Statements in this Annual Report about anticipated financial results and growth, as well as about the development of our products and markets, are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A. "Risk Factors" of this report.

Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.

In 2008, we reported revenue of $1,070 million and operating income of $125 million, a 180 basis point improvement in operating margins from 2007. Our acquisition of CoCreate Software GmbH (acquired on November 30, 2007) and favorable foreign currency exchange rate movements were significant contributors to our operating results for the year. Largely due to these factors, we experienced revenue growth in Europe and Asia-Pacific. We also generated over $222 million of operating cash flow, an increase of over $90 million from 2007, as a result of improved profitability and strong customer collections with days sales outstanding improving to 61 days at the end of 2008 versus 74 days at the end of 2007.

We see the most significant risks for 2009 to be the macroeconomic climate, which could cause our customers to delay, forego or reduce the amount of their investments in our solutions or delay payments of amounts due to us, and the recent decline in foreign currency exchange rates, particularly the Euro, which could adversely affect our reported results as amounts earned in other countries are translated into dollars for reporting purposes.

We have been, and expect to continue, investing in our product portfolio, through both internal development and strategic acquisitions. We have also undertaken a number of initiatives to enhance our long-term business model, including significant steps toward globalizing our work force, evolving our distribution model, enhancing the efficiency and scale of our services business and growing our base of maintenance-paying customers.

Product Releases

The most recent releases of our two core 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-included significant functionality enhancements that we believe will create additional revenue opportunities. 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 to continue. We believe this will result in increased services revenue and generate future license and maintenance revenue as we expect our installed base will then expand their Windchill use. We also expect to release Windchill ProductPoint in December 2008. Windchill ProductPoint is targeted at the small- and medium-size business (SMB) market, which we believe represents a growth opportunity over the longer term.

Globalization

As part of our continuing efforts to increase profitability, we have relocated 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 $20.1 million in 2008. We believe that by moving certain business functions to these locations we have increased both our strategic presence and our ability to add cost effective resources as our business grows. We do not expect to incur restructuring costs related to these initiatives in 2009.

Acquisitions

A significant element of our growth strategy is to acquire strategic companies and technologies that expand our solution footprint and/or our distribution model. We have made a number of strategic acquisitions that add to and expand elements of our solutions. Each of our acquisitions has helped us to extend our product development system, which we consider to be a significant competitive advantage for us. You can find more information about these acquisitions under the subheading "Acquisitions" of Item 1. "Business" of this Annual Report, which begins on page 1, and in Note E to the accompanying "Notes to Consolidated Financial Statements."

Fiscal Year 2009 Strategies and Risks

In 2009, our revenue and operating results will be impacted by currency fluctuations (the U.S. dollar strengthened relative to the Euro and the Yen in the first two months of 2009) and the impact of a slowing worldwide economy. Balancing a difficult near-term economic situation with the longer-term opportunity for the business, we are modestly increasing our investments in the business.

Our primary strategic initiatives for 2009 are to:

• continue to invest in research and development to further improve the breadth and competitiveness of our product portfolio, potentially supported by modest acquisitions;

• continue to evolve our distribution model through increased investment in support of our reseller channel and investment in developing a network of enterprise reseller partners;

• enhance and leverage the value of our services business through expansion of our services ecosystem, including the addition of strategic services partners; and

• continue the globalization of our workforce, primarily through investments in emerging economies, particularly China.

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

• execute strategic and business initiatives;

• 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 Russia; and

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

We discuss additional factors affecting our revenue and operating results under Item 1A. "Risk Factors" of this Annual Report.

Explanatory Note about Our Revenue Reporting

As of the first quarter of 2008, we have been reporting 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 the 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. On a year-over-year comparative basis, our revenues for both 2008 and 2007 benefited as a result of changes in currency exchange rates, primarily the Euro and the Japanese Yen. Conversely, our expenses were higher as a result of changes in these rates. If 2008 and 2007 actual reported results were converted into U.S. dollars based on the corresponding prior year's foreign currency exchange rates, revenue would have been lower by approximately $57.8 million and $21.2 million, respectively, while expenses would have been lower by approximately $37.7 million and $17.2 million, respectively. The net impact on year-over-year results would have been a decrease in operating income of $20.1 million and $4.0 million in 2008 and 2007, respectively. The results of operations, revenue by line of business and revenue by geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis.

