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 Annual Report.

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

The most significant challenge we faced in 2009 was the adverse global economic environment. While we have seen recent signs, including sequential license growth in the second half of 2009 (particularly in North America), that cause us to believe the economy may be beginning to stabilize, we expect that the economic environment will continue to affect our business at least for the near term and that customers (including those of our resellers) may continue delaying purchase decisions or reducing the size of their purchases.

Another significant factor impacting our 2009 results was the decline in the value of certain non-U.S. currencies in which we transact business, particularly the Euro, relative to the U.S. dollar. Compared to 2008, this adversely affected revenue by $39 million and favorably impacted our reported costs and expenses by $41 million, as amounts earned in these currencies are translated into dollars for reporting purposes. While the impact on reported revenue and expenses was significant, the net impact on operating income was not significant.

We recorded $938 million of total revenue in 2009 compared to $1,070 million in 2008. Most significantly, this reflects a decrease in license revenue of 36% (a decrease of $120 million) in 2009 compared to 2008. Economic conditions and the decline in license revenue had a negative impact on our consulting and training services revenue and maintenance revenue in the second half of 2009 and may continue to negatively impact such revenue in 2010.

Primarily as a result of the revenue decline in 2009 compared to 2008, our operating income declined by $106 million in 2009. Net income declined by $48 million in 2009 primarily due to lower operating income, partially offset by a decrease of $54 million in our income tax provision over the same period.

As a result of our lowered revenue expectations for 2009, we took actions beginning in the second quarter of 2009 that reduced or contained our operating costs, including:

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

• eliminating annual merit pay increases for our employees;

• reducing travel and marketing related expenses; and

• reducing our workforce, resulting in $23 million of restructuring charges.

Although we took these actions to reduce costs, we chose to make investments in research and development in 2009 in support of strategic product development initiatives.

Our balance sheet remained strong with $235 million of cash and an additional $172 million available on our revolving credit facility as of September 30, 2009. Our cash flow from operations was $70 million in 2009, down $152 million from 2008 primarily as a result of lower operating income in 2009. We used $33 million to complete two small acquisitions, $32 million to repay a portion of our borrowings under our revolving credit facility, and $14 million to repurchase shares of our common stock during 2009.

Fiscal Year 2010 Expectations, Strategies and Risks

We expect that the global economy will improve in fiscal 2010 with recovery in Europe and Asia-Pacific lagging recovery in North America. We believe that this will result in license revenue growth in 2010. However, we expect that the steep license revenue decline we saw in 2009 will continue to adversely impact our maintenance and services businesses. As a result, we expect maintenance and services revenue in 2010 to be relatively flat with 2009. Further, our revenue and operating results may continue to be impacted by currency fluctuations.

If economic growth in North America does not improve, or if the economies of countries in Europe or Asia-Pacific are slower to recover than we expect, customers may continue to delay, reduce or forego technology purchases. This could result in further reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition.

Balancing a continuing difficult economic situation with the longer-term opportunity for the business, we are modestly increasing investments in our business that we believe are critical to delivering value to our customers and will help us gain market share, drive faster top line growth and improve operating profitability over the longer term. These investments include:

• investing in research and development to extend our technology leadership position with further enhancements to our product families including Windchill, Pro/ENGINEER, CoCreate, Arbortext, Mathcad and ProductPoint;

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

• enhancing and leveraging the value of our services business through expansion of our services ecosystem, including 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.

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

Explanatory Note about a Correction in our Consolidated Statement of Cash Flows for the Nine Months Ended July 4, 2009

In our consolidated statement of cash flows for the nine months ended July 4, 2009 (as presented in our Quarterly Report on Form 10-Q for the period ended July 4, 2009), we incorrectly classified $13.1 million of windfall tax benefits as a cash flow from operating activities rather than as a cash flow from financing activities. For the nine months ended July 4, 2009, cash provided by operating activities should have been $64.2 million and cash used by financing activities should have been $30.1 million. This error had no impact on our consolidated balance sheet or statement of operations. Because the misclassification is not material to our consolidated financial statements, the previously filed Quarterly Report on Form 10-Q for the period ended July 4, 2009 will not be amended. The corrected consolidated statement of cash flows for the nine months ended July 4, 2009 will be included as a comparable period in our Quarterly Report on Form 10-Q for the period ending July 3, 2010.

