4,315			1,588		7,208		3,676
In-process research and development (Note 5)		—			—		1,887		—
Restructuring charges (Note 2)		1,892			—		11,577		—

Total costs and expenses		226,761			206,837		453,138		407,521

Operating income		31,032			21,259		45,897		42,242
Other income (expense), net		(355	)		1,348		1,251		2,128

Income before income taxes		30,677			22,607		47,148		44,370
Provision for income taxes		11,829			5,208		18,420		11,818

Net income	$	18,848		$	17,399	$	28,728	$	32,552

Earnings per share—Basic (Note 4)	$	0.17		$	0.15	$	0.25	$	0.29
Earnings per share— Diluted (Note 4)	$	0.16		$	0.15	$	0.24	$	0.28
Weighted average shares outstanding—Basic		113,811			112,845		113,746		112,337
Weighted average shares outstanding—Diluted		117,247			117,486		117,667		117,384

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

PARAMETRIC TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


	Six months ended
	March 29,			March 31,
	2008			2007
Cash flows from operating activities:
Net income	$	28,728		$	32,552
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		26,848			19,223
Stock-based compensation		21,532			17,477
Other non-cash costs, net		827			1,529
In-process research and development		1,887			—
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		69,551			14,732
Accounts payable and accrued expenses		(9,826	)		(3,122	)
Accrued compensation and benefits		(20,370	)		(17,932	)
Deferred revenue		21,716			21,004
Accrued income taxes		2,513			3,072
Other current assets and prepaid expenses		(11,791	)		(2,877	)
Other noncurrent assets and liabilities		(3,811	)		(9,535	)

Net cash provided by operating activities		127,804			76,123

Cash flows from investing activities:
Additions to property and equipment		(10,707	)		(12,393	)
Acquisitions of businesses, net of cash acquired		(261,592	)		(17,639	)

Net cash used by investing activities		(272,299	)		(30,032	)

Cash flows from financing activities:
Borrowings under revolving credit facility		220,000			—
Repayment of borrowings under revolving credit facility		(67,358	)		—
Repurchases of common stock		(22,009	)		—
Proceeds from issuance of common stock		3,649			10,889
Payments of withholding taxes in connection with settlement of restricted stock and restricted stock units		(10,691	)		(6,486	)
Tax benefit from stock-based awards		61			194
Payments of capital lease obligations		(261	)		(244	)

Net cash provided by financing activities		123,391			4,353

Effect of exchange rate changes on cash and cash equivalents		16,779			4,135

Net (decrease) increase in cash and cash equivalents		(4,325	)		54,579
Cash and cash equivalents, beginning of period		263,271			183,448

Cash and cash equivalents, end of period	$	258,946		$	238,027

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

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)


	Three months ended					Six months ended
	March 29,		March 31,			March 29,		March 31,
	2008		2007			2008		2007
Net income	$	18,848	$	17,399		$	28,728	$	32,552

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		14,005		338			13,672		2,554
Minimum pension liability adjustment		15		—			1		—
Change in unrealized gain on investment securities		—		(655	)		—		(680	)

Other comprehensive income (loss)		14,020		(317	)		13,673		1,874

Comprehensive income	$	32,868	$	17,082		$	42,401	$	34,426

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

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Parametric Technology Corporation (PTC) and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our 2007 annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. Unless otherwise indicated, all references to a year reflect our fiscal year, which ends on September 30. The September 30, 2007 year-end consolidated balance sheet is derived from our audited financial statements.

Deferred revenue primarily relates to software maintenance agreements billed to customers for which the services have not yet been provided. The liability associated with performing these services is included in deferred revenue and, if not yet paid, the related customer receivable is included in other current assets. Billed but uncollected maintenance-related amounts included in other current assets at March 29, 2008 and September 30, 2007 were $75.6 million and $59.9 million, respectively.

The results of operations for the six months ended March 29, 2008 are not necessarily indicative of the results expected for the remainder of the fiscal year.

2. Restructuring Charges

As part of our continuing efforts to increase profitability, we are relocating certain business functions to locations, including China, where we are seeking to enhance our business presence and where labor costs are lower. In the second quarter of 2008, we recorded a restructuring charge of $1.9 million. The restructuring charge included a $0.6 million charge for severance and related costs associated with 19 employees notified of termination during the quarter and a $0.7 million charge related to excess facilities. In addition, we recorded $0.6 million for costs incurred in connection with our integration of CoCreate.

In the first quarter of 2008, we recorded a restructuring charge of $9.7 million. The restructuring charge included a $3.3 million charge for severance and related costs associated with 62 employees notified of termination during the quarter and a $6.4 million charge related to excess facilities. The charge for excess facilities was primarily related to gross lease commitments in excess of estimated sublease income for excess facilities in the U.S. and the U.K.

There were no restructuring charges recorded in the first six months of 2007.

The following table summarizes restructuring accrual activity for the six months ended March 29, 2008:


	Employee			Facility
	Severance			Closures
	and Related			and Other
	Benefits			Costs			Total
	(in thousands)
Balance, September 30, 2007	$	5,905		$	17,401		$	23,306
Charges to operations		3,887			7,690			11,577
Cash disbursements		(8,853	)		(7,731	)		(16,584	)
Non-cash utilization		—			(700	)		(700	)
Foreign exchange impact		142			(39	)		103

Balance, March 29, 2008	$	1,081		$	16,621		$	17,702

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The accrual for facility closures and related costs is included in accrued expenses and other current liabilities and other long-term liabilities in the consolidated balance sheet, and the accrual for employee severance and related benefits is included in accrued compensation and benefits. As of March 29, 2008, of the $17.7 million remaining in accrued restructuring charges, $10.5 million was included in current liabilities and $7.2 million was included in other long-term liabilities, principally for facility costs to be paid out through 2013.

In determining the amount of the facilities accrual, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. These estimates are reviewed quarterly based on known real estate market conditions and the credit-worthiness of subtenants and may result in revisions to established facility reserves. We had accrued $16.1 million as of March 29, 2008 related to excess facilities (compared to $16.9 million at September 30, 2007), representing gross lease commitments with agreements expiring at various dates through 2013 of approximately $33.9 million, net of committed and estimated sublease income of approximately $17.5 million and a present value factor of $0.3 million. We have entered into signed sublease arrangements for approximately $15.6 million, with the remaining $1.9 million based on future estimated sublease arrangements.

3. Stock-based Compensation

We measure the cost of employee services received in exchange for stock-based awards based on the grant-date fair value of the award using an option pricing model for stock options or the fair value of our stock on the date of grant for restricted stock and restricted stock units. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.

Our equity incentive plans provide for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units and stock appreciation rights to employees, directors, officers and consultants. Since July 2005, the date that we adopted Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment, we have awarded restricted stock and restricted stock units as the principal equity incentive awards, including certain performance-based awards that are earned based on achieving performance criteria established by the Compensation Committee of our Board of Directors on or prior to the grant date. Each restricted stock unit represents the contingent right to receive one share of our common stock. Our equity incentive plans are described more fully in Note K to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007.

We made the following restricted stock and restricted stock unit grants in the second quarter and first six months of 2008 and 2007:


	Restricted Stock				Restricted Stock Units
Grant Period	Performance-based		Time-based		Performance-based		Time-based
	(Number of Shares)				(Number of Units)
Second quarter of 2008		—		71,426		—		468,786
First six months of 2008		477,830		425,464		88,215		2,772,345
Second quarter of 2007		—		442,590		3,181		380,355
First six months of 2007		495,768		442,590		60,561		728,182

Restricted Stock

Performance-based.In the first six months of 2008 and 2007, we granted our executive officers performance-based shares that are earned based on achievement of certain company operating performance criteria. The criteria were specified by the Compensation Committee on or prior to the date of grant. With respect to the 2008 grant, the restrictions on up to approximately 241,805 shares will lapse on the later of November 9, 2008 or the date the Compensation Committee determines the extent to which the performance criteria have been achieved, and the restrictions on the remaining shares, up to 236,025, will lapse in substantially equal amounts on November 9, 2009 and 2010, provided that the holder of the award remains employed by us at those dates. With respect to the 2007 grant, 425,373 of the shares were earned and 70,395 were forfeited as the performance criteria were not achieved in full. Of the earned shares, the restrictions on 215,563 lapsed on November 9, 2007 and the restrictions on the remaining shares will lapse in two substantially equal installments on November 9, 2008 and 2009, provided that the holder of the award remains employed by us at those dates.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Time-based. In the first quarter of 2008, 354,038 shares were granted to our executive officers. The restrictions on these shares will lapse in substantially equal installments on each of November 9, 2008, 2009 and 2010, provided that the holder of the award remains employed by us at those dates. In the second quarter of 2008, 71,426 shares were granted to members of our Board of Directors. The restrictions on these shares will lapse on March 5, 2009, provided that the holder of the award remains a director on that date.

Restricted Stock Units

Performance-based. In the first quarter of 2008, 88,215 performance-based restricted stock units were granted to employees in connection with our employee management incentive plans for the 2008 fiscal year and, to the extent the performance criteria are achieved, will vest on the later of November 7, 2008 or the date the Compensation Committee determines the extent to which the performance criteria have been achieved, provided that the holder of the award remains employed by us at those dates. In the first six months of 2007, 60,561 performance-based restricted stock units were granted to employees in connection with our employee management incentive plans for the 2007 fiscal year. Of those units, approximately 90% were earned and 10% were forfeited as the performance criteria were met in part. The units earned vested on November 9, 2007.