Impact of Reversal of Valuation Allowance

Net income for 2007 was significantly higher year over year due to a non-cash tax benefit of $58.9 million recorded in the third quarter of 2007 primarily associated with our reversal of valuation allowances against certain deferred tax assets in the U.S. and a foreign jurisdiction.

Overview

The following is a summary of our results of operations for the last three
years, which includes the results of operations of companies we acquired
beginning on their acquisition date.



                                                Percent Change                         Percent Change
                                                         Constant                               Constant
                                2008         Actual      Currency       2007        Actual      Currency       2006
                                                           (Dollar amounts in millions)
Total revenue                 $ 1,070.3          14 %           8 %    $ 941.3          11 %           9 %    $ 848.0
Total costs and expenses          945.1          11 %           7 %      848.5           9 %           6 %      781.5

Operating income                  125.2          35 %          13 %       92.8          39 %          33 %       66.5
Other income (expense),
net                                (6.3 )                                  6.9                                    3.7

Income before income taxes        118.9                                   99.7                                   70.2
Provision for (benefit
from) income taxes                 39.2                                  (44.0 )                                 13.4

Net income                    $    79.7                                $ 143.7                                $  56.8

Revenue increased from 2007 to 2008 primarily due to revenue from the CoCreate business, which we acquired on November 30, 2007, and the favorable impact of foreign currency exchange rate movements, as well as organic growth in maintenance and consulting and training service revenue.

Revenue increased from 2006 to 2007 primarily due to organic revenue growth, the favorable impact of foreign currency rate movements and a modest contribution from acquired businesses.

Costs and expenses increased from 2007 to 2008 primarily due to costs of the CoCreate business, the impact of foreign currency exchange rate movements, measured spending increases to support planned revenue growth, restructuring charges from our cost reduction and globalization measures, and increased amortization of intangible assets and in-process research and development charges associated with our acquisitions.

Costs and expenses increased from 2006 to 2007 primarily due to the impact of foreign currency exchange rate movements, measured spending increases to support planned revenue growth and restructuring charges from our cost reduction and globalization measures.

Refer to Costs and Expenses for a more detailed discussion. Total costs and expenses reflect the following:

• stock-based compensation expense of $44.4 million in 2008, $36.4 million in 2007 and $38.2 million in 2006;

• restructuring and other charges of $20.1 million in 2008, $15.3 million in 2007 and $5.9 million in 2006; and

• amortization expense related to intangible assets of $35.5 million in 2008, $14.9 million in 2007 and $11.9 million in 2006.

The provision for (benefit from) income taxes in 2007 and 2006 includes tax benefits totaling $62.8 million and $6.1 million, respectively. The 2007 benefit 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 and a $3.9 million tax benefit from the favorable outcome of a tax refund claim in the U.S. The 2006 benefit resulted from favorable resolutions of tax audits with the Internal Revenue Service in the U.S.

Net income reflects improved operating margin contributions from increased revenue year over year, offset by the impact of the items discussed above.

The following table shows certain consolidated financial data as a percentage of our total revenue for the last three years:

                                                             Year ended
                                                           September 30,
                                                       2008     2007     2006
          Revenue:
          License                                        30 %     31 %     31 %
          Service                                        70       69       69

          Total revenue                                 100      100      100

          Costs and expenses:
          Cost of license revenue                         3        2        1
          Cost of service revenue                        28       29       31
          Sales and marketing                            29       31       32
          Research and development                       17       17       17
          General and administrative                      8        8        9
          Amortization of acquired intangible assets      1        1        1
          In-process research and development            -        -        -
          Restructuring and other charges                 2        2        1

          Total costs and expenses                       88       90       92

          Operating income                               12       10        8
          Interest income                                 1        1       -
          Interest expense                               (1 )     -        -
          Other expense, net                             (1 )     -        -

          Income before income taxes                     11       11        8
          Provision for (benefit from) income taxes       4       (4 )      1

          Net income                                      7 %     15 %      7 %

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).

