10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: December 28, 2002

Commission File Number: 0-18059

Parametric Technology Corporation

(Exact name of registrant as specified in its charter)

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

140 Kendrick Street, Needham, MA 02494

(Address of principal executive offices, including zip code)

(781) 370-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES x        NO ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    YES x        NO ¨

There were 262,584,050 shares of our common stock outstanding on December 28, 2002.

PARAMETRIC TECHNOLOGY CORPORATION

INDEX TO FORM 10-Q

For the Quarter Ended December 28, 2002

	Page Number
Part I – FINANCIAL INFORMATION
Item 1.     Unaudited Financial Statements:
Consolidated Balance Sheets as of December 28, and September 30, 2002	1
Consolidated Statements of Operations for the three months ended December 28, 2002 and December 29, 2001	2
Consolidated Statements of Cash Flows for the three months ended December 28, 2002 and December 29, 2001	3
Consolidated Statements of Comprehensive Income (Loss) for the three months ended December 28, 2002 and December 29, 2001	4
Notes to the Consolidated Financial Statements	5
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.     Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.     Controls and Procedures	33
Part II – OTHER INFORMATION
Item 6.     Exhibits and Reports on Form 8-K	34
Signature	34
Certifications	35

i

PART I – FINANCIAL INFORMATION

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 28, 2002			September 30, 2002
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	183,360		$	178,825
Short-term investments		30,264			27,905
Accounts receivable, net of allowance for doubtful accounts of $5,541 and $6,173		159,197			157,522
Prepaid expenses		32,517			30,726
Other current assets		54,109			53,137
Prepaid income taxes		4,879			52,470
Total current assets		464,326			500,585
Marketable investments		1,657			3,684
Property and equipment, net		82,323			86,535
Goodwill (Note 5)		37,081			36,885
Other intangible assets, net (Note 5)		16,160			17,418
Other assets		39,517			29,852
Total assets	$	641,064		$	674,959
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	25,280		$	23,834
Accrued expenses		41,950			45,366
Accrued compensation and severance		46,382			49,194
Deferred revenue		179,548			197,303
Total current liabilities		293,160			315,697
Other liabilities		68,424			69,334
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued		—			—
Common stock, $0.01 par value; 500,000 shares authorized; 262,584 shares issued		2,626			2,626
Additional paid-in capital		1,644,320			1,644,198
Accumulated deficit		(1,334,907	)		(1,323,517	)
Accumulated other comprehensive loss		(32,559	)		(33,379	)
Total stockholders’ equity		279,480			289,928
Total liabilities and stockholders’ equity	$	641,064		$	674,959

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

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PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three months ended
	December 28, 2002			December 29, 2001
				Restated
				Note 2
Revenue:
License	$	51,477		$	64,343
Service		120,490			131,076
Total revenue		171,967			195,419
Costs and expenses:
Cost of license revenue		2,645			4,364
Cost of service revenue		48,630			51,601
Sales and marketing		81,443			84,511
Research and development		31,900			34,689
General and administrative		15,523			15,370
Amortization of goodwill and other intangible assets (Note 5)		1,481			9,165
Restructuring charges		—			6,089
Total costs and expenses		181,622			205,789
Operating loss		(9,655	)		(10,370	)
Other income (expense), net		(565	)		255
Loss before income taxes		(10,220	)		(10,115	)
Provision for (benefit from) income taxes		1,170			(4,075	)
Net loss	$	(11,390	)	$	(6,040	)
Loss per share (Note 4):
Basic	$	(0.04	)	$	(0.02	)
Diluted	$	(0.04	)	$	(0.02	)

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

2

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three months ended
	December 28, 2002			December 29, 2001
				Restated
				Note 2
Cash flows from operating activities:
Net loss	$	(11,390	)	$	(6,040	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		10,835			18,342
Changes in operating assets and liabilities that provided (used) cash:
Accounts receivable		(1,675	)		14,745
Accounts payable and accrued expenses		(1,927	)		3,025
Accrued compensation and severance		(2,812	)		(16,747	)
Deferred revenue		(17,755	)		(755	)
Income taxes		48,709			(6,497	)
Other current assets and prepaid expenses		(2,763	)		(12,365	)
Other noncurrent assets and liabilities		(11,747	)		733
Net cash provided (used) by operating activities		9,475			(5,559	)
Cash flows from investing activities:
Additions to property and equipment		(4,022	)		(10,095	)
Additions to other intangible assets		(821	)		(411	)
Purchases of investments		(5,952	)		(14,526	)
Proceeds from sales and maturities of investments		5,641			21,633
Net cash used by investing activities		(5,154	)		(3,399	)
Cash flows from financing activities:
Proceeds from issuance of common stock		—			269
Purchases of treasury stock		—			(4,998	)
Net cash used by financing activities		—			(4,729	)
Effect of exchange rate changes on cash		214			(646	)
Net increase (decrease) in cash and cash equivalents		4,535			(14,333	)
Cash and cash equivalents, beginning of period		178,825			217,369
Cash and cash equivalents, end of period	$	183,360		$	203,036

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

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PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

	Three months ended
	December 28, 2002			December 29, 2001
				Restated
				Note 2
Net loss	$	(11,390	)	$	(6,040	)
Other comprehensive income (loss), net of tax provision (benefit):
Foreign currency translation adjustment, net of tax of $0 and $(642), respectively		837			(1,192	)
Unrealized losses on securities and derivatives, net of tax of $0 and $(22), respectively		(17	)		(40	)
Other comprehensive income (loss)		820			(1,232	)
Comprehensive loss	$	(10,570	)	$	(7,272	)

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

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PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Parametric Technology Corporation and its wholly owned subsidiaries and have been prepared by management in accordance with generally accepted accounting principles. Unless otherwise indicated, all references to a year reflect our fiscal year, which ends on September 30. The year-end consolidated balance sheet was derived from our audited financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of our financial position, results of operations and cash flows at the dates and for the periods indicated. The consolidated statement of operations for the three months ended December 29, 2001 reflects the reclassification of reimbursements for out-of-pocket expenses to service revenue (see Note 6) and the consolidated balance sheet as of September 30, 2002 reflects the reclassification of certain intangible assets to goodwill (see Note 5). While we believe that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2002.