Time-based.In the second quarter of 2008, we granted 449,946 time-based restricted stock units to employees, which vest in three substantially equal installments on March 15, 2009, 2010 and 2011, provided that the holder of the award remains employed by us at those dates. In the first quarter of 2008, we granted 760,277 time-based restricted stock units to employees, which vest in three substantially equal installments on November 15, 2008, 2009 and 2010, provided that the holder of the award remains employed by us at those dates. In the first and second quarters of 2008, we also granted 1,543,282 and 18,840 time-based restricted stock units, respectively, to employees as a special retention grant. Two-thirds of such restricted stock units will vest on November 15, 2009 and the remaining restricted stock units will vest on November 15, 2010. The vesting of these retention units will be accelerated if the holder is terminated under certain circumstances within two years after a change in control of the company. In the first and second quarters of 2007, we granted 347,827 and 380,355 restricted stock units, respectively, to employees. These restricted stock units generally will vest in three substantially equal installments on the anniversary of the date of grant, provided that the holder of the award remains employed by us at those dates.

With respect to all grants of restricted stock and restricted stock units outstanding, in the first six months of 2008 and 2007, the restrictions on 858,726 and 664,463 restricted shares lapsed, respectively, and 1,125,335 and 1,099,349 restricted stock units vested, respectively. The fair value of restricted shares and restricted stock units granted in the first quarter of 2008 and 2007 was based on the fair market value of our stock on the date of grant. The weighted average fair value per share of restricted shares and restricted stock units granted in the first six months of 2008 and 2007 was $17.94 and $18.69, respectively.

The following table shows the classification of compensation expense recorded for our stock-based awards as reflected in our consolidated statements of operations:


	Three months ended				Six months ended
	March 29,		March 31,		March 29,		March 31,
	2008		2007		2008		2007
	(in thousands)
Cost of license revenue	$	14	$	19	$	14	$	40
Cost of service revenue		2,222		1,768		4,569		3,678
Sales and marketing		2,936		2,326		5,803		3,891
Research and development		2,337		1,629		4,607		3,471
General and administrative		3,420		3,105		6,539		6,397

Total stock-based compensation expense	$	10,929	$	8,847	$	21,532	$	17,477

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Earnings per Share (EPS) and Common Stock

EPS

Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, restricted shares and restricted stock units using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of unrecognized compensation expense and any tax benefits as additional proceeds.

The following table presents the calculation for both basic and diluted EPS:


	Three months ended				Six months ended
	March 29,		March 31,		March 29,		March 31,
	2008		2007		2008		2007
	(in thousands, except per share data)
Net income	$	18,848	$	17,399	$	28,728	$	32,552

Weighted average shares outstanding—Basic		113,811		112,845		113,746		112,337
Dilutive effect of employee stock options, restricted shares and restricted stock units		3,436		4,641		3,921		5,047

Weighted average shares outstanding—Diluted		117,247		117,486		117,667		117,384

Earnings per share-Basic	$	0.17	$	0.15	$	0.25	$	0.29
Earnings per share-Diluted	$	0.16	$	0.15	$	0.24	$	0.28

Stock options to purchase 3.2 million shares were outstanding for each of the second quarter and first six months of 2008 and stock options to purchase 3.5 million shares were outstanding for each of the second quarter and first six months of 2007 but were not included in the calculation of diluted net income per share because the exercise prices per share, plus the tax benefits and unamortized compensation relating thereto, were greater than the average market price of our common stock for those periods. These shares were excluded from the computation of diluted EPS as the effect would have been anti-dilutive.

Share Repurchases

As of July 2000, we were authorized to repurchase up to 16.0 million shares of our common stock. We had repurchased 12.5 million shares through the end of 2004 and did not repurchase any more shares until the third quarter of 2007, when our Board of Directors authorized us to use up to $40 million of cash from operations to repurchase our shares through May 15, 2008. Of this amount, as of March 29, 2008, we have repurchased approximately 1.9 million shares for $32.0 million, including 1.4 million shares repurchased in the first six months of 2008 for $22.0 million. Through March 29, 2008, we have repurchased, at a cost of $398.8 million, a total of 14.4 million shares of the 16.0 million shares authorized.

5. Acquisitions

CoCreate

In the first quarter of 2008, we acquired all of the outstanding common stock of CoCreate Software GmbH, a provider of CAD and PLM solutions, for approximately $247.5 million (net of cash acquired and including $5.1 million of acquisition-related transaction costs). CoCreate was a privately held company based in Sindelfingen, Germany. CoCreate’s results of operations have been included in our consolidated financial statements beginning December 1, 2007.

The acquisition of CoCreate has been accounted for as a business combination. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date (November 30, 2007). The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The allocation of the purchase price is based upon a preliminary valuation of certain assets and liabilities acquired. Our estimates and assumptions in determining the estimated fair values of certain assets and liabilities are

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

subject to change upon finalizing the valuation. The primary areas of the purchase price allocation that are not yet finalized relate to deferred taxes and integration costs, as well as the amount of resulting goodwill.

Based upon a preliminary valuation, the total preliminary purchase price allocation was as follows:


	(in thousands)
Goodwill	$	155,497
Identifiable intangible assets		130,953
Net tangible assets		883
Integration accrual		(2,469	)
Net deferred tax liabilities		(22,814	)
In-process research and development		811

Total preliminary purchase price allocation		262,861
Less: CoCreate cash acquired		(15,322	)

Total preliminary purchase price allocation, net of cash acquired	$	247,539

The preliminary purchase price allocation resulted in $155.5 million of goodwill, none of which is deductible for income tax purposes. The resulting amount of goodwill reflects our expectations of the following synergistic benefits: (1) the potential to sell our products into CoCreate’s traditional customer base, (2) the potential to leverage our reseller channel to sell CoCreate’s products, and (3) the potential geographic expansion for CoCreate’s products, particularly in North America and Asia. Intangible assets of $131.0 million includes purchased software of $55.1 million, customer relationships of $72.5 million, trademarks of $2.3 million, and non-compete agreements of $1.1 million, which are being amortized over average useful lives of 8 years, 11 years, 9 years and 1.5 years, respectively, based upon the pattern in which economic benefits related to such assets are being realized.

Net tangible assets consist of the fair values of tangible assets less the fair values of assumed liabilities and obligations. Except for accounts receivable, pension liabilities, leases, deferred support revenues, deferred taxes and integration accruals, net tangible assets were valued at the respective carrying amounts recorded by CoCreate as we believe that their carrying value amounts approximate their fair values at the acquisition date. We have not yet finalized our integration plans related to CoCreate. Currently, we have recorded estimated integration accruals of approximately $2.5 million primarily for severance costs related to the termination of certain CoCreate employees.

Purchased in-process research and development (IPR&D) of $0.8 million related to a project under development for which technological feasibility had not yet been established at the acquisition date and for which there was no alternative future use was written-off in the first quarter of 2008. The value of the purchased IPR&D was determined using the excess earnings method, which discounts the projected cash flow of the intangible asset. Under this method, the projected cash flow of the intangible asset considers the contribution of other assets to the overall cash flow in order to isolate the economic benefit generated by the specific intangible asset. A risk-adjusted discount rate of 23% was used to reflect the overall risk associated with the project. The expected cost to complete the project was approximately $0.3 million at the acquisition date. This development project is expected to be completed in 2008.

Pro Forma Financial Information (unaudited)

The unaudited financial information in the table below summarizes the combined results of operations of PTC and CoCreate, on a pro forma basis, as though the companies had been combined as of the beginning of 2007. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place at the beginning of 2007. For the three and six months ended March 31, 2007, the pro forma financial information is based on PTC’s results of operations for its three and six months ended March 31, 2007, combined with CoCreate’s results of operations for its three and six months ended April 30, 2007. For the six months ended March 29, 2008, the pro forma financial information is based on PTC’s results of operations for its six months ended March 29, 2008, which includes CoCreate’s results beginning December 1, 2007, combined with CoCreate’s results of operations for the two months ended November 30, 2007.

The pro forma financial information includes the amortization charges from acquired intangible assets, adjustments to interest income (expense) and the related tax effects.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Three months ended		Six months ended
	March 31,		March 29,		March 31,
	2007		2008		2007
	(in millions, except per share data)
Revenue	$	247.4	$	512.4	$	488.1
Operating income		25.1		49.3		49.9
Net income		16.3		29.2		30.4
Earnings per share-Basic	$	0.14	$	0.26	$	0.27
Earnings per share-Diluted	$	0.14	$	0.25	$	0.26

LBS

In the first quarter of 2008, we acquired Logistics Business Systems Ltd. (LBS), a provider of integrated logistics support solutions for the aerospace and defense and civil aviation industries, for approximately $13.1 million in cash (net of cash acquired and including $0.2 million of acquisition-related transaction costs). An additional $1.0 million of contingent purchase price will be capitalized as goodwill, if and when earned. LBS was a privately held company based in the United Kingdom. Results of operations for LBS have been included in PTC’s consolidated statements of operations since October 20, 2007. Our results of operations prior to this acquisition, if presented on a pro forma basis would not differ materially from our reported results.

This acquisition was accounted for as a business combination. The purchase price allocation is preliminary, pending the final valuation of acquired assets and liabilities. The preliminary purchase price allocation resulted in goodwill of $2.9 million; intangible assets of $10.4 million (including purchased software of $6.7 million, customer relationships of $3.5 million, and other intangible assets of $0.2 million, which are being amortized over useful lives of 8, 8 and 5 years, respectively); and other net assets of $1.4 million.

DHI

In the first quarter of 2008 we acquired all of the outstanding common stock of Digital Human, Inc. (DHI), a privately-held company based in Canada developing ergonomic simulation technology, for $1.1 million in cash. Because DHI was a development stage company, the entire purchase price was expensed as in-process research and development in the accompanying consolidated statements of operations. An additional $1.0 million of contingent purchase price will be capitalized as purchased software, if and when earned.