Total Revenue

The following table illustrates trends in our revenue from 2006 to 2008:



                                               Percent Change                       Percent Change
                                                        Constant                             Constant
                                 2008       Actual      Currency       2007      Actual      Currency       2006
                                                          (Dollar amounts in millions)
License revenue                $   316.2         7 %           2 %    $ 296.1        12 %          10 %    $ 263.5
Service revenue:
Maintenance revenue                497.5        22 %          15 %      408.4        11 %           8 %      369.2
Consulting and training
service revenue                    256.6         8 %           3 %      236.8        10 %           7 %      215.3

Total service revenue              754.1        17 %          10 %      645.2        10 %           8 %      584.5

Total revenue                  $ 1,070.3        14 %           8 %    $ 941.3        11 %           9 %    $ 848.0

Revenue growth in 2008 reflects revenue from 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 2007 did not include CoCreate revenue, while results for 2008 include ten months of CoCreate revenue.

Total revenue in 2008 and 2007 benefited from changes in foreign currency exchange rates due to the translation of revenue recorded in Europe and Asia into U.S. Dollars.

The increase in revenue in 2008 and 2007 also reflects:

• organic growth of our Windchill solutions, which we believe reflects our success in helping customers understand the benefits of investing in PLM solutions, as well as our ability to help customers adopt our solutions incrementally, which lowers customer risk;

• more wide-spread adoption of our solutions by both our existing and new customers, which we believe is a result of customer recognition of the benefits of our broad set of capabilities delivered on a single system architecture;

• growth in maintenance revenue, which we believe reflects continued customer satisfaction with our solutions and customer support; and

• in 2007, growth in license revenue in Europe and Asia-Pacific, primarily attributable to increased sales of new seats of Pro/ENGINEER.

These increases were partially offset by declines in consulting and training service revenue related to our MCAD solutions, particularly in North America. A portion of this decline was anticipated as we continue to expand our reseller and partner channel and their ability to offer these services to customers directly. We also experienced lower than anticipated revenue from our computer-based training products.

Revenue growth in 2007 also reflected revenue from Mathsoft products. We acquired Mathsoft on April 28, 2006. Prior to our acquisition of that business, Mathsoft generated revenue of approximately $20 million for the

twelve months ended March 31, 2006. The Mathsoft business has been included in our results of operations since its acquisition date. Accordingly, 2006 results only include revenue from Mathsoft products for approximately 5 months.

License Revenue

Total

License revenue accounted for 30%, 31% and 31% of total revenue in 2008, 2007 and 2006, respectively.

2008 compared to 2007

License revenue in 2008 reflects growth in Europe and Japan, partially offset by declines in North America and the Pacific Rim. Growth in license revenue in 2008 was primarily due to sales of acquired products, mainly CoCreate products, and the impact of favorable currency movements.

In 2008, Pro/ENGINEER new seat license revenue growth was offset by a decrease in revenue from Pro/ENGINEER upgrades and modules. We believe that our Pro/ENGINEER upgrades and modules license revenue in the first half of 2008 was negatively impacted by the end of the Pro/ENGINEER Wildfire 3.0 product cycle and the launch of Pro/ENGINEER Wildfire 4.0 in January 2008 as customers may have deferred purchases of those items until they have implemented Wildfire 4.0. License sales of our data management and collaboration products were up 7% in 2008, primarily due to higher sales of PDMLink. Total Windchill license revenue relative to the number of new seats varies quarter to quarter based on the type and volume of seats sold. In 2008, we sold proportionately more light user seats, which have a lower price than heavy user seats. 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 used outside the engineering function.

2007 compared to 2006

The growth in license revenue in 2007 compared to 2006 reflected increased revenue from customers of all sizes and across both product categories. Growth in license revenue from our data management and collaboration products was primarily due to growth in sales of Windchill PDMLinkฎ, our core Windchill content and process management solution. We believe growth in the number of new Windchill seats sold in 2007 reflected our success in marketing incremental adoption of our solutions as well as our improved and expanded product offerings.

License sales of our MCAD solutions products grew in 2007 primarily due to sales of Mathcad and Arbortext IsoDraw. Revenue from sales of Pro/ENGINEER was relatively flat from 2007 to 2006, with increases in new seat revenue offset by declines in sales of upgrades and modules.