Explanatory Note about a Change in Our Revenue Reporting

In the first quarter of 2009, we began classifying revenue from 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 2008, $16.2 million of license revenue and $3.5 million of maintenance revenue has been reclassified from consulting and training service revenue and related costs of $0.9 million have been reclassified from cost of service to cost of license. For 2007, $21.2 million of license revenue and $3.1 million of maintenance revenue has been reclassified from consulting and training service revenue, and related costs of $1.5 million have been reclassified from cost of service to cost of license. This reclassification had no impact on total revenue, operating income or net income. The amounts below for 2008 and 2007 have 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 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 actual reported results were converted into U.S. dollars based on the corresponding prior year's foreign currency exchange rates, 2009 revenue would have been higher by $38.5 million and 2008 revenue would have been lower by $57.8 million, while 2009 expenses would have been higher by $41.0 million and 2008 expenses would have been lower by $37.7 million. The net impact on year-over-year results would have been an increase in operating income of $2.5 million in 2009 and a decrease in operating income of $20.1 million in 2008. 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 reflects 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
                              2009         Actual        Currency          2008          Actual       Currency        2007
                                                              (Dollar amounts in millions)

Total revenue                $ 938.2          (12 )%           (9 )%     $ 1,070.3           14 %            8 %     $ 941.3
Total costs and expenses       918.9           (3 )%            2 %          945.1           11 %            7 %       848.5

Operating income                19.3          (85 )%          (87 )%         125.2           35 %           13 %        92.8
Other income (expense),
net                             (2.1 )                                        (6.3 )                                     6.9

Income before income
taxes                           17.2                                         118.9                                      99.7
(Benefit from) provision
for income taxes               (14.3 )                                        39.2                                     (44.0 )

Net income                   $  31.5                                     $    79.7                                   $ 143.7

2009 compared to 2008

Revenue decreased in 2009 from 2008 primarily due to a decrease in license revenue caused by the adverse economic environment in which customers reduced and delayed purchases and due to the unfavorable impact of foreign currency exchange rate movements on revenue described above.

Costs and expenses decreased in 2009 from 2008 primarily due to the favorable impact of foreign currency exchange rate movements on costs and expenses described above and due to actions taken to reduce our expenses described above in "Executive Overview." These decreases in costs and expenses were partially offset by higher research and development costs as a result of continuing investments to improve our products.

2008 compared to 2007

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

Costs and expenses increased in 2008 from 2007 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.

Refer to "Revenue" and "Costs and Expenses" below for a more detailed discussion.

Revenue

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



                                             Percent Change                            Percent Change
                                                       Constant                                  Constant
                               2009      Actual        Currency          2008       Actual       Currency        2007
                                                            (Dollar amounts in millions)

License revenue               $ 212.7       (36 )%          (34 )%     $   332.4         5 %           -  %     $ 317.3
Service revenue:
Maintenance revenue             499.1        -  %             3 %          501.0        22 %           15 %       411.5
Consulting and training
service revenue                 226.4        (4 )%            1 %          236.9        11 %            5 %       212.5

Total service revenue           725.5        (2 )%            3 %          737.9        18 %           11 %       624.0

Total revenue                 $ 938.2       (12 )%           (9 )%     $ 1,070.3        14 %            8 %     $ 941.3

                                                      Revenue by Category
                                                      as a Percentage of
                                                         Total Revenue
                                                   2009       2008      2007
         License revenue                              23 %      31 %      34 %
         Maintenance revenue                          53        47        44
         Consulting and training service revenue      24        22        22

                                                     100 %     100 %     100 %

Revenue results for 2009 reflect weak license sales as customers reduced the amount of their purchases and delayed purchasing decisions in an adverse macroeconomic environment. Additionally, compared to the prior year, revenue in 2009 was negatively impacted by unfavorable changes in foreign currency exchange rates in most foreign currencies in which we do business. While our maintenance and services businesses performed well in the first half of 2009, economic conditions and declines in license revenue had a negative impact on our maintenance and service businesses in the second half of 2009.

