Summary of PARAMETRIC TECHNOLOGY CORP

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Restatement of Previously Issued Financial Results As a result of an independent investigation led by the Audit Committee of our Board of Directors, the Audit Committee concluded on October 29, 2007 that we would need to restate our previously issued financial statements for the effect of certain transactions involving Toshiba Corporation of Japan ("Toshiba"), for which we recorded revenue of approximately $41 million during fiscal 2001 through 2006. Based on its investigation, the Audit Committee concluded that the understanding of the arrangement was not fully reflected in the order paperwork for these transactions because there were additional circumstances known or knowable by one or more of our personnel in Japan. That condition required us to change our conclusion that the transactions met the revenue recognition criteria of Statement of Position 97-2, Software Revenue Recognition.
The results of the investigation indicate that during the period 2001 to 2006, an employee of Toshiba Corporation initiated purchases of both software and services from our subsidiary in Japan, PTC Japan K.K. ("PTC Japan"). Many of these purchases were completed through a third party trading company that procured the software and services on Toshiba's behalf. The transactions were supported by orders that were signed by employees of Toshiba and the third party trading company. PTC Japan delivered the items for which revenue was recorded and was paid for the orders in question. The Toshiba employee also allegedly entered into a series of financing agreements with third party leasing companies, including GE Capital Leasing Corporation of Japan ("GECL"), in the name of Toshiba to fund various purchases. As part of those transactions, the leasing companies allegedly entered into transactions with various third party trading companies to procure the purchased items on behalf of Toshiba. We were not a party to those financing agreements. Toshiba has disclaimed responsibility for repayment of these financed amounts and has alleged that the Toshiba employee who entered into the financing agreements was not authorized to do so and that Toshiba did not receive delivery of the items so financed. Recently, the Toshiba employee involved in the transactions was arrested and charged with defrauding certain of the leasing companies. Among the allegations against him are that he forged contracts in the name of Toshiba. In addition, three individuals-each employed by a different trading company involved in the transactions-have been arrested for alleged involvement in a scheme to defraud the leasing companies. According to published news reports, the Toshiba employee and these other individuals are suspected of diverting some of the proceeds of the financings to a bank account controlled by one or more of them. Following these arrests, it was reported on October 23, 2007 that two former employees of PTC Japan were arrested on suspicion of demanding "hush money" from one of the participants in the fraudulent scheme. The press accounts indicate that the former PTC Japan employees-who left employment with PTC Japan in 2003 and 2004, respectively-were no longer working at PTC Japan at the time of the alleged demands. According to the press accounts, these individuals have not been charged with participating in the alleged underlying fraud.
To effect the restatement of revenue associated with the transactions placed by the Toshiba employee, we reduced previously recorded revenue by approximately $8 million in fiscal 2006, $15 million in fiscal 2005, $9 million in fiscal 2004, $2 million in fiscal 2003 and $7 million in prior years, and recorded related income tax effects. We did not make any adjustments to the costs incurred in connection with these transactions due to the uncertainty regarding our ultimate ability to retain the advances received for these transactions and our belief that all such costs are

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unrecoverable. Upon restatement, the revenue reversed from those prior periods was deferred and classified as Customer Advances in our consolidated balance sheets. That liability (which totaled $38.0 million and $39.5 million at June 30, 2007 and September 30, 2006, respectively, after the effects of foreign currency movements) will remain recorded until the rights and obligations of the several companies connected with the Toshiba transactions are resolved. To the extent that matters are resolved in our favor, we will reduce Customer Advances and record revenue or other income at that time.
Our restatement of prior period financial statements also includes adjustments for other previously identified errors that we had corrected in the periods they became known to us rather than in the periods in which they originated because we believed that the amounts of such errors, individually and in the aggregate, were not material to our financial statements for the affected periods. In this restatement, we have now recorded those corrections in the periods in which each error originated. Such adjustments, which have been tax effected, primarily relate to (i) recording rent expense on a straight-line basis for one of our office facilities, (ii) recording stock-based compensation expense due to the timing of approvals for certain stock options we granted, (iii) deferring or reversing revenue for certain customer orders in the Asia-Pacific region, and
(iv) reversing an income tax reserve that was unwarranted when established. Our restatement also includes an adjustment to correct our third quarter 2007 financial statements for a $10.4 million overstatement of reported net income, which resulted from tax errors detected in the fourth quarter of 2007 relating primarily to our release in the third quarter of a substantial portion of the valuation allowance for our U.S. net deferred tax assets.