The results of operations for the three months ended December 28, 2002 are not necessarily indicative of the results expected for the remainder of the fiscal year.

2.    Restatement

The accompanying unaudited consolidated financial statements for the three months ended December 29, 2001 reflect restatements to the financial statements from our previously filed Form 10-Q for the quarter ended December 29, 2001. In connection with our implementation of a new accounting system in late 2002, we subsequently determined that we had miscalculated the allocation of deferred maintenance revenues from 1999 through 2002, resulting in revenues not being recognized in the proper periods. We identified maintenance revenue recognized during the periods 1999 through 2002 that should have been deferred at September 30, 2002 to be recognized in fiscal 2003 and later periods. We included restated financial statements in our Annual Report on Form 10-K for the year ended September 30, 2002, filed with the Securities and Exchange Commission on January 28, 2003. The financial information for the three months ended December 29, 2001 included in these quarterly financial statements gives effect to the restatement and reflects a reduction in service revenue of $4.5 million for that period.

5

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of the effects of the restatement on our consolidated results of operations is as follows:

	Three months ended
	December 29, 2001
	(Unaudited)
	Previously
	Reported			Restated
Consolidated Statements of Operations:
Service revenue (1)	$	135,534		$	131,076
Operating loss		(5,912	)		(10,370	)
Loss before income taxes		(5,657	)		(10,115	)
Benefit from income taxes		(2,708	)		(4,075	)
Net loss		(2,949	)		(6,040	)
Loss per share:
Basic		(0.01	)		(0.02	)
Diluted		(0.01	)		(0.02	)

(1) Reflects reclassification of reimbursements for out-of-pocket expenses in accordance with EITF Issue No. 01-14. See Note 5.

3.    Restructuring Charges

In the first quarter of 2002 (ended December 29, 2001), we recorded restructuring charges of $6.1 million for severance and termination benefits associated with a reduction in workforce of approximately 70 people who were notified or terminated during the quarter.

The following table summarizes restructuring charges activity for the three months ended December 28, 2002:

	Employee Severance and Related Benefits			Facility Closures and Other Costs			Total
Balance at September 30, 2002	$	2,655		$	35,309		$	37,964
Disbursements		(1,575	)		(1,649	)		(3,224	)
Balance at December 28, 2002	$	1,080		$	33,660		$	34,740

The accrual for facility closures and related costs is included in accrued expenses and other liabilities in the consolidated balance sheet, and the accrual for employee severance and related benefits is included in accrued compensation and severance. We expect to make cash disbursements of approximately $10 million within the next twelve months, primarily related to facility closure costs.

4.    Earnings (Loss) Per Share

Basic earnings (loss) per share (EPS) is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income (loss) by the weighted

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PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options using the “treasury stock” method. The following table presents the calculation for both basic and diluted EPS:

	Three months ended
	December 28, 2002			December 29, 2001
				Restated
				Note 2
Net loss	$	(11,390	)	$	(6,040	)
Weighted average shares outstanding		262,584			260,353
Dilutive effect of employee stock options		—			—
Diluted shares outstanding		262,584			260,353
Basic loss per share	$	(0.04	)	$	(0.02	)
Diluted loss per share	$	(0.04	)	$	(0.02	)

Due to the net losses in the first quarter of 2003 and 2002, the effect of outstanding stock options for the purchase of 72.4 million and 67.3 million shares, respectively, was excluded from the computation of diluted EPS as the effect would have been anti-dilutive. Of those amounts, stock options to purchase 71.9 million and 58.3 million shares for first quarter of 2003 and 2002, respectively, had exercise prices per share that were greater than the average market price of our common stock for the period reported.

5.    Goodwill and Other Intangible Assets

On October 1, 2002, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we stopped amortizing goodwill and adopted a new policy for measuring goodwill and other intangible assets for impairment. We currently operate within a single industry segment – computer software and related services. Within this single industry segment we have two operating segments, our software products operating segment and services operating segment (see Note 6, Segment Information, for further discussion). All of our goodwill and other intangible assets are associated with our software products operating segment. Under our new policy, goodwill and other intangible assets are tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the operating segment below its carrying value. We completed the initial impairment review and concluded that no impairment charge was required as of October 1, 2002.

7

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following goodwill and other intangible assets are included in the accompanying consolidated balance sheets:

	December 28, 2002						September 30, 2002
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Goodwill and intangible assets with indefinite lives (not amortized):
Goodwill	$	139,104	$	102,023	$	37,081	$	138,377	$	101,492	$	36,885
Trademarks		9,827		5,882		3,945		9,767		5,847		3,920
Sub-total		148,931		107,905		41,026		148,144		107,339		40,805
Intangible assets with finite lives (amortized):
Purchased software		28,353		21,353		7,000		28,274		20,249		8,025
Customer lists		8,534		6,560		1,974		8,475		6,086		2,389
Capitalized software		15,138		12,034		3,104		14,317		11,396		2,921
Other		316		179		137		316		153		163
Sub-total		52,341		40,126		12,215		51,382		37,884		13,498
Total goodwill and intangible assets	$	201,272	$	148,031	$	53,241	$	199,526	$	145,223	$	54,303

Upon adoption of SFAS No. 142, we reclassified the net book value of assembled workforce to goodwill in accordance with that standard. The change in the carrying amounts of goodwill and trademarks for the three months ended December 28, 2002 is due to foreign currency translation adjustments related to those asset balances that are recorded in non-U.S. currencies.