Maintenance Revenue

Total

Maintenance revenue represented 46%, 43% and 44% of total revenue in 2008, 2007 and 2006, respectively. Growth in our maintenance revenue was primarily due to sales of acquired products and the impact of favorable foreign currency exchange rate movements, as well as a higher number of seats under maintenance agreements. Although the number of seats under maintenance has been increasing, this trend may not continue in the current macroeconomic climate and may be adversely affected to the extent customers do not continue maintenance for seats currently under maintenance due to layoffs or otherwise.

2008 compared to 2007

The growth in maintenance revenue in 2008 reflects a 28% increase in seats under maintenance, including a 4% increase in Pro/ENGINEER seats and a 28% increase in Windchill seats. In addition, the growth reflects favorable foreign currency exchange rate movements and the addition of CoCreate maintenance customers.

2007 compared to 2006

The increase in our maintenance revenue in 2007 was due primarily to an increase in the number of new users of our data management and collaboration solutions products as new customers were added and existing customers expanded their implementations to additional users. In addition, maintenance revenue related to our MCAD products grew in 2007 due to revenue contributions from our acquired products, particularly Mathcad, an increase in seats under maintenance and favorable foreign currency exchange rate movements.

Consulting and Training Revenue

Total

Consulting and training service revenue, which has a lower gross profit margin than both license and maintenance revenue, accounted for 24% of total revenue in 2008 and 25% of total revenue in both 2007 and 2006. We believe the decrease in consulting and training revenue as a percentage of overall revenue is due to a decline in mechanical computer-aided design and engineering implementation consulting revenue due to our strategic use of channel and specialized partners to provide these services. This initiative has enabled us to improve our consulting utilization and we intend to continue to pursue this approach in future quarters. Growth in total consulting and training services revenue is attributable to increased use by our customer base of our consulting and training services, as well as contributions from acquired businesses, partially offset by declines in consulting and training service revenue in North America as a result of declines in license revenue in that region.

2008 compared to 2007

The increase in consulting and training service revenue reflects an increase in consulting revenue of approximately 10% and an increase in training revenue of 4%. The increase in consulting and training service revenue in 2008 was primarily the result of continued growth in training services and Windchill implementation consulting in Europe and Asia-Pacific, partially offset by a decline in services revenue in North America. Europe's growth continues to benefit from higher consulting revenue from a large customer and from favorable currency movements.

2007 compared to 2006

The increase in our consulting and training service revenue in 2007 was due to increased customer demand for data management and collaboration solutions process and implementation consulting services as a result of increased adoption of our software solutions. Also, during 2007, consulting and training revenue included a large customer engagement in Europe which contributed to the growth. In 2007, MCAD Solutions consulting and training service revenue declined primarily due to a decrease in consulting and training revenue in North America.

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 period may be attributable to contracts entered into during the current period or in prior periods. License and/or consulting and training service revenue of $1 million or more recognized from individual customers in a single quarter during the fiscal year was $166.6 million, $156.7 million and $138.0 million in 2008, 2007 and 2006, respectively. While our customers may not continue to spend at these levels in future periods, we believe this increase is the result of a shift in customer priorities toward PLM solutions relative to other IT spending initiatives, our improved ability to provide broader solutions to our customers, and improvements in our competitive position due to our system architecture and product development process knowledge.

Revenue by Geographic Region



                                  Percent Change                    Percent Change
                                           Constant                          Constant
                      2008      Actual     Currency      2007     Actual     Currency      2006
                                            (Dollar amounts in millions)
    North America   $   364.7       -  %         -  %   $ 365.0        1 %          1 %   $ 360.6
    Europe              450.3       27 %         15 %     353.4       23 %         14 %     287.5
    Asia-Pacific        255.3       14 %          9 %     222.9       12 %         13 %     199.9

                    $ 1,070.3       14 %          8 %   $ 941.3       11 %          9 %   $ 848.0

We derived 66%, 61% and 57% of our total revenue from sales to customers outside of North America in 2008, 2007 and 2006, respectively. We believe the Asia-Pacific region, particularly China, continues to present an important growth opportunity because global manufacturing companies have continued to invest in that region and the market in that region for both our MCAD solutions and data management and collaboration solutions is relatively unsaturated. Economic growth in the United States slowed in 2008 and macroeconomic conditions deteriorated. If economic growth in the United States continues to slow, or if . . .