Summary of the Restatement Effects A summary of the cumulative revenue and net income effects of the restatement on our consolidated financial statements is as follows:

                           Nine months
                              ended
                            June 30,                           Year ended September 30,
                              2007              2006            2005            2004             2003           Prior Years          Total
                                                                (in thousands, except per share data)
Revenue, as
previously reported       $     674,859       $ 854,918       $ 720,719       $ 660,029       $  671,940
Adjustments                        (232 )        (6,935 )       (12,744 )        (8,361 )         (2,487 )     $     (10,506 )     $ (41,265 )

Revenue, as restated      $     674,627       $ 847,983       $ 707,975       $ 651,668       $  669,453


Net income (loss), as
previously reported       $     119,780       $  60,866       $  83,592       $  34,813       $  (98,280 )
Adjustments                      (6,763 )        (4,062 )       (10,405 )        (3,228 )         (2,907 )     $     (12,927 )     $ (40,292 )

Net income (loss), as
restated                  $     113,017       $  56,804       $  73,187       $  31,585       $ (101,187 )


Earnings (loss) per
share-Diluted, as
previously reported       $        1.02       $    0.54       $    0.75       $    0.32       $    (0.93 )
Adjustments                       (0.06 )         (0.04 )         (0.10 )         (0.03 )          (0.03 )

Earnings (loss) per
share-Diluted, as
restated                  $        0.96       $    0.50       $    0.65       $    0.29       $    (0.96 )

The restatement had no effect on previously reported cash balances or on the amounts of net cash flows from operating, investing and financing activities. The adjustments made as a result of the restatement are more fully described in Note 2 to our consolidated financial statements included in Part I, Item 1 "Unaudited Financial Statements" of this Form 10-Q/A. Our assessment of the effectiveness of our disclosure controls and procedures is included in Part I, Item 4 "Controls and Procedures" of this Form 10-Q/A.
Disclosure Amended by this Form 10-Q/A All amounts referenced to June 30, 2007, September 30, 2006 and July 1, 2006 in the following discussion reflect the balances and amounts on a restated basis. Also, comparisons of the three and nine months ended June 30, 2007 and July 1, 2006 to any other periods have been revised from those included in our Original Form 10-Q as necessary to reflect the restated information.
This Form 10-Q/A modifies only the disclosures described in the preceding paragraph to reflect the restatement and does not modify or update such disclosures in any other respect, or any other disclosures presented in the Original Form 10-Q. Further, this Form 10-Q/A does not reflect any other events occurring after August 9, 2007, the date we filed the Original Form 10-Q. We specifically note that we have not updated any forward-looking statements or our Risk Factors to reflect events occurring after the date we filed the Original Form 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the SEC since the filing date of the Original Form 10-Q, including our Current Reports on Form 8-K, our Annual Report on Form 10-K for the year ended September 30, 2007, and the amendments to our Quarterly Reports on Form 10-Q for the quarterly periods ended December 30, 2006 and March 31, 2007.

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Forward-Looking Statements Statements in this Quarterly Report on Form 10-Q about our anticipated financial results and growth, as well as about the development of our products and markets, 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; we may be unable to successfully achieve both revenue and earnings growth from newly acquired businesses; our ability to win against or displace competitors could be adversely affected by changes in the competitive landscape; 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) and enterprise content management (ECM) software solutions and related services that help companies improve their processes for developing physical and information products.
Our software solutions include our Enterprise Solutions products - a range of Internet-based collaboration, content and process management, and publishing technologies and our Desktop Solutions products - a suite of mechanical computer-aided design, engineering calculation, and XML-based document authoring tools. Our software solutions help customers develop products faster, improve product quality, increase innovation and reduce product development cost. The PLM market encompasses the mechanical computer-aided design, manufacturing and engineering (CAD, CAM and CAE) segment and the collaboration and product data management solutions segment, 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.
The ECM market includes technologies for business process management, compliance management, document management, dynamic publishing, document archival and retrieval, knowledge management, records management and Web content management. Within the ECM market, PTC focuses on a subset of solutions that optimize the development of dynamic publications, such as those associated with technical manuals, service documents, and regulatory and compliance data sets, as well as government and financial document publishing and content management.
Executive Overview Total revenue in the third quarter of 2007 was $224.9 million, reflecting 4% year-over-year growth. While our revenue grew on a year-over-year basis, our license revenue and operating margins were below our expectations and reflected mixed revenue performance across geographic areas and product categories. Our third quarter license revenue performance reflects two major factors:
(1) several large transactions that we expected to close did not close and (2) a reduction in add-on sales of Desktop Solutions in North America and Japan. In the third quarter of 2007, we continued to see strong revenue growth in Enterprise Solutions and our maintenance revenue was $103.1 million, the highest amount of quarterly maintenance revenue we have ever recorded. We believe this strong maintenance revenue is an indicator that we have a large and loyal customer base that continues to benefit from the use of our differentiated solutions. While our revenue performance in the third quarter of 2007 was lower than our expectations, we continue to believe that the overall PLM market is growing and will continue to grow as customers invest in solutions that help them improve their product development processes.