6. Goodwill and Acquired Intangible Assets

We have two reportable segments: (1) Software Products and (2) Services. As of March 29, 2008 and September 30, 2007, goodwill and acquired intangible assets in the aggregate attributable to our Software Products reportable segment was $605.3 million and $299.9 million, respectively, and attributable to our Services reportable segment was $25.3 million and $25.2 million, respectively. Goodwill is tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting segment below its carrying value. We completed our annual impairment review as of June 30, 2007 and concluded that no impairment charge was required as of that date. Since that date, there have not been any events or changes in circumstances that indicate that the carrying values of goodwill may not be recoverable.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Goodwill and acquired intangible assets consisted of the following:


	March 29, 2008						September 30, 2007
	Gross						Gross
	Carrying		Accumulated		Net Book		Carrying		Accumulated		Net Book
	Amount		Amortization		Value		Amount		Amortization		Value
	(in thousands)
Goodwill					$	414,258					$	244,497

Intangible assets with finite lives (amortized):
Purchased software	$	136,474	$	50,517		85,957	$	70,249	$	42,616		27,633
Capitalized software		22,877		22,877		—		22,877		22,815		62
Customer lists and relationships		149,798		27,536		122,262		68,383		21,566		46,817
Trademarks and tradenames		8,483		2,045		6,438		6,071		949		5,122
Other		3,492		1,764		1,728		2,069		1,148		921

	$	321,124	$	104,739		216,385	$	169,649	$	89,094		80,555

Total goodwill and acquired intangible assets					$	630,643					$	325,052

Changes in goodwill, presented by reportable segment, were as follows:


	Software
	Products		Services
	Segment		Segment		Total
	(in thousands)
Balance, September 30, 2007	$	226,886	$	17,611	$	244,497
Acquisition of CoCreate		155,497		—		155,497
Acquisition of LBS		2,875		—		2,875
Foreign currency translation adjustments		11,166		223		11,389

Balance, March 29, 2008	$	396,424	$	17,834	$	414,258

The aggregate amortization expense for intangible assets with finite lives recorded for the second quarter and first six months of 2008 and 2007 was classified in our consolidated statements of operations as follows:


	Three months ended				Six months ended
	March 29,		March 31,		March 29,		March 31,
	2008		2007		2008		2007
	(in thousands)
Amortization of acquired intangible assets	$	4,315	$	1,588	$	7,208	$	3,676
Cost of license revenue		4,623		1,926		7,623		3,637
Cost of service revenue		17		17		34		49

Total amortization expense	$	8,955	$	3,531	$	14,865	$	7,362

The estimated future amortization expense for intangible assets with finite lives remaining as of March 29, 2008 is $20.9 million for the remainder of 2008, $36.7 million for 2009, $33.6 million for 2010, $27.5 million for 2011, $23.5 million for 2012 and $74.2 million thereafter.

7. Recent Accounting Pronouncements

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk-related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We do not believe the adoption of SFAS 161 will have a material effect on our consolidated financial position, results of operations or cash flows.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Business Combinations

In December 2007, the FASB issued Statement No. 141(R),Business Combinations(SFAS 141(R)) and Statement No. 160,Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160). These statements will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements. SFAS 141(R) requires companies to: (i) recognize, with certain exceptions, 100% of the fair values of assets acquired, liabilities assumed, and noncontrolling interests in acquisitions of less than a 100% controlling interest when the acquisition constitutes a change in control of the acquired entity; (ii) measure acquirer shares issued in consideration for a business combination at fair value on the acquisition date; (iii) recognize contingent consideration arrangements at their acquisition-date fair values, with subsequent changes in fair value generally reflected in earnings; (iv) with certain exceptions, recognize preacquisition loss and gain contingencies at their acquisition-date fair values; (v) capitalize IPR&D assets acquired; (vi) expense, as incurred, acquisition-related transaction costs; (vii) capitalize acquisition-related restructuring costs only if the criteria in SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities, are met as of the acquisition date; and (viii) recognize changes that result from a business combination transaction in an acquirer’s existing income tax valuation allowances and tax uncertainty accruals as adjustments to income tax expense.

SFAS 141(R) is required to be adopted concurrently with SFAS 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will be subject to SFAS 141(R) beginning in fiscal 2010, which begins on October 1, 2009. Early adoption of these statements is prohibited. We believe the adoption of these statements will have a material impact on any significant acquisitions completed after October 1, 2009.

Fair Value Measurements

In September 2006, the FASB issued Statement No. 157,Fair Value Measurements(SFAS 157). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not believe the adoption of SFAS 157 in our fiscal 2009 will have a material effect on our consolidated financial position, results of operations or cash flows.

Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115(SFAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity must report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years, with early adoption permitted. We do not believe the adoption of SFAS 159 in our fiscal 2009 will have a material effect on our consolidated financial position, results of operations or cash flows.

8. Segment Information

We operate within a single industry segment — computer software and related services. Operating segments as defined by SFAS 131,Disclosures about Segments of an Enterprise and Related Information, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision making group is our executive officers. We have two operating and reportable segments: (1) Software Products, which includes license and maintenance revenue (including new releases and technical support);

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and (2) Services, which includes consulting, implementation, training and other support revenue. In our consolidated statements of operations, maintenance revenue is included in service revenue. We do not allocate certain sales, marketing or administrative expenses to our operating segments, as these activities are managed separately.

Beginning in the first quarter of 2008, we have been reporting revenue by line of business (license, maintenance and service) and by geographic region. Prior to the first quarter of 2008, we also reported our revenue in two product categories, Enterprise Solutions and Desktop Solutions, within our reportable segments. Beginning in the first quarter of 2008, we no longer use these product categories to report revenue.

The revenue and operating income attributable to our operating segments are summarized as follows:


	Three months ended						Six months ended
	March 29,			March 31,			March 29,			March 31,
	2008			2007			2008			2007
	(in thousands)
Revenue:
Software Products:
License	$	72,910		$	71,336		$	140,101		$	137,924
Maintenance (1)		121,097			98,766			234,974			199,350

Total software products segment revenue		194,007			170,102			375,075			337,274
Total service segment revenue		63,786			57,994			123,960			112,489

Total revenue	$	257,793		$	228,096		$	499,035		$	449,763

Operating income: (2)(3)
Software Products segment	$	120,190		$	108,913		$	232,956		$	217,231
Services segment		6,276			4,617			9,531			5,766
Sales and marketing expenses		(73,892	)		(71,560	)		(150,362	)		(141,121	)
General and administrative expenses		(21,542	)		(20,711	)		(46,228	)		(39,634	)

Total operating income	$	31,032		$	21,259		$	45,897		$	42,242


(1)		Maintenance revenue is included in service revenue in the consolidated statements of operations.

(2)		The operating income reported for each operating segment does not represent the total operating results as it does not contain an allocation of sales, marketing, corporate and general and administrative expenses incurred in support of the operating segments.

(3)		As described in Note 2 and Note 5, for the second quarter and first six months of 2008, we recorded combined charges for restructuring and in-process research and development of $1.9 million and $13.5 million, respectively. Of the combined charges, for the second quarter and first six months of 2008, $0.1 million and $3.0 million, respectively, was included in the Software Products segment, $0.5 million and $2.6 million, respectively, was included in the Services segment, $0.5 million and $6.0 million, respectively, was included in sales and marketing expenses, and $0.8 million and $1.9 million, respectively, was included in general and administrative expenses.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Data for the geographic regions in which we operate is presented below.


	Three months ended				Six months ended
	March 29,		March 31,		March 29,		March 31,
	2008		2007		2008		2007
	(in thousands)
Revenue:
North America (1)	$	88,167	$	89,409	$	172,689	$	175,890
Europe (2)		106,182		82,848		207,823		165,591
Asia-Pacific (3)		63,444		55,839		118,523		108,282

Total revenue	$	257,793	$	228,096	$	499,035	$	449,763


(1)		Includes revenue in the United States totaling $84.0 million and $84.3 million for the three months ended March 29, 2008 and March 31, 2007, respectively, and $164.9 million and $166.8 million for the six months ended March 29, 2008 and March 31, 2007, respectively.

(2)		Includes revenue in Germany totaling $37.0 million and $25.4 million for the three months ended March 29, 2008 and March 31, 2007, respectively, and $64.7 million and $50.2 million for the six months ended March 29, 2008 and March 31, 2007, respectively.

(3)		Includes revenue in Japan totaling $29.9 million and $25.1 million for the three months ended March 29, 2008 and March 31, 2007, respectively, and $55.1 million and $49.6 million for the six months ended March 29, 2008 and March 31, 2007, respectively.

Total long-lived tangible assets by geographic region have not changed significantly since September 30, 2007.

9. Income Taxes

Effective October 1, 2007, we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109(FIN 48). FIN 48 prescribes a new methodology by which a company must identify, recognize, measure and disclose in its financial statements the effects of any uncertain tax return reporting positions that a company has taken or expects to take. FIN 48 requires financial statement reporting of the expected future tax consequences of uncertain tax return reporting positions on the presumption that all relevant tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but it prohibits any discounting of any of the related tax effects for the time value of money. In addition, FIN 48 also mandates expanded financial statement disclosure about uncertainty in income tax reporting positions.

We implemented the methodology prescribed in FIN 48 as of October 1, 2007. We recorded the effect of adopting FIN 48 with a $7.2 million charge to beginning retained earnings in the consolidated balance sheet as of October 1, 2007.

Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. For the second quarter and first six months ended March 29, 2008, we included approximately $0.1 million of interest expense, and no tax penalty expense, in our income tax provision. As of October 1, 2007 and March 29, 2008, we had accrued approximately $0.4 million and $0.5 million, respectively, of estimated interest expense. We had no accrued tax penalties as of either October 1, 2007 or March 29, 2008.