The aggregate amortization expense for intangible assets with finite lives recorded for the three months ended December 28, 2002 was $2.1 million, with $1.5 million recorded as amortization of goodwill and other intangible assets and $0.6 million recorded as cost of license revenue. The estimated aggregate future amortization expense for intangible assets with finite lives remaining as of December 28, 2002 is $5.9 million for the remainder of 2003, $5.7 million for 2004, $0.4 million for 2005, and $0.2 million for 2006.

The following table sets forth the net loss for the three months ended December 28, 2002 and December 29, 2001, as adjusted to exclude amortization expense related to goodwill and other intangible assets that are no longer being amortized.

	Three months ended
	December 28, 2002			December 29, 2001
				Restated
				Note 2
Reported net loss	$	(11,390	)	$	(6,040	)
Goodwill amortization		—			5,755
Trademark amortization		—			276
Adjusted net loss	$	(11,390	)	$	(9	)
Loss per share—Basic	$	(0.04	)	$	(0.00	)
Loss per share—Diluted	$	(0.04	)	$	(0.00	)

8

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6.    Recent Accounting Pronouncements

Accounting for Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (“SFAS No. 148”). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123 Accounting for Stock-Based Compensation. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of SFAS No. 148 will be effective for all financial statements for fiscal years ending after December 15, 2002. The disclosure requirements shall be effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. We expect to adopt the disclosure portion of this statement for the quarter ending March 29, 2003. The application of this standard will have no impact on our consolidated financial position or results of operations.

Costs Associated with Exit or Disposal Activities

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred and nullifies EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. In SFAS No. 146, an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for the initial measurement of the liability. SFAS No. 146 was effective for exit or disposal activities initiated after December 31, 2002.

Reimbursements for Out-of-Pocket Expenses

In November 2001, the Emerging Issues Task Force (EITF) issued, effective for financial reporting periods beginning after December 15, 2001, Issue No. 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred requiring that reimbursements by our customers for our out-of-pocket expenses be classified as revenue. Historically, we recorded these reimbursements as a reduction to our cost of service revenues (offsetting the related costs). Beginning in the second quarter of 2002, we were required to adopt the EITF guidance and, accordingly, have reclassified reimbursements for out-of-pocket expenses (including prior comparable periods) to service revenue and correspondingly increased the Cost of Service Revenue. For the three months ended December 29, 2001, reimbursements reclassified to service revenue totaled $1.3 million.

7.    Segment Information

We operate within a single industry segment—computer software and related services. Within this single segment, we have two software product categories: (1) our computer aided design, manufacturing and engineering software (design solutions), including our flagship Pro/ENGINEER^® design software, which provides engineering solutions to our customers, and (2) our internet-based collaboration technologies (collaboration and control solutions), including our Windchill^® software, which provide collaborative information management solutions to our customers.

9

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is our executive officers. We have two operating segments: (1) software products, which includes license and maintenance revenue (including new releases and hot line support); and (2) services, which includes consulting, implementation, education and other technical support revenue. For external reporting purposes, maintenance revenue is included in Service Revenue. We do not allocate certain sales, marketing or administrative expenses to our operating segments, as these activities are managed separately.

The revenue and operating income (loss) attributable to these operating segments are summarized as follows:

	Three months ended
	December 28, 2002			December 29, 2001
				Restated
				Note 2
Revenue:
Software products: (1)
Design solutions	$	108,649		$	121,958
Collaboration and control solutions		23,399			26,211
Total software products revenue		132,048			148,169
Services: (2)
Design solutions		19,706			24,172
Collaboration and control solutions		20,213			23,078
Total services revenue		39,919			47,250
Total revenue:
Design solutions		128,355			146,130
Collaboration and control solutions		43,612			49,289
Total revenue	$	171,967		$	195,419
Operating income (loss): (3) (4)
Software products	$	84,827		$	88,972
Services (4)		2,484			5,759
Distribution expenses (4) (5)		(81,443	)		(88,724	)
Unallocated expenses (4) (6)		(15,523	)		(16,377	)
Total operating loss	$	(9,655	)	$	(10,370	)

(1) Includes maintenance service revenues which, in the consolidated statements of operations, is included in Service Revenue.

(2) In the second quarter of 2002, we reclassified reimbursements for out-of-pocket expenses from costs to revenue in accordance with EITF Issue No. 01-14. See Note 6.

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

(4) In the first quarter of 2002, services included $0.9 million, distribution expenses included $4.2 million and unallocated expenses included $1.0 million, respectively, of the $6.1 million restructuring charge. There were no restructuring charges in the first quarter of 2003.

(5) Distribution expenses represent all sales and marketing expenses including the related portion of restructuring charges.

(6) Unallocated expenses represent all corporate and general and administrative expenses including the related portion of restructuring charges.

10

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	Three months ended
	December 28, 2002		December 29, 2001
			Restated
			Note 2
Revenue:
North America	$	70,958	$	82,050
Europe		53,809		69,496
Asia/Pacific		47,200		43,873
Total revenue	$	171,967	$	195,419

Total long-lived assets by geographic region have not changed significantly from September 30, 2002.

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

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q about our anticipated financial results and long-term 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 certain factors that may cause our actual results to differ materially from these statements are contained below and in “Important Factors That May Affect Future Results” beginning on page 26.