Revenue growth in 2008 reflects revenue from acquired businesses, particularly CoCreate which we acquired on November 30, 2007. Results for 2007 did not include CoCreate revenue, while results for 2008 included ten months of CoCreate revenue ($68.1 million). Total revenue in 2008 benefited from favorable changes in foreign currency exchange rates in foreign currencies in which we do business. The increase in revenue in 2008 also reflects organic growth of our Windchill solutions and growth in maintenance revenue. 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 work to improve our operating margins by developing our reseller and partner channel to offer these services to customers directly. We also experienced lower than anticipated revenue from our computer-based training products.

License Revenue

2009 compared to 2008

License revenue in 2009 decreased year over year in every region and across most of our major product families. License revenue in North America, Europe and Asia-Pacific declined $14.3 million (14%), $63.6 million (49%) and $41.7 million (42%), respectively. Overall license revenue in 2009 was unfavorably impacted by approximately $7.2 million due to unfavorable foreign currency exchange rate movements.

2008 compared to 2007

License revenue in 2008 reflects growth in Europe of $27.4 million (27%), partially offset by an $8.1 million (7%) decline in North America and a $3.9 million (6%) decline in the Pacific Rim. Growth in license revenue in 2008 was primarily due to sales of CoCreate products, which contributed $16.4 million of license revenue, and the impact of favorable currency movements. Changes in currency exchange rates, primarily the Euro, favorably impacted license revenue by $15.4 million in 2008.

In 2008, Pro/ENGINEER new seat license revenue growth of 6% was offset by a 16% 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 PLM products were up 9% in 2008, primarily due to higher sales of Windchill 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.

Maintenance Revenue

Maintenance revenue represents renewals of seats under maintenance and maintenance on new seat licenses. In 2009 and 2008, maintenance revenue was impacted by foreign currency exchange rate movements and sales of acquired products, primarily CoCreate products.

2009 compared to 2008

In 2009, our maintenance revenue was adversely impacted by the global economic climate and significant declines in license revenue. This resulted in a decrease in maintenance revenue, particularly in the second half of 2009, which we expect may continue in the near term. The decline in maintenance revenue in 2009 reflects a 1% decrease in seats under maintenance as of the end of 2009 compared to the end of 2008, including a 2% decrease in Pro/ENGINEER seats and a 1% decrease in Windchill seats. Maintenance revenue in 2009 includes $10.7 million more CoCreate maintenance revenue than 2008 due to the fact that 2008 results included only 10 months of CoCreate revenue whereas 2009 included a full year of CoCreate revenue. Maintenance revenue in 2009 was unfavorably impacted by $19.0 million as a result of foreign currency exchange rate movements.

2008 compared to 2007

The growth in maintenance revenue in 2008 reflects a 28% increase in seats under maintenance as of the end of 2008 compared to the end of 2007, including a 4% increase in Pro/ENGINEER seats and a 28% increase in Windchill seats. In addition, the growth reflects the addition of CoCreate maintenance customers and favorable foreign currency exchange rate movements. CoCreate maintenance contributed $47.1 million of revenue in 2008. Maintenance revenue in 2008 was favorably impacted by $29.5 million as a result of foreign currency exchange rate movements.

Consulting and Training Revenue

Significantly reduced year-over-year license revenue, particularly Windchill license revenue, began to have an adverse impact on services revenue in the third and fourth quarters of 2009. This is due to the fact that new licenses, particularly of our PLM solutions, typically carry new services engagements as well. Although we have pending service engagements that we expect to perform, recent and continuing declines in new licenses sold have had, and may continue to have, an adverse effect on future services revenue.

One of our strategic initiatives is to continue to expand our services ecosystem by adding strategic services partners who can focus on smaller engagements, enabling us to focus on larger engagements. This strategy has resulted in a concentration of our services engagements among a smaller number of customers. Our revenue includes a consulting and training service engagement with a large European customer that has benefited all periods presented.