Following the measurement methodology of FIN 48, we had $29.0 million of unrecognized tax benefits ($25.0 million net of tax benefits from other jurisdictions) as of October 1, 2007. During the first six months ended March 29, 2008, we recorded a net increase of approximately $0.2 million, increasing the total unrecognized tax benefit to $29.2 million ($25.2 million net of tax benefits from other jurisdictions) as of March 29, 2008. If all of our unrecognized tax benefits as of March 29, 2008 were to become recognizable in the future, we would record $22.8 million to the income tax provision. We do not anticipate significant changes in the amount of unrecognized tax benefits over the next twelve months.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of October 1, 2007, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:


Major Tax Jurisdiction		Open Years
United States		2003 through 2007
Germany		2004 through 2007
France		2004 through 2007
Japan		2004 through 2007
Ireland		2003 through 2007

Our effective tax rate in the second quarter and first six months of 2008 compared to the second quarter and first six months of 2007 was impacted by our decision in the third quarter of 2007 to reverse a substantial portion of the valuation allowance recorded against net deferred tax assets in the U.S. and a foreign jurisdiction. In both the second quarter and first six months of 2008, our effective tax rate was 39% on pre-tax income of $30.7 million and $47.1 million, respectively, compared to 23% and 27% in the second quarter and first six months of 2007 on pre-tax income of $22.6 million and $44.4 million, respectively. In the second quarter and first six months of 2008, our effective tax rate was higher than the statutory federal income tax rate due primarily to the impact of losses in a foreign jurisdiction for which we did not record a tax benefit due to the uncertainty of whether we will be able to realize the benefit of such losses. In the second quarter and first six months of 2007, our effective tax rate was lower than the statutory federal income tax rate of 35% due primarily to our use of net operating loss carryforwards (NOLs) to offset our U.S. taxable income (which reduced the valuation allowance we had previously recorded against those NOLs) and to taxes owed in foreign jurisdictions at rates lower than the U.S. statutory tax rate, partially offset by the impact of losses in foreign jurisdictions for which a tax benefit was not recorded and withholding taxes that we incurred in the U.S. in connection with certain foreign operations.

10. Commitments and Contingencies

Revolving Credit Agreement

On February 21, 2006, we entered into a multi-currency bank revolving credit facility. The credit facility consists of a $230 million revolving credit facility, which may be increased by up to an additional $150 million if the existing or additional lenders are willing to make increased commitments. The credit facility expires on February 20, 2011, when all amounts will be due and payable in full. Any obligations under the credit facility are guaranteed by PTC’s material domestic subsidiaries and are collateralized by a pledge of 65% of the capital stock of PTC’s material first-tier non-U.S. subsidiaries. Subject to the terms of the credit facility agreement, we may borrow funds up to $230 million, repay the same in whole or in part and re-borrow at any time through February 20, 2011.

Interest rates under the credit facility range from 0.75% to 1.50% above the Eurodollar rate for Eurodollar-based borrowings or the defined base rate for base rate borrowings, in each case based upon our leverage ratio. In addition, we may borrow certain foreign currencies at the London interbank-offered interest rates for those currencies, with the same range above such rates based on our leverage ratio. We are required to pay a quarterly commitment fee based on the undrawn portion of the credit facility, ranging from 0.125% to 0.30% per year, depending upon our leverage ratio.

On November 28, 2007, in connection with our acquisition of CoCreate, we borrowed $220 million under the credit facility in two tranches: $36 million that accrued interest at the Eurodollar-based borrowing rate, and an alternate currency loan of 124.6 million Euros, equivalent to $184 million at the borrowing date, that accrues interest at 5.4375% per year. The $36 million loan was repaid in full in the first six months of 2008. In addition, in the second quarter of 2008, we repaid 20 million Euros of the alternate currency loan. The remaining balance is due on May 28, 2008. Upon the due date, we may either repay the amount outstanding or roll over the amount outstanding with new short term loans at the then current interest rates described above. As of March 29, 2008, we had 104.6 million Euros outstanding under the revolving credit facility, which was equivalent to $164.4 million on that date.

The credit facility limits our and our subsidiaries’ ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

credit facility, we and our material domestic subsidiaries may not invest cash or property in, or loan cash to, our foreign subsidiaries in aggregate amounts exceeding $25 million for any purpose and an additional $50 million for acquisitions of businesses. In addition, under the credit facility, we and our subsidiaries must maintain specified leverage and fixed-charge ratios. Any failure to comply with the financial or operating covenants of the credit facility would not only prevent us from being able to borrow additional funds, but would also constitute a default, resulting in, among other things, the amounts outstanding, including all accrued interest and unpaid fees, becoming immediately due and payable. A change in control of PTC (as defined in the credit facility) also constitutes an event of default, permitting the lenders to accelerate the required payments of all amounts due and to terminate the credit facility. We were in compliance with all financial and operating covenants of the credit facility as of March 29, 2008.

Legal Proceedings

On August 2, 2007, GE Capital Leasing Corporation (GECL) filed a lawsuit against us in the U.S. District Court for the District of Massachusetts. The lawsuit alleges that GECL was fraudulently induced to provide over $60 million in financing to Toshiba Corporation for purchases of third party products, predominantly PTC products, during the period from 2003 to 2006. GECL claims that PTC participated in the alleged scheme or, alternatively, should have been aware of the scheme and made negligent misrepresentations that enabled the scheme to continue undetected. All of the alleged transactions occurred in Japan. GECL claims damages of $47 million and seeks three times that amount plus attorneys’ fees. We dispute GECL’s claims and intend to contest them vigorously. As of March 29, 2008 and September 30, 2007, revenue of $46.6 million and $40.3 million, respectively, has been deferred and recorded as customer advances in our consolidated balance sheets. That liability will remain recorded until the rights and obligations of the several companies connected with the Toshiba transactions are resolved. The change in customer advances at March 29, 2008 from September 30, 2007 is due to foreign currency translation adjustments related to these balances which are recorded in Japanese Yen. To the extent that matters are resolved in our favor, we will reduce customer advances and record revenue or other income at that time. We have not accrued any other liability for this matter as of March 29, 2008.

We also are subject to various legal proceedings and claims that arise in the ordinary course of business. We currently believe that resolving these other matters will not have a material adverse impact on our financial condition or results of operations.

Guarantees and Indemnification Obligations

We enter into standard indemnification agreements in our ordinary course of business. Pursuant to these agreements, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our current products, as well as claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and we accordingly believe the estimated fair value of these agreements is immaterial.

We warrant that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products for a specified period of time (generally 90 to 180 days). Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have never incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these agreements is immaterial.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q about our anticipated financial results and growth, the development of our products and markets, and adoption of our solutions are forward-looking statements that are subject to the inherent uncertainties in predicting future results and conditions. Risks and uncertainties that could cause actual results to differ materially from those projected include the following: we may be unable to increase revenues or successfully execute strategic and other business initiatives while containing expenses; our efforts to globalize our workforce will cause us to incur additional restructuring charges and could disrupt our business operations; our ability to successfully differentiate our products and services from those of our competitors and otherwise compete could be adversely affected by changes in the competitive landscape that have increased both the size and number of companies with which we compete; as well as other risks and uncertainties referenced in Part II, Item 1A. “Risk Factors” of this report.

Our Business

We develop, market and support product lifecycle management (PLM) software solutions and related services that help companies improve their processes for developing physical and information products. The PLM market encompasses the mechanical computer-aided design, manufacturing and engineering (CAD, CAM and CAE) market and the collaboration and product data management solutions market, as well as many previously isolated markets that address various other phases of a product’s lifecycle. These include but are not limited to component and supplier management, visualization and digital mockup, enterprise application integration, program and project management, after market service and portfolio management, requirements management, customer needs management, manufacturing planning, and technical and marketing publications.

Our PLM software solutions provide our customers with a product development system that enables them to create digital product information, collaborate internally and externally, control content and automate processes, manage product configurations, communicate product information to people and systems across the extended enterprise and design chain, create compound documents from reusable content components, and configure and publish the information for a variety of uses and audiences in multiple formats. We have devoted significant resources to developing our PLM offerings into an integrated product development system.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Executive Overview

We continue to focus on revenue growth and increasing operating profitability. Our second quarter and year-to-date results reflect progress in both of these measures.

Total revenue, costs and expenses, operating income and net income for the second quarters and first six months of 2008 and 2007 were as follows:


	Three months ended								Six months ended
	March 29,			March 31,		Percent			March 29,		March 31,		Percent
	2008			2007		Change			2008		2007		Change
	(Dollar amounts in millions)
Total revenue	$	257.8		$	228.1		13%	(1)	$	499.0	$	449.8		11	%(1)
Total costs and expenses		226.8			206.8		10%	(2)		453.1		407.5		11	%(2)

Operating income		31.0			21.3					45.9		42.3
Other income (expense), net		(0.3	)		1.3					1.2		2.1

Income before income taxes		30.7			22.6					47.1		44.4
Provision for income taxes		11.8			5.2					18.4		11.8

Net income	$	18.9		$	17.4				$	28.7	$	32.6


(1)		On a consistent foreign currency basis, compared to the year-ago periods, total revenue for the second quarter and first six months of 2008 increased 7% and 5%, respectively.

(2)		On a consistent foreign currency basis, compared to the year-ago periods, total costs and expenses for the second quarter and first six months of 2008 increased 6% and 7%, respectively.

Revenue increased primarily due to revenue from the CoCreate business, which we acquired on November 30, 2007, and the favorable impact of foreign currency rate movements, as well as organic growth in maintenance revenue and consulting and training service revenue.