Introduction

As described in Note 2 to our accompanying unaudited consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, we have restated our financial statements for the fiscal years ended September 30, 2001, 2000 and 1999. In connection with the implementation of a new accounting system in late 2002, we subsequently determined that we had miscalculated the allocation of deferred maintenance revenues from 1999 through 2002, resulting in revenues not being recognized in the proper periods. We identified maintenance revenue recognized during the periods 1999 through 2002 that should have been deferred at September 30, 2002 to be recognized in fiscal 2003 and later periods. We included restated financial statements in our Annual Report on Form 10-K for the year ended September 30, 2002, filed with the Securities and Exchange Commission on January 28, 2003. The financial information for the three months ended December 29, 2001 included in the following discussion gives effect to the restatement and reflects a reduction in service revenue of $4.5 million for that period.

A summary of the effects of the restatement on our consolidated results of operations is as follows:

	Three months ended
	December 29, 2001 (Unaudited)
	Previously Reported			Restated Note 2
Consolidated Statements of Operations:
Service revenue (1)	$	135,534		$	131,076
Operating loss		(5,912	)		(10,370	)
Loss before income taxes		(5,657	)		(10,115	)
Benefit from income taxes		(2,708	)		(4,075	)
Net loss		(2,949	)		(6,040	)
Loss per share:
Basic		(0.01	)		(0.02	)
Diluted		(0.01	)		(0.02	)

(1) Reflects reclassification of reimbursements for out-of-pocket expenses in accordance with EITF Issue No. 01-14. See Note 5 of Notes to Consolidated Financial Statements.

Business Overview

Parametric Technology Corporation (PTC), founded in 1985 and headquartered in Needham, MA, develops, markets and supports product lifecycle management (PLM) software solutions that help manufacturers improve the competitiveness of their products and product development processes. Our solutions, which include a suite of

12

mechanical computer-aided design tools (our design solutions) and a range of web-based collaboration technologies (our collaboration and control solutions), enable manufacturing companies to create virtual computer-based products (digital products), collaborate on designs within the enterprise and throughout the extended supply chain, and control the digital product information throughout the product lifecycle. This results in streamlined engineering processes, improved product quality, optimized product information management and reduced cost and time-to-market cycles. Our PLM software solutions are complemented by our experienced services organization, as well as third-party systems integrators, resellers, and other strategic partners, who provide training, consulting, ancillary product offerings, implementation and support to customers worldwide.

Historically, our core business focus has been to provide design solutions to customers through our flagship Pro/ENGINEER^® design software, and we continue to provide our customers with industry-leading product development, manufacturing and engineering design solutions based on this software. License and services revenue associated with our design solutions continues to comprise a majority of our revenue. While the discrete market for computer-aided design solutions has declined, we believe that there is opportunity for growth in the adjacent collaboration and control solutions market and have seen these two markets converge into the broader PLM opportunity. With our full suite of PLM software solutions, we see an opportunity to address several key challenges that manufacturing companies face in their product development processes: more frequent change, heterogeneity of systems, and increased communication inside and outside the manufacturing enterprise to support growing outsourcing and increasingly transparent supply chains. Accordingly, we have channeled significant resources into our Windchill^®-based collaboration and control solutions technology so that, with our PLM software suite, we can provide our customers a complete product development system.

Our PLM software and services solutions permit individuals—regardless of their roles in the commercialization of a product, the computer-based tools they use, or their location geographically or in the supply chain—to participate in and impact the product development process across the manufacturing value chain. The PLM market covers the mechanical computer-aided design, manufacturing and engineering (CAD, CAM and CAE) markets as well as many smaller, previously isolated markets that address various phases of the product lifecycle. These include product data management (PDM), component and supplier management (CSM), visualization and digital mockup, enterprise application integration (EAI), program and project management, as well as manufacturing planning.

All of our software solutions continue to be distributed primarily through our direct sales force. In tandem with our direct sales force, we utilize both an inside sales group, focused predominantly on telesales and existing accounts, and an indirect distribution channel. Our indirect distribution channel has been broadened over the last two years through alliances with third-party systems integrators, resellers and other strategic partners. The systems integrator partners work with our direct sales force to locate and target potential PLM opportunities. The resellers for our design solutions provide greater geographic and small-account coverage.

In an effort to advance a dialog about PLM with customers, PTC has developed a framework that explores the various product development strategies and initiatives that companies use to grow revenue or improve profitability. Called “The way to Product First^™: A Roadmap for Creating and Capturing Value,” it provides a framework for companies looking to improve their business with a centralized focus on creating better products through specific product development strategies, initiatives and competencies. We believe this roadmap provides a clear explanation of the link between the product development process and achieving corporate goals and objectives. As such, the roadmap will be an important tool for demonstrating the value of our PLM solutions.

Our design solutions and our collaboration and control solutions are aligned under a unified product strategy. The strategy allows us to capitalize on existing product synergies and offer fully leveraged solutions that enable the creation, collaboration and control of digital product information across the extended design chain.

DESIGN SOLUTIONS

Our family of engineering design software encompasses a broad spectrum of engineering disciplines essential to the development of virtually all manufactured products, ranging from consumer products to jet aircraft.

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Manufacturers compete on the basis of cost, time to market and product performance criteria, which are significantly affected by the quality and length of the product development process. Our software tools offer high-performance product design solutions for the creation of digital products that improve product quality and reduce time to market by enabling end-users to easily evaluate multiple design alternatives and to share data with bi-directional associativity.

The cornerstone of our design solutions software is Pro/ENGINEER, a mechanical design automation technology based on a robust, parametric, feature-based solid modeler, enabling changes made during the design process to be associatively updated throughout the design. Pro/ENGINEER is complemented by functional options and extensions as well as other products for drafting, design, surfacing, visualization and analysis. These features, along with its “Designed for Windows XP^®” user-interface, allow companies to create more innovative, differentiated and functional products quickly and easily.

