Statements in this Quarterly Report on Form 10-Q about our anticipated financial results and profitability, 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: our customers may continue to decrease, delay or forego investments in our solutions in this global economic climate; customers may delay, or become unable to pay, payments due to us in this global economic climate; our efforts to reduce our operating costs may not become effective as quickly as we expect and could harm our business; our cost reduction initiatives may delay our ability to take advantage of opportunities when the economy recovers; we may be unable to increase revenues or successfully execute strategic and other business initiatives while containing expenses; 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, some of which have larger operating budgets on an absolute and relative basis; as well as other risks and uncertainties referenced in Part II, Item 1A. "Risk Factors" of this report.

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.

Our PLM software solutions provide our customers with a product development system that enables them to create digital product content, collaborate internally and externally, control content and automate processes, configure products and content, and communicate product information to people and systems across the extended enterprise and design chain. We have devoted significant resources to developing our PLM offerings into an integrated product development system.

The most significant challenge we faced in the quarter was the current global economic environment in which companies are spending less and taking longer to decide where they are going to invest. We expect this economic environment to continue at least for the near-term and our customers, including those of our resellers, to reduce the amount of their investments in our solutions and to take longer to make investment decisions. Our other significant challenge was the recent decline in the value of non-U.S. currencies in which we transact business relative to the U.S. dollar, particularly the Euro, which adversely affected, and may continue to adversely affect, our reported results as amounts earned in these currencies are translated into dollars for reporting purposes.

We recorded $240 million of revenue in the first quarter of 2009 compared to $241 million in the year-ago period. While our revenue was relatively flat quarter over quarter, it reflects a 29% decline in license revenue, approximately $20 million, and a decline in the value of the Euro relative to the U.S. Dollar, partially offset by two months of additional revenue contribution in the first quarter of 2009 from the CoCreate business, which we acquired on November 30, 2007, and organic growth in our maintenance and services businesses. We view the decline in license revenue as particularly significant and, accordingly, have reduced our revenue expectations for

the year. We expect license revenues will continue to be below 2008 levels and that the declines in license revenue could negatively impact to a lesser extent consulting and training services revenue and maintenance revenue in 2009 and beyond.

Our operating income and net income were also below our expectations for the quarter as our operating expenses constituted a greater percentage of our revenue than we had planned due to the lower than planned level of revenue recorded in the quarter.

Accordingly, as a result of the lower than anticipated revenue expectations for 2009, we are taking actions to reduce our operating costs, including:

• implementing a hiring freeze other than for selected positions that support our key strategic initiatives;

• eliminating annual merit increases for our employees;

• reducing travel and marketing related expenses; and

• reducing our workforce.

We expect that the employee headcount reductions, and potential associated facility consolidations, will result in total combined restructuring charges during the remainder of 2009 of approximately $15 million, substantially all of which we expect will be recorded in the second quarter of 2009.

While we remain focused on reducing costs to increase our profitability, we intend to continue to make strategic investments we believe are critical to gaining market share and improving operating profitability over the longer-term. Such investments include:

• improving the breadth and competitiveness of our product portfolio through both internal development and strategic acquisitions;

• expanding our reseller channel and developing a network of enterprise reseller partners; and

• expanding our services ecosystem with the addition of strategic services partners.

Continued macroeconomic pressure or additional declines in revenue beyond that which we expect could cause us to reduce or delay these strategic investments and/or take further actions to reduce our operating costs.

Product Releases and Recent Acquisitions

We released Windchill ProductPoint®(our Microsoft SharePoint-based version of Windchill) in January 2009. Windchill ProductPoint is targeted at the small- and medium-size business (SMB) market, which we believe represents a growth opportunity over the longer term.

We continue to pursue acquisitions of strategic companies and technologies that will expand our solution footprint and/or our distribution model. In the first quarter of 2009, we acquired substantially all of the assets of Synapsis Technology, Inc, a provider of software that supports environmental regulatory compliance and "green" product design, for approximately $7.4 million. We do not expect that the acquisition will contribute significantly to revenue or earnings in 2009.