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Net income for the third quarter and first nine months of 2007 was significantly higher year over year due to non-cash tax benefits recorded in the quarter primarily associated with our reversal of valuation allowances in the U.S. and a foreign jurisdiction. Based upon our operating results over recent years and through June 30, 2007 as well as an assessment of our expected future operating results, we determined that it had become more likely than not that we will realize a substantial portion of our deferred tax assets in the U.S. and a foreign jurisdiction. As a result, during the third quarter of 2007, we reversed the valuation allowance against certain deferred tax assets in the U.S. and a foreign jurisdiction, resulting in a tax benefit of $58.9 million, a decrease to goodwill of $20.0 million, and an increase in stockholders' equity of $0.9 million.
We believe operating results for the first nine months of 2007, during which revenue grew 12% year over year and operating margins improved, reflect the trends in our business better than the results of the third quarter of 2007 alone. These nine-month results reflect growth across our lines of business, growth in both our Desktop Solutions and Enterprise solutions product categories, growth across our three major geographies, and growth in revenue from customers of all sizes. We believe these nine-month operating results reflect successful execution of our strategic initiatives over the past three years as well as increased technology spending by our customers. Those initiatives focused on improving our product and service offerings, our distribution model, our strategic account relationships, our competitive position and our marketing programs. We believe our strategic initiatives have created three key competitive differentiators which we believe are causing customers to adopt our solutions: our broad product development system capabilities, our single platform architecture, and our unique process framework for addressing our customers' product development challenges. In particular, we believe our strategy to offer a product development system with fully integrated solutions on a common architecture provides us with a significant competitive advantage and is a major factor in our increased sales of Pro/ENGINEER� and Windchill�. We also believe that acquisitions by others of certain of our competitors create competitive opportunities for us.
As a result of third quarter revenue being lower than our expectations and as part of our ongoing efforts to deliver operating margin growth, we have taken recent steps to reduce costs. In the fourth quarter of 2007, we expect to terminate the employment of approximately 200 employees, which will result in a restructuring charge for severance and related costs of approximately $11 million in the fourth quarter of 2007. Additionally, we are evaluating other cost savings opportunities including optimizing the use of our leased facilities worldwide and relocating functions to lower-cost geographies. This evaluation may result in additional restructuring costs in the fourth quarter of 2007 and in 2008. We expect these planned restructuring initiatives will help us to improve operating margins and increase our strategic presence in emerging geographies.
Other Important Information
On August 2, 2007, GE Capital Leasing Corporation ("GELC") filed a lawsuit against PTC alleging that PTC was a participant in an alleged scheme in which an employee of Toshiba Corporation fraudulently induced GELC to provide over $60 million in financing for purchases of third party products, including PTC software, during the period from 2003 to 2006. GELC alleges that the scheme commenced in or about late 2000, prior to GELC's involvement. GELC alleges that the Toshiba employee was not authorized to undertake the orders or enter into the financing agreements. GELC further alleges that PTC was aware of this lack of authority. All of the alleged transactions occurred in Japan. GELC has alleged that PTC and other alleged participants have received and recorded at least $47 million in funds from GELC. We are investigating this matter and, based on our investigation to date, believe revenue was properly recognized on the applicable transactions. If our investigation were to conclude that certain of GELC's allegations were true, PTC could be required to reverse all or a portion of the revenue associated with the applicable transactions, which could result in a restatement of our previously issued financial statements. Additionally, we cannot predict the ultimate resolution of the GELC lawsuit at this time, but, if determined adversely to us, this lawsuit could have a material adverse impact on our financial condition or results of operations.

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Results of Operations The following is a summary of our results of operations for the third quarters and first nine months of 2007 and 2006, which includes the results of operations of companies we acquired beginning on their respective acquisition dates.

                                       Three months ended                                     Nine months ended
                            June 30,         July 1,          Percent             June 30,         July 1,          Percent
                              2007             2006           Change                2007             2006           Change
                                                             (Dollar amounts in millions)
Total revenue              $    224.9        $  215.6                4 %(1)      $    674.6        $  603.7               12 %(1)
Total costs and
expenses                        205.3           203.3                1 %              612.8           570.1                7 %

Operating income                 19.6            12.3                                  61.8            33.6
Other income
(expense), net                    2.2             0.8                                   4.4             2.7

Income before income
taxes                            21.8            13.1                                  66.2            36.3
(Benefit from)
provision for income
taxes                           (58.6 )          (2.8 )                               (46.8 )           6.5

Net income                 $     80.4        $   15.9                            $    113.0        $   29.8

(1) On a consistent foreign currency basis, compared to the year-ago periods, total revenue for the third quarter and first nine months of 2007 increased 2% and 9%, respectively.