In February 2003, we commenced shipment of the production version of Pro/ENGINEER Wildfire^™, the most recent release of our Pro/ENGINEER design solution. Pro/ENGINEER Wildfire is designed to offer design engineers enhanced ease-of-use and the ability to integrate design tools with our collaboration and control solutions. In line with our unified product strategy, Pro/ENGINEER Wildfire supports web-interfaces and Windchill-based interfaces that provide customers with the opportunity to more readily integrate traditional design solutions with collaboration and control solutions. Additionally, Pro/ENGINEER Wildfire offers optional peer-to-peer design conferencing from within the application, enabling enhanced real-time collaboration with a distributed design team.

COLLABORATION AND CONTROL SOLUTIONS

Our collaboration and control solutions are based on our Windchill technology, which has evolved since its introduction in 1998 to address evolving customer needs. Windchill is currently sold in two forms: Windchill Enterprise and our Windchill Link solutions.

Windchill Enterprise consists of a suite of commercial “off-the-shelf” application modules for an engineering environment, consisting principally of the following: a vault for data management to store and retrieve product files; workflow applications for sequencing the flow of product information and change management processes; visualization software for enabling the customer to see a three dimensional view of product data; and, when desired, data adaptors for connecting to standard computer aided design (CAD) software or standard enterprise resource planning (ERP) systems via standard application interfaces. The application modules include standard features and functions with capabilities that include product management, collaboration, and product planning.

Our Windchill Link solutions consist of pre-configured, integrated products that utilize the web-based Windchill architecture, as well as components of our design solutions and our Windchill Enterprise application modules. These point solutions are designed to address specific business-critical manufacturing functions and can be implemented with little configuration in as little as several weeks in accordance with a pre-defined implementation methodology. These solutions include Windchill ProjectLink^™, Windchill PDMLink^™, Windchill PartsLink^™ and Windchill DynamicDesignLink^™.

These design and collaboration and control solutions are part of our overall strategy to provide a complete portfolio of PLM solutions that address specific business challenges that occur at various points in the product lifecycle. They are designed to enable manufacturers to deliver new products to market faster and manage the complexities of product development throughout an evolving supply chain. Going forward, we plan to evaluate periodically the requirements of our customers and general market need for additional solutions.

SERVICES ORGANIZATION

Our software solutions are complemented by service offerings from our services organization, as well as from third-party systems integrators, resellers and other strategic partners. Our services organization is

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committed to meeting the consulting, implementation, education and technical support requirements of our customers in seven major support centers and more than 70 educational facilities worldwide.

Results of Operations

The following is an overview of our results of operations for the first quarters of 2003 and 2002:

• Total revenue was $172.0 million for the first quarter of 2003 compared to $195.4 million for the first quarter of 2002.

• Our year-over-year first quarter revenue declined 12%, reflecting a 20% decrease in software license revenue and an 8% decrease in service revenue.

• Collaboration and control (Windchill-based) solutions revenue decreased to $43.6 million for the first quarter of 2003 from $49.3 million in the first quarter of 2002.

• Design solutions revenue decreased to $128.4 million for the first quarter of 2003 from $146.1 million for the first quarter of 2002.

• There were no restructuring charges in the first quarter of 2003, compared to $6.1 million in the first quarter of 2002.

• For the first quarter of 2003, we incurred a net loss of $11.4 million, compared to a net loss of $6.0 million for the first quarter of 2002.

The following table shows certain consolidated financial data as a percentage of our total revenue for the first quarters of 2003 and 2002:

	December 28, 2002		December 29, 2001
			Restated
			Note 2
Revenue:
License	30	%	33	%
Service	70		67
Total revenue	100		100
Costs and expenses:
Cost of license revenue	2		2
Cost of service revenue	28		26
Sales and marketing	47		43
Research and development	19		18
General and administrative	9		8
Amortization of goodwill and other intangible assets	1		5
Restructuring charges	—		3
Total costs and expenses	106		105
Operating loss	(6	)	(5	)
Other income (expense), net	—		—
Loss before income taxes	(6	)	(5	)
Provision for (benefit from) income taxes	1		(2	)
Net loss	(7	)%	(3	)%

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Revenue

Total Revenue

Our revenue consists of software license revenue and service revenue, which includes software maintenance, consulting, implementation, education and other technical support revenue. Overall, our total revenue decreased 12% in the first quarter of 2003, compared to the first quarter of 2002. The decrease in total revenue in the first quarter of 2003 compared to the first quarter of 2002 reflects a decrease of 12% in both our total collaboration and control (Windchill-based) solutions revenue and in our total design solutions revenue. Total revenue was adversely affected by continued weakness in technology spending in the global manufacturing economy and the other factors described below in Design Solutions Revenue. We derived 59% and 58% of our total revenue from sales to customers outside of North America in the first quarters of 2003 and 2002, respectively.

Total license revenue decreased 20% in the first quarter of 2003, compared to the first quarter of 2002. Service revenue accounted for 70% and 67% of total revenue in the first quarter of 2003 and 2002, respectively. Service revenue, which has a lower gross profit margin than license revenue, decreased by $10.6 million or 8% in the first quarter of 2003, compared to the first quarter of 2002. Service revenue has been, and may continue to be, adversely affected by lower license sales in current and prior periods.

Collaboration and Control (Windchill-based) Solutions Revenue

Total revenue from our collaboration and control (Windchill-based) solutions and related services decreased 12% in the first quarter of 2003, compared to the first quarter of 2002, while remaining at 25% of total revenue for both the first quarters of 2003 and 2002. To meet what we believe is an opportunity for growth in the broader PLM solutions market, we have invested significant resources in our Windchill technology over the past two years. While we continue to derive our overall license and service revenue primarily from our design solutions, we expect our collaboration and control solutions revenue to comprise a growing percentage of total revenue in the future.