Explanatory Note about a Change in Our Revenue Reporting

In the first quarter of 2009, we began classifying revenue related to sales of our computer-based training products as license and maintenance revenue to better align our reporting with how these training products are

sold to customers. Prior to that, computer-based training product revenue, and maintenance thereon, was classified as consulting and training service revenue and included in total service revenue. Revenue for the first quarter of 2008 has been reclassified to conform to the current classification and the discussion below gives effect to this change.

Impact of Foreign Currency Exchange on Results of Operations

Approximately two-thirds of our revenue and half of our expenses are transacted in currencies other than the U.S. dollar. 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 the first quarter of 2009 were unfavorably impacted as a result of changes in currency exchange rates, primarily the Euro. Conversely, our expenses were lower as a result of changes in these rates. If actual reported results for the first quarter of 2009 had been converted into U.S. dollars based on the corresponding prior year's foreign currency exchange rates, revenue would have been higher by approximately $7.8 million and expenses would have been higher by approximately $7.7 million. The net impact on year-over-year results would have been an increase in operating income of $0.1 million. 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 year over year on a constant currency basis.

Total Operating Results

Total revenue, costs and expenses, operating income and net income for the first
quarters of 2009 and 2008 were as follows:



                                                                Percent Change
                                 Three months ended                        Constant         Three months ended
                                   January 3, 2009          Actual         Currency          December 29, 2007
                                                          (Dollar amounts in millions)
Total revenue                    $             240.4            -  %              3 %       $             241.2
Total costs and expenses                       236.9             5 %              8 %                     226.3

Operating income                                 3.5           (77 )%           (75 )%                     14.9
Other income (expense), net                     (1.0 )                                                      1.6

Income before income taxes                       2.5                                                       16.5
Provision for (benefit
from) income taxes                              (2.2 )                                                      6.6

Net income                       $               4.7                                        $               9.9

Revenue decreased primarily due to a 29% decrease in license revenue and the unfavorable impact of foreign currency exchange rate movements, partially offset by two additional months of revenue in the first quarter of 2009 from the CoCreate business, which we acquired on November 30, 2007, as well as organic growth in maintenance and consulting and training service revenue.

Costs and expenses increased primarily due to higher sales and marketing costs due to planned increases in sales capacity, higher cost of service revenue in support of increased consulting and training services revenue, higher research and development expenses due to investments we made to support expansion of our solutions, two additional months of costs from the CoCreate business and increased amortization of intangible assets associated with our acquisitions, partially offset by the impact of foreign currency exchange rate movements and the absence of restructuring charges.

Operating income decreased due to lower than expected revenue and the cost and expense increases described above.

Details of Results of Operations

We discuss our results of operations for the first quarters of 2009 and 2008 in
detail below, beginning with a table showing certain consolidated financial data
as a percentage of total 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.



                                                       Three months ended
                                                   January 3,     December 29,
                                                      2009            2007
      Revenue:
      License                                              21 %             29 %
      Service                                              79               71

      Total revenue                                       100              100

      Costs and expenses:
      Cost of license revenue                               3                2
      Cost of service revenue                              32               30
      Sales and marketing                                  33               29
      Research and development                             20               17
      General and administrative                            9               10
      Amortization of acquired intangible assets            2                1
      In-process research and development                  -                 1
      Restructuring charges                                -                 4

      Total costs and expenses                             99               94

      Operating income                                      1                6
      Interest and other income (expense), net             -                 1

      Income before income taxes                            1                7
      Provision for (benefit from) income taxes            (1 )              3

      Net income                                            2 %              4 %

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).

In the first quarter of 2009, we began classifying revenue related to sales of our computer-based training products as license and maintenance revenue to better align our reporting with how these training products are sold to customers. Prior to that, computer-based training product revenue, and maintenance thereon, was classified as consulting and training service revenue and included in total service revenue. For the quarter ended December 29, 2007, we reclassified $3.8 million of license revenue and $0.9 million of maintenance revenue related to computer-based training product sales from consulting and training service revenue to license revenue and maintenance revenue, respectively, to conform to the current classification. The table and discussion below gives effect to this reclassification. The amount of computer-based training product revenue varies from quarter to quarter and, for the first quarter of 2009, was below such revenue recorded in the first quarter of 2008.