Costs and expenses increased primarily due to costs from the CoCreate business, restructuring charges from our cost reduction and globalization measures, the impact of foreign currency rate movements, and amortization of intangible assets and in-process research and development costs and expenses associated with our acquisitions.

Operating income improved due to a combination of the net impact of foreign currency rate changes of approximately $4.6 million and $7.4 million for the second quarter and first six months of 2008, respectively, the margin accretion from the CoCreate business and our on-going efforts to improve our sales distribution model, globalize our workforce and improve our services business model, partially offset by the incremental costs and expenses described above.

Net income in the second quarter and first six months of 2008 reflects the operating margin impacts described above, as well as a higher effective tax rate due primarily to our decision in the third quarter of 2007 to reverse a substantial portion of the valuation allowance recorded against net deferred tax assets in the U.S and a foreign jurisdiction.

Cash provided by operating activities was $127.8 million in the first six months of 2008, which was $51.7 million higher than the first six months of 2007.

We believe our recent releases of our two most significant products — Windchill 9.0, which was released in the fourth quarter of 2007, and Pro/ENGINEER Wildfire 4.0, which was released in January 2008 — will create additional revenue opportunities as customers upgrade to these releases over the next two years. We also continue to migrate our customers on non-Windchill-based versions of Pro/INTRALINK to the new Windchill-based Pro/INTRALINK. The number of customers that have completed this migration has increased with the release of Windchill-based Pro/INTRALINK 9.0 and we expect this will continue throughout this year. We believe this will

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

result in increased services revenue and generate future license and maintenance revenue as we expect our installed base will then expand their Windchill and Arbortext use.

Globalization

As part of our continuing efforts to increase profitability, we are relocating business functions to locations, including China, where we are seeking to enhance our business presence and where labor costs are lower. As part of this globalization initiative, as well as the integration of CoCreate, we incurred restructuring costs of $1.9 million and $11.6 million in the second quarter and first six months of 2008, respectively, and we expect to incur additional restructuring costs of approximately $3 million to $5 million during the remainder of 2008.

Fiscal Year 2008 Strategies and Risks

Our goals in 2008 are to increase revenue and profitability. Increasing profitability while also increasing revenue is challenging as decisions we make to reduce or contain costs and expenses can adversely affect our ability to grow revenue, especially license revenue.

In support of our goals to increase revenue and profitability in 2008, we plan to:

•		leverage and optimize our distribution model, including, when appropriate, making measured increases to our direct sales force and reseller channel while continuing our efforts to increase sales productivity;

•		continue to improve services profitability by focusing on services utilization, limiting growth of lower margin services such as implementation consulting while growing higher-margin services such as training and process consulting services and utilizing strategic service partners to provide lower margin services;

•		continue to offshore or outsource selected non-customer facing roles in multiple organizations to ensure that we grow resources to support planned growth while keeping overall costs low;

•		invest in emerging geographic regions, particularly China, and focus on increasing revenue in the Asia-Pacific market; and

•		pursue corporate development opportunities, including mergers and acquisitions and strategic partnerships.

Our success will depend on, among other factors, our ability to:

•		execute strategic and business initiatives while containing our expenses;

•		encourage our customers to expand their product development technology infrastructure to a more robust PLM product development system in order to further their global product development initiatives;

•		differentiate our products and services from those of our competitors to effectively pursue opportunities within the small and medium-size business market as well as with strategic, larger accounts;

•		optimize our sales and services coverage and productivity through, among other means, effective use and management of our internal resources in combination with our resellers and other strategic partners and appropriate investment in our distribution channel;

•		manage the development and enhancement of our expanding product line using our geographically dispersed development resources;

•		manage our operations in non-U.S. locations where we are expanding our operations, such as China; and

•		integrate newly acquired businesses into our operations and execute future corporate development initiatives while remaining focused on organic growth opportunities.

We discuss additional factors affecting our business, revenue and operating results under Item 1A. “Risk Factors” included herein and included in our Annual Report on Form 10-K for the year ended September 30, 2007.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations

Explanatory Note about Our Revenue Reporting

Beginning with the first quarter of 2008, we report revenue by line of business (license, maintenance and consulting and training service) and by geographic region. We previously also reported our revenue in two product categories, Enterprise Solutions and Desktop Solutions. We no longer use these product categories to report revenue. The discussion below gives effect to this change for both periods presented.

Impact of Foreign Currency Exchange on Results of Operations

Approximately two thirds of our revenue and half of our expenses are transacted in currencies outside of the U.S. Because we report our results of operations in U.S. dollars, currency translation affects our reported results.

As noted in the table in “Executive Overview” above, revenue growth and increases in costs and expenses between the periods are lower on a constant currency basis. Year over year, second quarter and year-to-date revenue benefited as a result of changes in currency rates by approximately $12.9 million and $24.8 million, respectively, while expenses were negatively impacted by approximately $8.3 million and $17.4 million, respectively. The net result was an increase in operating income of $4.6 million and $7.4 million in the second quarter and first six months of 2008, respectively.

Results of Operations

We discuss our results of operations for the second quarters and first six months of 2008 and 2007 in detail below, beginning with a table showing certain consolidated financial data as a percentage of revenue, followed by a discussion of revenue and costs and expenses. Our results of operations include the results of operations of companies we acquired beginning on their respective acquisition dates.


	Percentage of Total Revenue
	Three months ended						Six months ended
	March 29,			March 31,			March 29,			March 31,
	2008			2007			2008			2007
Revenue:
License		28	%		31	%		28	%		31	%
Service		72			69			72			69

Total revenue		100			100			100			100

Costs and expenses:
Cost of license revenue		2			2			2			2
Cost of service revenue		29			30			29			31
Sales and marketing		28			31			29			31
Research and development		18			18			18			17
General and administrative		8			9			9			9
Amortization of acquired intangible assets		2			1			2			1
In-process research and development		—			—			—			—
Restructuring charges		1			—			2			—

Total costs and expenses		88			91			91			91

Operating income		12			9			9			9
Other income (expense), net		—			1			—			1

Income before income taxes		12			10			9			10
Provision for income taxes		5			2			4			3

Net income		7	%		8	%		5	%		7	%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Revenue

Total Revenue

Our revenue consists of software license revenue and service revenue, which includes software maintenance revenue (consisting of providing our customers software updates and technical support) as well as consulting and training revenue (including implementation services).

The following table shows our revenue by line of business for the periods indicated.


	Three months ended							Six months ended
	March 29,		March 31,		Percent			March 29,		March 31,		Percent
	2008		2007		Change			2008		2007		Change
	(Dollar amounts in millions)
License Revenue	$	72.9	$	71.3		2	%	$	140.1	$	137.9		2	%
Service revenue:
Maintenance revenue		121.1		98.7		23	%		234.9		199.3		18	%
Consulting and training service revenue		63.8		58.1		10	%		124.0		112.6		10	%

Total service revenue		184.9		156.8		18	%		358.9		311.9		15	%

Total revenue	$	257.8	$	228.1		13	%(1)	$	499.0	$	449.8		11	%(1)


(1)		On a consistent foreign currency basis from the comparable year-ago period, in the second quarter and first six months of 2008 total revenue increased 7% and 5%, respectively.

Revenue growth in the second quarter and first six months of 2008 reflects both organic growth and revenue from recently acquired businesses, particularly CoCreate. As a stand-alone company, CoCreate generated revenue of approximately $78 million for the twelve months ended October 31, 2007. CoCreate revenue has been included in our results of operations since December 1, 2007. Accordingly, results for the first six months of 2007 did not include CoCreate revenue while results for the first six months of 2008 include four months of CoCreate revenue.

License Revenue

License revenue in the second quarter and first six months of 2008 reflects strong license sales in Europe partially offset by continued softness in North America. Growth in license revenue in the second quarter and first six months of 2008 reflects sales of acquired products, particularly CoCreate products, partially offset by a decrease in organic license revenue. License revenue attributable to new license sales grew across most of our major products, but much of that growth was offset by a decrease in revenue from Pro/ENGINEER upgrades and modules. We are currently at the end of the Pro/ENGINEER Wildfire 3.0 product cycle and we launched Pro/ENGINEER Wildfire 4.0 in January 2008. We believe that our Pro/ENGINEER upgrades and modules license revenue in the first six months of 2008 was negatively impacted by the timing of this release as customers may have deferred purchases of those items until they have implemented Wildfire 4.0. The number of new Windchill seats grew 11% and 16% in the second quarter and first six months of 2008 over the same periods in 2007. Windchill license revenue was flat year over year due to our selling proportionately more light user seats, which have a lower price than heavy user seats, in the first six months of 2008 as compared to the first six months of 2007. We believe this reflects increased adoption of Windchill beyond the engineering organization as heavy user seats are used by engineers while light user seats are for users outside the engineering function.

Maintenance Revenue

Maintenance revenue represented 47% of total revenue in both the second quarter and first six months of 2008 and 43% and 44% of total revenue in the second quarter and first six months of 2007, respectively. Maintenance revenue growth in the second quarter and first six months of 2008 reflects growth in the number of both Pro/ENGINEER and Windchill seats on maintenance year-over-year, as well as favorable currency movements and the addition of CoCreate maintenance customers. We believe the increase in Pro/ENGINEER and Windchill seats on maintenance is the result of license revenue growth in recent quarters and continued improvements in customer satisfaction.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Consulting and Training Service Revenue

Consulting and training service revenue, which has a lower gross profit margin than license and maintenance revenues, accounted for 25% of total revenue in each of the second quarters and first six months of 2008 and 2007. The increase in consulting and training service revenue was the result of continued growth in training services and computer-based training products and Windchill implementation consulting, and reflected higher consulting revenue from a large customer in Europe. This increase was partially offset by a decline in services revenue in North America and Europe associated with our mechanical computer-aided design and engineering products. We believe the decline in mechanical computer-aided design and engineering service revenue is due to our strategic use of channel and specialized partners to provide these services. This initiative has enabled us to significantly improve our consulting utilization and our consulting and training services margins and we intend to continue to pursue this approach in future quarters.