License revenue for our collaboration and control software decreased 15% in the first quarter of 2003, compared to the first quarter of 2002. Service revenue related to collaboration and control software decreased 9% in the first quarter of 2003, compared to the first quarter of 2002. Although we experienced a degree of sequential growth in revenue from the fourth quarter of 2002 to the first quarter of 2003, we attribute the decline in our collaboration and control software license revenue from the first quarter of 2002 and prior periods to the reluctance of our customers to consummate large enterprise software purchases in the current unstable economic climate and to lower levels of service activity resulting from planned growth in our partner program (described below).

Since introducing our Windchill technology, we have focused on offering enterprise-wide solutions, which are characterized by longer and less predictable sales cycles and more complex service engagements. While comprising a small portion of our overall revenues, these enterprise offerings still account for the majority of our collaboration and control related revenue. To complement our enterprise offerings, we have introduced Windchill-based point solutions targeted at specific business-critical PLM processes (our Windchill Link solutions). These Windchill Link solutions can be implemented easily and quickly, which may limit service revenue opportunities but should help generate additional license revenue once they begin to gain acceptance. During the first quarter of 2003, these Windchill Link solutions accounted for 40% of our collaboration and control license revenue. We believe these solutions address a growing customer demand for better return on investment. As the requirements of our customers and general market change, we plan to periodically evaluate the need for additional solutions.

We also have entered into business relationships with leading systems integrators and other strategic partners to expand the footprint of our distribution and services efforts. While these initiatives have contributed to recent declines in service revenues and may limit some opportunities for additional service revenue growth within enterprise-level implementations, we believe that entering into these relationships will best serve to expand the coverage of our collaboration and control software solutions, generate additional license and maintenance revenue, and provide necessary expertise for implementation and support of our solutions.

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Design Solutions Revenue

We have been experiencing declines in our design solutions revenue. Comparing the first quarter of 2003 to the first quarter of 2002, total revenue from our mechanical design and engineering software tools and related services (our design solutions) decreased 12%, license revenue for our design solutions software decreased 22%, service revenue related to design solutions decreased 8%, software unit sales for our design solutions decreased by 8%, and the average selling price of this software decreased 15%. Reasons for declines in our design solutions revenue include: the weakness in technology spending in the global manufacturing economy, which has led to a decline in large dollar license transactions with existing customers; increased competition and price pressure from products offering more limited functionality at lower cost; and the difficulty associated with displacing incumbent product design systems in the discrete market for computer-aided design solutions. Design solutions revenue may also have been impacted by customers’ anticipation of Pro/ENGINEER Wildfire, which commenced shipment in the second quarter of 2003.

To address the decline in our design solutions revenue, we are in the process of introducing design solutions packages that have price points, functionality and ease-of-use features that appeal to a broader spectrum of design solution users. Pro/ENGINEER Wildfire, released in February 2003, supports web interfaces and Windchill-based interfaces that will provide customers with the opportunity to more readily integrate traditional design solutions with collaboration and control solutions. The product’s new user interface makes it more competitive with lower-end modeling tools on the market that are known for ease-of-use, while maintaining the powerful functionality of Pro/ENGINEER. The new Web interface, which is unique to Pro/ENGINEER, offers a differentiated design solution to manufacturing companies looking for a complete product development system. While all Pro/ENGINEER maintenance paying customers will receive Pro/ENGINEER Wildfire as a release, we are offering complementary technology packages for both our installed customer base and new customers.

We have been building and diversifying our reseller channel to become less dependent on a small number of distributors and to provide the resources necessary for more effective distribution of our design solutions. We believe that utilizing diverse and geographically dispersed distributors that focus on smaller businesses provides an efficient and cost effective means to reach these customers while allowing our direct sales force to focus on higher impact sales opportunities. Design solutions license sales from our reseller channel were up 19% in the first quarter of 2003, compared to the first quarter of 2002, and we expect that the design solutions revenue that we license through third-party distributors and agents will continue to increase over the next several quarters.

Our largest distributor has been Rand A Technology Corporation. During the first quarter of 2003 we amended our distribution agreements with Rand covering certain territories. Rand’s distribution rights under these agreements will now expire on December 31, 2003 rather than on October 1, 2005. Also during the first quarter of 2003, we appointed Mensch und Maschine Software AG as a major distributor of our design solutions in Europe. We do not expect the revisions to the Rand distribution agreements or the addition of Mensch und Maschine Software AG to have a material impact on our operating results.

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REVENUE BY GEOGRAPHY (IN MILLIONS)

Outlook

Looking forward, our overall performance will depend on: improved economic conditions and the strengthening of technology spending in the global manufacturing sector; our ability to elevate PLM expenditures over other technology spending as a budgetary priority among our customers; our ability to successfully execute our product strategy to provide an integrated, easy to use and rapidly deployable suite of PLM software solutions that enable creation, collaboration and control across the extended design chain with a proven return on investment; and our ability to differentiate our products and services from those of our competitors. Over the course of 2001 and 2002, we released a suite of Windchill Link point solutions targeted for the market that we see developing for overall PLM solutions and have just introduced Pro/ENGINEER Wildfire, the most recent version of our  Pro/ENGINEER design solution. Pro/ENGINEER Wildfire is designed to offer design engineers enhanced ease of use and the ability to integrate design tools with our Windchill Link solutions. This suite of PLM software solutions provides the foundation for our future growth, as these solutions expand upon traditional high-end design products, for which the market has declined. We must accordingly focus on refining and marketing these solutions so that our customers are able to clearly recognize and understand their advantages.

As a key component to informing our customers about PLM, in the first quarter of 2003 we announced: “The way to Product First: A Roadmap for Creating and Capturing Value.” The way to Product First is a detailed product development strategy roadmap for manufacturing companies trying to improve their use of the product development process to create sustainable value. It provides a framework for companies looking to improve their business with a centralized focus on creating better products through specific product development strategies, initiatives and competencies. We believe the roadmap clearly demonstrates the link between the product development process and achieving corporate goals and objectives. As such, the roadmap will be an important tool for demonstrating the value of our PLM solutions to our customers.