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

                                                               Percent Change
                                  Three months ended                      Constant         Three months ended
                                    January 3, 2009        Actual         Currency          December 29, 2007
                                                          (Dollar amounts in millions)
License revenue                   $              50.5         (29 )%           (26 )%      $              71.0
Service revenue:
Maintenance revenue                             130.8          14 %             16 %                     114.7
Consulting and training
service revenue                                  59.1           6 %             12 %                      55.5

Total service revenue                           189.9          12 %             15 %                     170.2

Total revenue                     $             240.4          -  %              3 %       $             241.2

Revenue results for the first quarter of 2009 reflect weak license sales. We believe this was primarily attributable to the adverse macroeconomic environment which caused our customers to reduce the amount of their purchases and delay purchasing decisions. Additionally, revenue in the quarter, compared to the year-ago period, was negatively impacted by unfavorable foreign currency exchange rates in most currencies in which we do business. Our maintenance and services businesses, however, performed well in the quarter. Revenue in the first quarter of 2009 also included growth 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 the first quarter of 2008 included only one month of CoCreate revenue.

License Revenue

License revenue in the first quarter of 2009 reflects decreased year-over-year license sales in every region and across most of our major product families which we believe reflects the impact of the macroeconomic environment. License revenue was also unfavorably impacted by approximately $2.2 million due to unfavorable foreign currency exchange rate movements.

Maintenance Revenue

Maintenance revenue represented 54% and 48% of total revenue in the first quarters of 2009 and 2008, respectively. Maintenance revenue growth in the first quarter of 2009 reflects growth in the number of both Pro/ENGINEER and Windchill seats on maintenance year over year across all of our geographic regions. Maintenance revenue growth in the first quarter continued to benefit from CoCreate's maintenance base. Excluding the CoCreate business, we delivered 4% year-over-year growth in maintenance revenues. Increases in maintenance revenue in the first quarter of 2009 were partially offset by unfavorable foreign currency exchange rate movements of approximately $3 million.

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. Accordingly, declines in license revenue will likely have an adverse effect on future maintenance revenue.

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% and 23% of total revenue in the first quarters of 2009 and 2008, respectively.

The increase in consulting and training service revenue in the first quarter of 2009 compared to the first quarter of 2008 was primarily the result of growth in consulting services in Asia-Pacific and North America.

Training revenue, which typically represents about 15% of our total consulting and training services revenue, was up 7% year over year. Consulting revenue, which is primarily related to Windchill implementations, was up 6% year over year.

Although we have pending service engagements that we expect to perform, declines in license revenue, particularly Windchill license revenue, will likely have an adverse effect on future services revenue.

Revenue by Geographic Region



                                                                   Percent Change
                                  Three months ended                          Constant          Three months ended
                                   January 3, 2009            Actual          Currency           December 29, 2007
                                                            (Dollar amounts in millions)
Revenue by region:
North America                    $               83.5             (1 )%             (1 )%       $              84.5
Europe                                           99.4             (2 )%              8 %                      101.6
Asia-Pacific                                     57.5              4 %              (1 )%                      55.1
Revenue by region as a %
of total revenue:
North America                                      35 %                                                          35 %
Europe                                             41 %                                                          42 %
Asia-Pacific                                       24 %                                                          23 %

North America. The decrease in revenue in North America in the first quarter of 2009 compared to the first quarter of 2008 was due to a decrease in license revenue, partially offset by increases in maintenance revenue and consulting and training service revenue. Our reseller channel revenue grew 2% in North America in the first quarter of 2009 as we continue to increase our use of channel partners.

Europe. The first quarter of 2009 benefited from two additional months of CoCreate revenue offset by unfavorable foreign currency exchange rate movements, particularly the Euro. Revenue in the first quarter of 2009 reflects declines in license revenue partially offset by revenue from acquired products, particularly CoCreate products, and higher consulting and training services revenue. European revenue in the first quarters of both 2009 and 2008 included significant consulting service revenue from a single customer. Total revenue from that customer in both quarters did not exceed 5% of total revenue.