Revenue by Geographic Region


	Three months ended							Six months ended
	March 29,		March 31,		Percent			March 29,		March 31,		Percent
	2008		2007		Change			2008		2007		Change
	(Dollar amounts in millions)
Revenue by region:
North America	$	88.2	$	89.4		(1	)%	$	172.7	$	175.9		(2	)%
Europe	$	106.2	$	82.8		28	%(1)	$	207.8	$	165.6		26	%(2)
Asia-Pacific	$	63.4	$	55.9		14	%(1)	$	118.5	$	108.3		9	%(2)


(1)		On a consistent foreign currency basis from the year-ago period, in the second quarter of 2008 revenue in Europe increased 16% and revenue in Asia-Pacific increased 8%.

(2)		On a consistent foreign currency basis from the year-ago period, in the first six months of 2008 revenue in Europe increased 10% and revenue in Asia-Pacific increased 6%.

North America.We derived 34% and 39% of our total revenue from sales to customers in North America in the second quarters of 2008 and 2007, respectively, and 35% and 39% of our total revenue from sales to customers in North America in the first six months of 2008 and 2007, respectively. The decrease in revenue in North America year over year was primarily due to declines in license and consulting service revenue. However, our reseller channel revenue grew in excess of 16% and 19% in North America in the second quarter and first six months of 2008, respectively, as we continue to increase our use of channel partners.

Europe.Revenue in Europe has been growing significantly for several quarters, including revenue from the reseller channel. Growth in European revenue included growth in both organic revenue across all lines of business and revenue from acquired products, particularly CoCreate products. Additionally, revenue was favorably impacted by foreign currency exchange rate movements. European revenue in the first six months of 2008 included significant service revenue from a single customer.

Asia-Pacific.Revenue in Asia-Pacific reflects 9% and 8% year-over-year growth in the Pacific Rim for the second quarter and first six months of 2008, respectively, and 19% and 11% growth in Japan for the same periods. The increases in revenue in the Pacific Rim in the second quarter and first six months of 2008 was attributable to growth in maintenance and consulting and training service revenue. Growth in Japan was attributable to higher maintenance revenue in the second quarter and first six months of 2008, including both organic revenue and revenue from acquired products, particularly CoCreate products, and higher consulting revenue for both periods. Revenue in Japan is largely driven by large customer transactions, which fluctuate from period to period.

Revenue from Individual Customers

We enter into customer contracts that may result in revenue being recognized over multiple reporting periods. Accordingly, revenue recognized in a current quarter may be attributable to contracts entered into during the current

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

period or in prior periods. License and/or consulting and training service revenue of $1 million or more recognized from individual customers in the second quarter and first six months of 2008 was $37.6 million (attributable to sixteen customers) and $69.7 million, respectively, and in the second quarter and first six months of 2007 was $35.6 million (attributable to sixteen customers) and $63.8 million, respectively. While our customers may not continue to spend at these levels in future periods, we believe our continued strong performance in large accounts is the result of success in our strategic account program. We believe our ability to provide broader solutions to our customers and improvements in our competitive position, attributable to our system architecture and product development process knowledge, have resulted in customers continuing to spend on PLM solutions relative to other IT spending initiatives.

Channel Revenue

Revenue from our reseller channel grew 26% and 25% in the second quarter and first six months of 2008, to $61.6 million and $120.3 million, respectively, from $48.9 million and $96.2 million in the second quarter and first six months of 2007, respectively. Growth came from all major geographic regions and was the result of both organic revenue growth and the addition of the CoCreate channel. Our reseller channel contributed 24% of our total revenue in both the second quarter and first six months of 2008 compared to 21% of total revenue in both the second quarter and first six months of 2007. We believe our reseller channel continues to help us improve our profitability and increase our reach to small and medium-sized businesses around the world. We expect our channel revenue to grow at a rate faster than that of the overall business.

Costs and Expenses

Over the past several years, we have made significant investments to transform our business from providing a single line of technical software with a largely direct distribution model, supplemented by a small number of channel partners, to providing integrated product development system solutions with an expanded channel and partner-involved distribution model. As part of this effort, we have broadened our product development system through acquisitions and we intend to continue to do so.

While we intend to continue to invest in our strategic initiatives to support planned revenue growth and to fund revenue-generating initiatives, we remain focused on achieving our operating margin goals. Accordingly, we are taking steps to improve operating margins. We have increased margins on the delivery of consulting and training services through improving utilization rates, increased use of third parties to perform lower margin service engagements and focusing on higher margin service products. Additionally, we are relocating certain business functions to locations, including China, where we are seeking to enhance our business presence and where labor costs are lower. As part of these efforts, we have incurred the restructuring charges shown in the table below and described in “Restructuring Charges” below.

The following table shows our costs and expenses by expense category for the periods stated.


	Three months ended							Six months ended
	March 29,		March 31,		Percent			March 29,		March 31,		Percent
	2008		2007		Change			2008		2007		Change
	(Dollar amounts in millions)
Costs and expenses:
Cost of license revenue	$	6.6	$	4.2		57	%	$	11.3	$	7.8		46	%
Cost of service revenue		74.1		68.6		8	%		145.1		137.2		6	%
Sales and marketing		73.4		71.5		3	%		144.4		141.1		2	%
Research and development		45.7		40.2		14	%		87.3		78.1		12	%
General and administrative		20.8		20.7		—	%		44.3		39.6		12	%
Amortization of acquired intangible assets		4.3		1.6		172	%		7.2		3.7		96	%
In-process research and development		—		—					1.9		—
Restructuring charges		1.9		—					11.6		—

Total costs and expenses	$	226.8	$	206.8		10	%(1)	$	453.1	$	407.5		11	%(1)


(1)		On a consistent foreign currency basis, compared to the year-ago periods, total costs and expenses for the second quarter and first six months of 2008 increased 6% and 7%, respectively.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Our increases in costs and expenses in the second quarter and first six months of 2008 compared to the prior year periods were primarily due to the following:

	•		$1.9 million and $11.6 million of restructuring charges incurred in the second quarter and first six months of 2008, respectively;

	•		the CoCreate and LBS acquisitions completed in the first quarter of 2008 and the NC Graphics acquisition completed in the third quarter of 2007 that added operating costs and increased headcount;

	•		approximately $3.2 million of professional fees included in general and administrative expenses incurred primarily in connection with an Audit Committee investigation and restatement of prior period financial statements completed in the first quarter of 2008;

	•		higher amortization of intangible assets of $5.4 million and $7.5 million in the second quarter and first six months of 2008, respectively; and

	•		$1.9 million of in-process research and development written off in connection with acquisitions completed in the first quarter of 2008.

Primarily as a result of our acquisition of CoCreate, headcount increased to 4,725 at March 29, 2008 from 4,449 at September 30, 2007 and 4,523 at March 31, 2007.

Cost of License Revenue

Our cost of license revenue consists of fixed and variable costs associated with reproducing and distributing software and documentation as well as royalties paid to third parties for technology embedded in or licensed with our software products and amortization costs associated with acquired products. Cost of license revenue as a percentage of license revenue was 9% and 6% for the second quarters of 2008 and 2007, respectively, and 8% and 6% for the first six months of 2008 and 2007, respectively. The increase in cost of license revenue in the second quarter and first six months of 2008 compared to the second quarter and first six months of 2007 was due primarily to amortization of purchased software, which was higher by approximately $2.7 million and $4.4 million, respectively, attributable to recent acquisitions. Cost of license revenue as a percent of license revenue can vary depending on product mix sold and the effect of fixed and variable royalties and the level of amortization of acquired software intangible assets.

Cost of Service Revenue

Our cost of service revenue includes costs associated with training, customer support and consulting personnel, such as salaries and related costs; third-party subcontractor fees; costs associated with the release of maintenance updates (including related royalty costs); and facility costs. Cost of service revenue as a percentage of service revenue was 40% for both the second quarter and first six months of 2008 compared to 44% for both the second quarter and first six months of 2007. Service margins can vary based on the product mix sold in the period. Improvements in service margins in the first six months of 2008 are the result of our efforts to improve services profitability through increased billable utilization of consultants, shifting revenue to higher margin offerings, and use of strategic partners to provide lower margin services. Service-related headcount was 1,338 at March 29, 2008, 1,256 at September 30, 2007 and 1,340 at March 31, 2007. Total salaries, commissions, benefits and travel costs were $4.5 million and $6.5 million higher in the second quarter and first six months of 2008, respectively, compared to the second quarter and first six months of 2007. The cost of third-party consulting services was $1.5 million and $2.7 million higher in the second quarter and first six months of 2008, respectively, compared to the second quarter and first six months of 2007, due to the use of such services in support of increases in consulting and training service revenue.

Sales and Marketing

Our sales and marketing expenses primarily include salaries and benefits, sales commissions, advertising and marketing programs, travel and facility costs. Sales and marketing expenses as a percentage of total revenue were 28% and 31% for the second quarters of 2008 and 2007, respectively, and 29% and 31% for the first six months of 2008 and 2007, respectively. Sales and marketing headcount increased to 1,266 at March 29, 2008 from 1,166 at September 30, 2007 and 1,192 at March 31, 2007. As a result of increases in headcount primarily due to

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

acquisitions, our salaries and benefit costs, sales commissions and travel expenses were higher by an aggregate of $2.3 million and $5.5 million in the second quarter and first six months of 2008, respectively, compared to the second quarter and first six months of 2007.