Our success also will depend on other factors, including: our ability to optimize our sales coverage and productivity through, among other means, effective utilization and management of our third-party systems integrator partners, resellers, and other strategic partners as well as our own sales teams; our ability to further improve customer satisfaction and to build customer references; and our success at penetrating strategic emerging markets. We believe we have made progress on these initiatives; however, spending in our sector of the economy is weak and prospects remain uncertain. We believe that the weakness in the economy will continue to impact our revenue by causing our customers to reduce or defer their expenditures for software and services.

Additional factors affecting our revenues and operating results are identified under “Important Factors That May Affect Future Results” below.

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Costs and Expenses

Our operating expenses are based on anticipated future revenue and are largely fixed for the short term. Primarily as a result of restructuring initiatives, costs and expenses (excluding amortization of goodwill and other intangible assets and restructuring charges) decreased 5% in the first quarter of 2003 to $180.1 million, compared to $190.5 million in the first quarter of 2002.

Due to lower than expected revenues, we initiated cost cutting measures and reduced our headcount to 3,803 at the end of 2002, down from 4,533 at September 30, 2001. As a result of these headcount reductions and excess facility costs, we recorded restructuring charges of $31.2 million in 2002, including $6.1 million in the first quarter of 2002 (see “Restructuring Charges” below and Note 3 of Notes to Consolidated Financial Statements).

Cost of License Revenue

Our cost of license revenue consists of fixed and variable costs associated with reproducing and distributing software and documentation and the payment of royalties. Cost of license revenue was $2.6 million, or 5% of license revenue, in the first quarter of 2003 and $4.4 million, or 7% of license revenue, in the first quarter of 2002. Cost of license revenue as a percent of license revenue can vary depending on product mix sold in the quarter and the effect of fixed and variable royalties in relation to the level of license revenue.

Cost of Service Revenue

Our cost of service revenue includes costs associated with training, customer support and consulting personnel, such as salaries and related costs, the release of maintenance updates and facility costs. Cost of service revenue as a percentage of service revenue was 40% and 39% in the first quarters of 2003 and 2002, respectively.

Sales and Marketing

Our sales and marketing expenses primarily include salaries and benefits, sales commissions, advertising and marketing programs, travel and facility costs. Sales and marketing costs as a percentage of total revenue were 47% and 43% for the first quarters of 2003 and 2002, respectively; the increased percentage was due to decreased revenue, partially offset by decreased costs. These costs decreased 4%, or $3.1 million, in the first quarter of 2003 compared to the first quarter of 2002. The decrease is primarily due to reduced headcount, facilitated by more cost-efficient sales coverage and the centralization of our pre-sales delivery group through the establishment of “Innovation Centers,” and lower commissions resulting from lower license revenue.

Research and Development

Our research and development expenses consist principally of salaries and benefits, expenses associated with product translations, costs of computer equipment and facility expenses. Research and development expenses as a percentage of total revenue were 19% and 18% for the first quarters of 2003 and 2002, respectively. These costs decreased 8%, or $2.8 million, in the first quarter of 2003, compared to the first quarter of 2002, primarily due to a 7% decrease in headcount as of the end of the first quarter of 2003, compared to the first quarter of 2002.

General and Administrative

Our general and administrative expenses include the costs of our corporate, finance, information technology, human resources and administrative functions. General and administrative expenses as a percentage of total revenue were 9% and 8% for the first quarter of 2003 and 2002, respectively. These costs increased 1%, or $0.2 million, in the first quarter of 2003, compared to the first quarter of 2002. The increase in total general and administrative expenses was due to investments in information technology systems and financial infrastructure, offset by a 10% decrease in headcount as of the end of the first quarter of 2003, compared to the first quarter of 2002, and lower bad debt expense.

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Amortization of Goodwill and Other Intangible Assets

These costs represent the amortization of intangible assets acquired, including developed technology and customer lists and, prior to October 1, 2002, goodwill, trademarks and assembled workforce. In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that, effective October 1, 2002, ratable amortization of goodwill and intangible assets with indefinite useful lives be replaced with periodic impairment tests of those assets and that certain intangible assets other than goodwill be amortized over their useful lives. Beginning October 1, 2002, we no longer amortize goodwill and certain intangible assets with an indefinite useful life, including acquired trademarks. As a result, amortization of goodwill and other intangible assets decreased $7.7 million to $1.5 million in the first quarter of 2003 from $9.2 million in the first quarter of 2002. See Note 5 of Notes to Consolidated Financial Statements.

Restructuring Charges

There were no restructuring charges in the first quarter of 2003, compared to $6.1 million in the first quarter of 2002. The 2002 restructuring charges were related to severance and termination benefits associated with a reduction in workforce of approximately 70 people who were notified or terminated during the quarter.

In the first quarter of 2003, we made cash payments of $3.2 million for restructuring charges. Amounts not yet paid at December 28, 2002 related to restructuring charges were $34.7 million, primarily related to facility reserves, of which we expect to pay approximately $10 million within the next twelve months.

Other Income (Expense), Net

Other income (expense), net includes interest income, costs of hedging contracts, certain realized and unrealized foreign currency transaction gains or losses, and other charges incurred in connection with financing customer contracts. For the first quarter of 2003, we reported other expense of $0.6 million, compared to $0.3 million of income in the first quarter of 2002. The higher net expense is due primarily to lower interest income from lower average cash balances and lower average yields in 2003.