Asia-Pacific. Revenue in Asia-Pacific reflects 6% year-over-year growth in the Pacific Rim for the first quarter of 2009, and 3% growth in Japan for the same period. The increase in revenue in the Pacific Rim in the first quarter of 2009 was attributable to growth in Windchill license and consulting and training service revenue and maintenance revenue, partially offset by a decrease in MCAD products license revenue. Growth in Japan was attributable to revenue from acquired products, particularly CoCreate products license revenue, and the favorable impact of changes in the Yen exchange rate relative to the U.S. dollar, partially offset by a decline in organic license revenue across all of our major products.

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 period or in prior periods. License and/or consulting and training service revenue of $1 million or more recognized from individual customers in the first quarter of 2009 was $24.2 million (attributable to nine customers) and in the first quarter of 2008 was $32.0 million (attributable to twelve customers). The decline in revenue with respect to these customers was primarily due to lower license revenue. We attribute the decline in the number of large transactions and the decline in license revenue to the macroeconomic environment.

The current adverse global economic conditions have resulted in longer lead times and smaller deal sizes, which we expect to continue at least for the near term. While we expect fluctuations and uncertainty in the level of customer spending for at least the next year, over the longer term we believe our historically strong performance in large accounts will continue as we believe that customers will continue to invest in PLM solutions relative to other IT spending initiatives and that customers will continue to invest in our PLM solutions due to the strength and breadth of our solutions.

Channel Revenue

We have been building and diversifying our reseller channel to become less dependent on a small number of resellers and to provide the resources necessary for more effective distribution of our products. We believe that using diverse and geographically dispersed resellers that focus on smaller businesses provides an efficient and cost effective means to reach these customers and allows our direct sales force to focus on larger sales opportunities. Revenue from our reseller channel grew 10% in the first quarter of 2009 to $64.8 million from $58.7 million in the first quarter of 2008. This growth was the result of two months of incremental CoCreate revenue and growth in North America. Excluding CoCreate revenue, our channel revenue was down 3% year over year. Our reseller channel was 27% of our total revenue in the first quarter of 2009, compared to 24% of total revenue in the first quarter of 2008. 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

While we intend to continue to invest in the strategic initiatives described in the "Executive Summary" of this section of this report, we remain focused on achieving our operating margin goals. Accordingly, we have taken and are taking steps to improve operating margins. We are implementing the cost reduction initiatives described in the "Executive Summary" to reduce our operating expenses in response to reduced revenue expectations for 2009. We expect to incur the restructuring charges described below in "Restructuring Charges" in connection with some of these initiatives.

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

                                                         Three months ended
                                              January 3,    Percent        December 29,
                                                 2009       Change             2007
                                                    (Dollar amounts in millions)
Costs and expenses:
Cost of license revenue                      $        7.6        58 %      $         4.8
Cost of service revenue                              75.7         7 %               71.0
Sales and marketing                                  79.9        12 %               71.0
Research and development                             48.4        16 %               41.5
General and administrative                           21.4        (9 )%              23.6
Amortization of acquired intangible assets            3.9        34 %                2.9
In-process research and development                    -                             1.9
Restructuring charges                                  -                             9.7

Total costs and expenses                     $      236.9         5 %(1)   $       226.4

(1) On a consistent foreign currency basis, compared to the year-ago period, total costs and expenses for the first quarter of 2009 increased 8%.

The increase in costs and expenses in the first quarter of 2009 compared to the prior year period was primarily due to the following:

• acquisitions completed in 2008, particularly CoCreate in the first quarter of 2008, that added operating costs and increased headcount by an aggregate of more than 250 employees as of the end of 2008 compared to the end of 2007;

• spending to support planned revenue growth, including increasing our services delivery capacity and investments in sales headcount;

• investments in research and development to improve the breadth and competitiveness of our product portfolio; and

• amortization expense, primarily associated with acquired intangible . . .