Research and Development

Our research and development expenses consist principally of salaries and benefits, costs of computer equipment and facility expenses. Major research and development activities include developing new releases of our software that work together in a more integrated fashion and that include functionality enhancements. Research and development expenses as a percentage of total revenue were 18% in the second quarters of both 2008 and 2007 and 17% in the first six months of both 2008 and 2007. Research and development headcount increased to 1,621 at March 29, 2008 from 1,547 at September 30, 2007 and 1,535 at March 31, 2007. As a result of these increases in headcount, total salaries, benefits and travel costs were higher in the second quarter and first six months of 2008 compared to the second quarter and first six months of 2007 by an aggregate of $4.9 million and $8.4 million, respectively.

General and Administrative

Our general and administrative expenses include the costs of our corporate, finance, information technology, human resources, legal and administrative functions, as well as bad debt expense. General and administrative expenses as a percentage of total revenue were 8% in the second quarter of 2008 and 9% in each of the second quarter of 2007, the first six months of 2008 and the first six months of 2007. General and administrative headcount was 485 at March 29, 2008 and 465 at September 30, 2007, up from 438 at March 31, 2007. Total salaries, benefits and travel costs were higher in the second quarter and first six months of 2008 compared to the second quarter and first six months of 2007 by an aggregate of $1.5 million and $2.4 million, respectively. General and administrative expenses also include costs associated with outside professional services, including accounting and legal fees. The first quarter of 2008 included approximately $3.2 million of costs for outside professional services incurred primarily in connection with an Audit Committee investigation and restatement of prior period financial statements completed in that quarter. The second quarter of 2007 included higher costs for outside professional services incurred in connection with our corporate development initiatives, including $1.7 million related to potential acquisitions that did not close.

Amortization of Acquired Intangible Assets

These costs represent the amortization of acquired intangible assets. The increase in expense in the second quarter and first six months of 2008 compared to the second quarter and first six months of 2007 was due primarily to amortization of intangible assets resulting from the CoCreate and LBS acquisitions completed in the first quarter of 2008 and the NC Graphics acquisition completed in the third quarter of 2007.

Our acquisition of CoCreate in the first quarter of 2008 resulted in an increase in acquired intangible assets of $131.0 million. Acquired intangible assets consisted of $72.5 million of customer relationship intangibles, $55.1 million of purchased software, $2.3 million of trademarks, and $1.1 million of non-compete agreements, which are being amortized over estimated useful lives of 11 years, 8 years, 9 years and 1.5 years, respectively. The purchase price allocation for the CoCreate acquisition is preliminary pending the final valuation of acquired assets and liabilities.

Our acquisition of LBS in the first quarter of 2008 resulted in an increase in acquired intangible assets of $10.4 million. Acquired intangible assets consisted of $3.5 million of customer relationship intangibles, $6.7 million of purchased software, and $0.2 million of other intangibles, which are being amortized over estimated useful lives of 8 years, 8 years and 5 years, respectively. The purchase price allocation for the LBS acquisition is preliminary pending the final valuation of acquired assets and liabilities.

Our acquisitions of NC Graphics and NetRegulus completed in the third and fourth quarters of 2007, respectively, resulted in an increase in acquired intangible assets of $8.3 million. Acquired intangible assets consisted of $1.3 million of customer relationship intangibles, $6.9 million of purchased software, and $0.1 million of other intangibles, which are being amortized over estimated useful lives of 5 to 10 years, 3 to 7 years and 1 year, respectively.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

In-process Research and Development

In the first quarter of 2008, we recorded $1.9 million of in-process research and development costs associated with acquisitions completed in the quarter. These costs are related to research and development projects in process for which technological feasibility had not yet been established at the respective acquisition date and for which there was no alternative future use.

Restructuring Charges

In the second quarter of 2008, we recorded a restructuring charge of $1.9 million. The restructuring charge included a $0.6 million charge for severance and related costs associated with 19 employees notified of termination during the quarter and a $0.7 million charge related to excess facilities. In addition, we recorded $0.6 million for costs incurred in connection with our integration of CoCreate.

As part of our continuing efforts to increase profitability, we are relocating certain business functions to locations, including China, where we are seeking to enhance our business presence and where labor costs are lower. As part of this initiative, we expect to incur additional restructuring costs of $3 million to $5 million during the remainder of 2008.

Other Income (Expense), net

Other income (expense), net includes interest income, interest expense, costs of hedging contracts, certain realized and unrealized foreign currency transaction gains or losses, charges incurred in connection with obtaining corporate and customer contract financing, and exchange gains or losses resulting from the required period-end currency remeasurement of the financial statements of our subsidiaries that use the U.S. dollar as their functional currency. A large portion of our revenue and expenses is transacted in foreign currencies. To reduce our exposure to fluctuations in foreign exchange rates, we engage in hedging transactions involving the use of foreign currency forward contracts, primarily in the Euro, the British Pound and the Japanese Yen. Other income (expense), net was $(0.3) million and $1.3 million for the second quarters of 2008 and 2007, respectively, and $1.2 million and $2.1 million for the first six months of 2008 and 2007, respectively. The decrease in other income, net in the second quarter and first six months of 2008 is due primarily to higher interest expense on borrowings outstanding under our revolving credit facility, partially offset by interest income and a one-time benefit of $1.3 million related to a legal settlement. In the second quarter of 2008 and 2007, interest expense was $2.7 million and $0.1 million, respectively, and interest income was $2.5 million and $2.2 million, respectively. In the first six months of 2008 and 2007, interest expense was $3.9 million and $0.3 million, respectively, and interest income was $5.1 million and $4.0 million, respectively. We expect higher interest expense relative to 2007 for the remainder of 2008 related to outstanding amounts borrowed under our credit facility.

Income Taxes

On October 1, 2007, we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109(FIN 48). FIN 48 prescribes a new methodology by which a company must identify, recognize, measure and disclose in its financial statements the effects of any uncertain tax return reporting positions that a company has taken or expects to take. See “Note 9. Income Taxes,” in the Notes to Consolidated Financial Statements of this Form 10-Q for additional information.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

of $44.4 million. In the second quarter and first six months of 2008, our effective tax rate was higher than the statutory federal income tax rate due primarily to the impact of losses in a foreign jurisdiction for which we did not record a tax benefit due to the uncertainty of whether we will be able to realize the benefit of such losses. In the second quarter and first six months of 2007, our effective tax rate was lower than the statutory federal income tax rate of 35% due primarily to our use of net operating loss carryforwards (NOLs) to offset our U.S. taxable income (which reduced the valuation allowance we had previously recorded against those NOLs) and to taxes owed in foreign jurisdictions at rates lower than the U.S. statutory tax rate, partially offset by the impact of losses in foreign jurisdictions for which a tax benefit was not recorded and withholding taxes that we incurred in the U.S. in connection with certain foreign operations.

Our future effective tax rate may be materially impacted by the amount of income taxes associated with our foreign earnings, which are taxed at rates different from the U.S. federal statutory rate, as well as the timing and extent of the realization of deferred tax assets and changes in the tax law. Further, our tax rate may fluctuate within a fiscal year, including from quarter to quarter, due to items arising from discrete events, including settlements of tax audits and assessments; the resolution or identification of tax position uncertainties; and acquisitions of companies.

Liquidity and Capital Resources


	March 29,			March 31,
	2008			2007
	(in thousands)
Cash and cash equivalents	$	258,946		$	238,027

Amounts below are for the six months ended:
Cash provided by operating activities	$	127,804		$	76,123
Cash used by investing activities		(272,299	)		(30,032	)
Cash provided by financing activities		123,391			4,353
Cash provided by operating activities included the following:
Cash disbursements for restructuring and other charges		(16,584	)		(3,747	)
Cash used by investing activities included the following:
Cash paid to acquire businesses, net of cash acquired		(261,592	)		(17,639	)

Cash and cash equivalents

We invest our cash with highly rated financial institutions and in diversified domestic and international money market mutual funds. Cash and cash equivalents include highly liquid investments with original maturities of three months or less. At March 29, 2008, cash and cash equivalents totaled $258.9 million, down from $263.3 million at September 30, 2007. The decrease in cash and cash equivalents in the first six months of 2008 was due primarily to approximately $261.6 million paid for acquisitions, primarily CoCreate; the use of $22.0 million to repurchase our common stock; the use of $10.7 million to pay employee withholding taxes related to restricted stock and restricted stock units that vested during the period; and the use of $10.7 million for additions to property and equipment, partially offset by $152.6 million of net borrowings under our revolving credit facility and $127.8 million of cash provided by operations.

Cash provided by operating activities

Cash provided by operating activities was $127.8 million in the first six months of 2008 compared to cash provided by operating activities of $76.1 million in the first six months of 2007. This change was due primarily to higher receivables collections in the first six months of 2008 compared to the first six months of 2007. Days sales outstanding decreased to 64 days as of the end of the second quarter of 2008 compared to 74 days as of the end of the second quarter of 2007.

Cash used by investing activities

Cash used by investing activities was $272.3 million in the first six months of 2008 compared to $30.0 million in the first six months of 2007. The increase in cash used by investing activities in the first six months of 2008 was

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

primarily due to disbursements for acquisitions of $261.6 million in the first six months of 2008 compared to $17.6 million in the first six months of 2007. During the first quarter of 2008, we paid approximately $247.4 million, $13.1 million and $1.1 million for the CoCreate, LBS and DHI acquisitions, respectively, net of cash acquired. During the first quarter of 2007, we paid approximately $16.7 million for the ITEDO acquisition. In addition, cash used for additions to property and equipment was $10.7 million in the first six months of 2008 compared to $12.4 million in the first six months of 2007. Our expenditures for property and equipment consist primarily of computer equipment, software, office equipment and facility improvements.