Revenue results for the third quarter and first nine months of 2007 are described below in Revenue.
Total costs and expenses reflect increases in our operating cost structure from acquisitions and from measured increases to support planned revenue growth. Refer to Costs and Expenses beginning on page 34 for a more detailed discussion. The increase in operating income in the third quarter and first nine months of 2007 compared to 2006 is favorably impacted by lower stock-based compensation expense and restructuring charges in the 2007 periods as compared to the 2006 periods. In addition, as described in Executive Overview beginning on page 26 and in Costs and Expenses, net income in the third quarter and first nine months of 2007 includes a $58.9 million tax benefit due to the reversal of a significant portion of our valuation allowances against deferred tax assets in the U.S. and in a foreign jurisdiction.

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The following table shows certain consolidated financial data as a percentage of our total revenue for the third quarters and first nine months of 2007 and 2006:

                                                     Three months ended                Nine months ended
                                                 June 30,          July 1,         June 30,         July 1,
                                                   2007             2006             2007             2006
Revenue:
License                                               28 %             30 %             30 %            30 %
Service                                               72               70               70              70

Total revenue                                        100              100              100             100

Costs and expenses:
Cost of license revenue                                2                1                2               1
Cost of service revenue                               30               30               30              31
Sales and marketing                                   33               33               32              33
Research and development                              18               17               18              18
General and administrative                             7                8                8               9
Amortization of acquired intangible assets             1                1                1               1
Restructuring charges                                  -                3                -               1
In-process research and development                    -                1                -               -

Total costs and expenses                              91               94               91              94

Operating income                                       9                6                9               6
Other income (expense), net                            1                -                1               -

Income before income taxes                            10                6               10               6
(Benefit from) provision for income taxes            (26 )             (1 )             (7 )             1

Net income                                            36 %              7 %             17 %             5 %

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). We report our revenue in two product categories:
� Enterprise Solutions, which includes Windchill, Pro/INTRALINK, ProductView, Arbortext Publishing Engine, Arbortext IsoView and all other solutions that help companies collaborate and manage and publish information across an extended enterprise; and

� Desktop Solutions, which includes Pro/ENGINEER, Arbortext Editor, Arbortext IsoDraw, Mathcad and all other solutions that help companies create content and improve desktop productivity.

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The following table shows our software license revenue and our service revenue by product category for the periods stated.

                                    Three months ended                               Nine months ended
                           June 30,       July 1,        Percent           June 30,       July 1,        Percent
                             2007           2006         Change              2007           2006         Change
                                                       (Dollar amounts in millions)
License revenue:
Enterprise                $     23.9      $   22.2              8 %       $     69.8      $   64.6              8 %
Desktop                         38.2          43.5            (12 )%           130.2         114.3             14 %

Total license revenue           62.1          65.7             (5 )%           200.0         178.9             12 %
Maintenance revenue:
Enterprise                      20.5          17.5             17 %             58.9          49.9             18 %
Desktop                         82.6          76.6              8 %            243.5         222.0             10 %

Total maintenance
revenue                        103.1          94.1             10 %            302.4         271.9             11 %
Consulting and
training service
revenue:
Enterprise                      41.5          32.9             26 %            116.4          92.4             26 %
Desktop                         18.2          22.9            (21 )%            55.8          60.5             (8 )%

Total consulting and
training service
revenue                         59.7          55.8              7 %            172.2         152.9             13 %

Total service revenue          162.8         149.9              9 %            474.6         424.8             12 %

Total revenue             $    224.9      $  215.6              4 %(1)    $    674.6      $  603.7             12 %(1)

Total Enterprise
Solutions revenue         $     85.9      $   72.6             18 %       $    245.1      $  206.9             18 %
Total Desktop
Solutions revenue         $    139.0      $  143.0             (3 )%      $    429.5      $  396.8              8 %

(1) On a consistent foreign currency basis from the comparable year-ago period, in the third quarter and first nine months of 2007 total revenue increased 2% and 9%, respectively.

Our results include the highest amount of quarterly maintenance revenue we have recorded, as well as growth in Europe across both product categories and all lines of business. Growth in these areas was offset by declines in Desktop Solutions license revenue in North America and Japan and a decline in channel revenue in Asia-Pacific. Our nine-month year-over-year revenue growth in both Desktop Solutions and Enterprise Solutions reflects both organic growth of our Desktop Solutions and Enterprise Solutions and revenue from the Mathsoft and ITEDO businesses acquired on April 28, 2006 and October 18, 2006, respectively. Historically, Mathsoft generated revenue of approximately $20 million for the twelve months ended March 31, 2006 and ITEDO generated revenue of approximately . . .