2009 compared to 2008

The decrease in consulting and training service revenue reflects a $6.3 million (16%) decline in training revenue and a $4.3 million (2%) decline in consulting services revenue. Consulting services revenue in 2009 reflects an $8.0 million (15%) decrease in Asia-Pacific offset by a $4.0 million (5%) increase in Europe.

2008 compared to 2007

The increase in consulting and training service revenue reflects an increase in consulting revenue of $17.6 million (10%) and an increase in training revenue of $6.8 million (21%). 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. Consulting services revenue in Europe and Asia-Pacific was up $12.3 million (17%) and $10.9 million (26%), respectively. These increases were partially offset by a $5.6 million (8%) decline in consulting services 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 $126.8 million, $165.2 million and $155.3 million in 2009, 2008 and 2007, respectively. This revenue represented 29% of total license and consulting and training service revenue in 2009, 2008 and 2007. The declines in this revenue in 2009 were primarily declines in license revenue, which we attribute to the unfavorable macroeconomic environment.

Revenue by Geographic Region



                                             Percent Change                            Percent Change
                                                       Constant                                  Constant
                               2009      Actual        Currency          2008       Actual       Currency        2007
                                                            (Dollar amounts in millions)
Revenue by region:
North America                 $ 351.4        (4 )%           (4 )%     $   364.7        -  %           -  %     $ 365.0
Europe                          373.2       (17 )%           (6 )%         450.3        27 %           15 %       353.4
Asia-Pacific                    213.6       (16 )%          (20 )%         255.3        15 %            9 %       222.9

                              $ 938.2       (12 )%           (9 )%     $ 1,070.3        14 %            8 %     $ 941.3

Revenue by region as a % of total revenue:

                                       2009      2008      2007
                       North America     37 %      34 %      39 %
                       Europe            40 %      42 %      37 %
                       Asia-Pacific      23 %      24 %      24 %

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 PLM solutions and MCAD solutions is relatively unsaturated. Economic growth in the United States slowed in 2008 and macroeconomic conditions deteriorated significantly in the last quarter of 2008 and first half of 2009. In the second half of 2009, we began to see some recovery in North America. We expect the recovery to follow in Europe, followed by Asia-Pacific. The Europe region has a consulting and training service engagement with a large customer that has benefitted all periods presented.

North America

2009 compared to 2008

Revenue in North America in 2009 reflects a year-over-year decline of $14.3 million (14%) in license revenue, partially offset by $3.2 million (2%) growth in maintenance revenue. Our reseller channel revenue declined 7% in North America in 2009.

2008 compared to 2007

Revenue in North America in 2008 reflects year-over-year declines of $8.1 million (7%) in license revenue and $4.2 million (5%) in consulting and training service revenue offset by $11.9 million (7%) growth in maintenance revenue. Our reseller channel revenue grew in excess of 12% in North America in 2008 as we continued to increase our use of channel partners.

Europe

2009 compared to 2008

Revenue in Europe in 2009 reflects year-over-year declines of $63.6 million (49%) in license revenue and $14.3 million (6%) in maintenance revenue offset by $0.8 million (1%) growth in consulting and training service revenue. European revenue in 2009 was unfavorably impacted by foreign currency exchange rate movements, particularly with respect to the Euro. At foreign currency exchange rates consistent with the prior year, revenue in 2009 would have been higher by $49.1 million. Excluding the impact of currency movements, revenue in 2009 reflects a $55.2 million (43%) decline in license revenue, partially offset by a $15.1 million (15%) increase in consulting and training services revenue and a $12.1 million (5%) increase in maintenance revenue.

2008 compared to 2007

Revenue in Europe included growth in both organic revenue across all lines of business and revenue from acquired products, particularly CoCreate products. Organic revenue in Europe in 2008 grew 16% and the sale of CoCreate products and services in Europe contributed $37.5 million of revenue in 2008. Revenue was . . .