Cash provided by financing activities

Cash provided by financing activities was $123.4 million and $4.4 million in the first six months of 2008 and 2007, respectively. The increase in 2008 compared to 2007 is primarily due to $152.6 million of net borrowings under our revolving credit facility. That increase was partially offset by: $22.0 million used to repurchase common stock in the first six months of 2008; lower proceeds from the issuance of common stock under employee stock plans, which were $3.6 million in the first six months of 2008 compared to $10.9 million in the first six months of 2007; and $10.7 million of cash used to pay employee withholding taxes related to restricted stock and restricted stock units that vested during the first six months of 2008, compared to $6.5 million in the first six months of 2007.

Credit Facility

On November 28, 2007, in connection with our acquisition of CoCreate, we borrowed $220 million under our credit facility in two tranches: $36 million that accrued interest at the Eurodollar-based borrowing rate, and an alternate currency loan of 124.6 million Euros, equivalent to $184 million at the borrowing date, that accrues interest at 5.4375% per year. We repaid the $36 million loan in full in the first six months of 2008 and we repaid 20 million Euros of the alternate currency loan in the second quarter of 2008. The remaining balance is due on May 28, 2008. Upon the due date, we may either repay the amount outstanding or roll over the amount outstanding with new short term loans at the then current interest rates under the credit facility. As of March 29, 2008, we had 104.6 million Euros outstanding under the revolving credit facility, which was equivalent to $164.4 million on that date. We expect to roll over all or a portion of the outstanding balance to new short term loans on May 28, 2008.

For a description of the terms and conditions of the credit facility, including limitations on our ability to undertake certain actions, see “Note 10. Commitments and Contingencies” in the Notes to Consolidated Financial Statements of this Form 10-Q.

Share Repurchase Program

As of July 2000, we were authorized to repurchase up to 16.0 million shares of our common stock. We had repurchased 12.5 million shares through the end of 2004 and did not repurchase any more shares until the third quarter of 2007 when our Board of Directors authorized us to use up to $40 million of cash from operations to repurchase our shares through May 15, 2008. Of this amount, as of March 29, 2008, we had repurchased approximately 1.9 million shares for $32.0 million, including 1.4 million shares repurchased in the first six months of 2008 for $22.0 million. As of May 7, 2008, we had repurchased a total of 14.4 million shares of the 16.0 million shares authorized. We intend to continue to repurchase shares and to ask the Board of Directors to provide additional authority to repurchase shares upon expiration of the current authorization, which approval is not certain. Any such repurchases will reduce our cash balances.

Expectations for the Remainder of Fiscal 2008

We believe that existing cash and cash equivalents together with cash we expect to generate from operations will be sufficient to meet our working capital and capital expenditure requirements through at least the next twelve months.

During the remainder of 2008, we expect to make additional repayments under our revolving credit facility and to make cash disbursements estimated at $6 million for restructuring charges incurred in the first six months of 2008 and prior periods. Total capital expenditures for 2008 are currently anticipated to be approximately $25 million.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

We have evaluated, and expect to continue to evaluate, possible strategic transactions on an ongoing basis and at any time may be engaged in discussions or negotiations with respect to possible strategic transactions. Our cash position could be reduced and we may incur additional debt obligations to the extent we complete any significant transactions.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are set forth under the heading “Critical Accounting Policies and Estimates” in Part II, Item 7:Management’s Discussion and Analysis of Financial Condition and Results of Operationsof our 2007 Annual Report on Form 10-K.

We did not make any changes to these policies or to these estimates during the quarter ended March 29, 2008. As described in “Note 9. Income Taxes” in the Notes to Consolidated Financial Statements, in the quarter ended December 29, 2007 we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109(“FIN 48”).

Recent Accounting Pronouncements

Business Combinations

For a description of other recent accounting pronouncements, see “Note 7. Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements of this Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Other than as described below, there have been no significant changes in our market risk exposure as described in Item 7A:Quantitative and Qualitative Disclosures About Market Riskof our 2007 Annual Report on Form 10-K.

As of March 29, 2008, we had 104.6 million Euros outstanding under our revolving credit facility, which was equivalent to $164.4 million on that date. This Euro-denominated loan is subject to foreign currency rate risk. Additionally, the entire amount is subject to interest rate risk as interest rates will be adjusted at the respective due date (currently May 28, 2008) to the extent such amounts are not repaid. The impact would be partially mitigated by the floating rate interest earned on excess cash. Interest on this loan accrues at an annual rate of 5.4375% through May 28, 2008 at which time a new rate will be established at then current interest rates. If there was a hypothetical 10% change in interest rates, the annual net impact to earnings and cash flows would be approximately $0.9 million. The potential change in cash flows and earnings has been calculated based on the change in the net interest expense over a one-year period due to an immediate 10% change in the interest rate based upon borrowings outstanding at March 29, 2008.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

Our management maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.

We evaluated, under the supervision and with the participation of management, including our principal executive and principal financial officers, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of March 29, 2008 because of the material weakness in our accounting for income taxes disclosed in our 2007 Annual Report on Form 10-K and described below.

Notwithstanding the existence of the material weakness described below, we concluded that the consolidated financial statements in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Material Weakness in Accounting for Income Taxes

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

A material weakness in our internal control over financial reporting existed on March 29, 2008 in that we did not maintain effective controls over the accounting for income taxes, including the determination and reporting of accrued income taxes, deferred taxes and the related income tax provision. Specifically, we did not have adequate personnel to enable us to properly consider and apply generally accepted accounting principles for taxes, review and monitor the accuracy and completeness of the components of the income tax provision calculations and the related deferred taxes and accrued income taxes, ensure that the rationale for certain tax positions was appropriate, and ensure that effective oversight of the work performed by our outside tax advisors was exercised. Until remediated, this material weakness could result in a misstatement in the tax-related accounts described above that would result in a material misstatement to our interim or annual consolidated financial statements and disclosures that would not be prevented or detected.

Remediation Initiatives

Our management is in the process of actively addressing and remediating the material weakness in internal control over financial reporting described above. During 2008, we will undertake the following actions to remediate the material weakness identified:

	•		Hire additional personnel and retain professional advisors trained and experienced in income tax accounting;

	•		Re-evaluate the design of income tax accounting processes and controls and implement new and improved processes and controls, if warranted; and

	•		Increase the level of review and discussion of significant tax matters and supporting documentation with senior finance management.

As part of our 2008 assessment of internal control over financial reporting, our management will conduct sufficient testing and evaluation of the controls to be implemented as part of this remediation plan to ascertain that they are designed and operating effectively.

Although we have begun remediation efforts, we have not adequately remediated the material weakness described above and cannot predict when we will have remediated this material weakness.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 29, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The discussion of legal proceedings in “Note 10. Commitments and Contingencies” in the Notes to Consolidated Financial Statements of this Form 10-Q is hereby incorporated by reference.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors described in Part I, Item 1A. “Risk Factors” in our 2007 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our 2007 Annual Report on Form 10-K have not changed materially. They are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below shows the shares of our common stock we repurchased in the second quarter of 2008.

ISSUER PURCHASES OF EQUITY SECURITIES

Maximum Number (or

Total Number of

Approximate Dollar

Shares (or Units)

Value) of Shares

Purchased as Part

(or Units) that May

Total Number of

of Publicly

Yet Be Purchased

Shares (or Units)

Average Price Paid

Announced Plans or

Under the Plans or

Period⁽¹⁾

Purchased

per Share (or Unit)

Programs

Programs⁽²⁾

December 30, 2007 — January 26, 2008.

—

2,966,843

January 27 — February 23, 2008

769,100

16.35

769,100

2,197,743

February 24 — March 29, 2008

609,600

15.47

609,600

1,588,143

Total

1,378,700

15.96

1,378,700

1,588,143


(1)		Periods are our fiscal months within the fiscal quarter.

(2)		As of July 2000, our board had authorized us to repurchase up to 16.0 million shares of our common stock. We repurchased 12.5 million shares through the end of 2004 and repurchased no shares thereafter until the third quarter of 2007 when our Board of Directors authorized us to use up to $40 million of cash from operations to repurchase our shares through May 15, 2008. We announced this authorization and our intent to repurchase shares under it on May 25, 2007. As of March 29, 2008, we had repurchased approximately 1.9 million shares for $32 million under this authorization. Through March 29, 2008, we had repurchased a total of 14.4 million shares of the 16.0 million shares authorized.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Annual Meeting of Stockholders held on March 5, 2008, the stockholders:

•

elected Robert N. Goldman and C. Richard Harrison as Class III directors of the Company to hold office until the 2011 Annual Meeting (subject to the election and qualification of their successors and to their earlier resignation, removal or death):


Name	Votes For		Votes Withheld
Robert N. Goldman		102,349,202		5,066,627
C. Richard Harrison		104,779,276		2,636,554

•

confirmed the selection by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending September 30, 2008:


Votes For	Votes Against	Votes Abstaining
104,980,076	2,408,985	26,767

ITEM 6. EXHIBITS

10		Compensatory Arrangements with Directors.

31.1		Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).

31.2		Certification of the Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).

32*		Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.


*		Indicates that the exhibit is being furnished with this report and is not filed as a part of it.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	Parametric Technology Corporation
	By:	/s/Cornelius F. Moses, III
		Cornelius F. Moses, III
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: May 8, 2008

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PTC (PTC) 10-Q2008 Q2 Quarterly report

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