Income Taxes

Our effective tax rate was a provision of 11% for the first quarter of 2003 and a benefit of 40% for the first quarter of 2002. The difference between our effective tax rate and the statutory federal income tax rate of 35% in the first quarter of 2003 was due primarily to U.S. operating losses that could not be benefited and taxes payable in certain foreign jurisdictions. The difference in the first quarter of 2002 was due primarily to the non-deductibility of certain acquisition-related amortization and foreign operating losses that could not be benefited.

Employees

The number of worldwide employees was 3,800 at December 28, 2002, compared to 4,240 at December 29, 2001. The decrease over the prior year is primarily a result of terminations associated with the reductions in workforce in the first and third quarters of 2002.

Critical Accounting Policies

The preparation of our financial statements in conformity with generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Management has made its best estimates and judgments, giving due consideration to materiality, and these

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estimates, judgments and assumptions are continually evaluated based on available information and experience. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. Note A to the Consolidated Financial Statements included in our Form 10-K for the year ended September 30, 2002 describes our significant accounting policies.

Certain of our accounting policies require higher degrees of judgment than others in their application. These include:

Revenue Recognition

We derive revenues from two primary sources: (1) software license revenues and (2) services revenues, which include maintenance, consulting, and education revenues. While the basis for software revenue recognition is substantially governed by the provisions of Statement of Position No. 97-2, “Software Revenue Recognition,” (“SOP 97-2”) and Statement of Position No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” (“SOP 98-9”), both issued by the American Institute of Certified Public Accountants, and SEC Staff Accounting Bulletin 101, “Revenue Recognition in Financial Statements,” we exercise judgment and use estimates in connection with the determination of the amount of software license and services revenues to be recognized in each accounting period.

For software license arrangements that do not require significant modification or customization of the underlying software, we recognize revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred (FOB shipping point or electronic distribution); (3) the fee is deemed fixed or determinable; and (4) collection is probable. Substantially all of our license revenues are recognized in this manner.

Our software is distributed primarily through our direct sales force. However, our indirect distribution channel continues to expand through alliances with resellers. Revenue arrangements with resellers are recognized on a sell-through basis; that is, when we receive persuasive evidence that the reseller has sold the products to an end user customer. We do not offer contractual rights of return, stock balancing, or price protection.

We assess whether fees are fixed or determinable and free of contingencies or significant uncertainties at the time of sale and recognize revenue if all other revenue recognition criteria are met. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer.

Our license arrangements generally do not include acceptance provisions. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period. We record revenue only after customer acceptance, if any, has occurred.

Our software arrangements may include consulting services sold separately under consulting engagement contracts that generally include implementation. These services may be provided completely or partially by independent third-parties experienced in providing such consulting and implementation in coordination with dedicated customer personnel. Revenues from these arrangements are generally accounted for separately from the license revenue because the arrangements qualify as “service transactions” as defined in SOP 97-2. The more significant factors considered in determining whether the revenue should be accounted for separately include the nature of services (i.e., consideration of whether the services are essential to the functionality of the licensed product), degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee.

If an arrangement does not qualify for separate accounting of the license and service transactions, then license revenue is recognized together with the consulting services based on contract accounting using either the percentage-of-completion or completed-contract method as described below. Contract accounting is also applied to any software arrangements: (1) that include milestones or customer specific acceptance criteria which may

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affect collection of the license fees; (2) where services include significant modification or customization of the software or (3) where the license payment is tied to the performance of consulting services.

We estimate the percentage of completion on contracts with fixed or “not to exceed” fees on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours for the project’s completion. If we do not have a sufficient basis to measure progress towards completion, revenue is recognized upon completion of the contract. When total cost estimates exceed revenues, we accrue for the estimated losses immediately.

We generally account for software license revenues included in multiple-element arrangements using the residual method prescribed in SOP 98-9. Under the residual method, the fair value of the undelivered elements (i.e., maintenance, consulting, and education services) based on vendor specific objective evidence (VSOE) is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements (i.e., software license). If evidence of the fair value of one or more of the undelivered services does not exist, revenues are deferred and recognized when delivery of those services occurs or fair value can be established. We determine VSOE of fair value for services revenues based upon our current pricing for those services when sold separately, and VSOE of fair value for maintenance services may additionally be measured by substantive renewal rates. Our current pricing practices are influenced primarily by product type, purchase volume, maintenance term, and customer location. We review services revenues sold separately and maintenance renewal rates on a periodic basis and update, when appropriate, our VSOE of fair value for such services revenues to ensure that it reflects our current pricing. Significant incremental discounts offered in multiple-element arrangements that would be characterized as separate elements are infrequent and are allocated to software license revenues under the residual method. Where a customer receives a subscription based license, license revenue is recognized ratably over the term of the arrangement. In limited circumstances, where the right to use the software license is contingent upon current payments of maintenance, fees for software and maintenance are recognized ratably.

Maintenance services generally include rights to unspecified upgrades (when and if available), telephone support, updates, and bug fixes. Maintenance revenue is recognized ratably over the term of the maintenance contract on a straight-line basis when all the revenue recognition requirements are met. It is uncommon for us to offer a specified upgrade to an existing product; however, in such instances, revenue is deferred until the future upgrade is delivered.

Consulting revenues are generally recognized as the services are performed on a time and materials basis. Consulting revenues for fixed-priced contracts are recognized using the percentage-of-completion method described above. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenue is deferred until the uncertainty is sufficiently resolved. Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in services revenue, with the offsetting expense recorded in cost of services revenue.

Education services include hands-on, web-based and classroom training, and self-evaluation. Education revenues are recognized as the related training services are provided.

Valuation of Long-lived Assets

We assess the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period or a reduction of our market capitalization relative to net book value. When an impairment review is triggered, we measure any impairment based on discounted cash flow projections. Our net goodwill and other intangible assets totaled $53.2 million as of December 28, 2002.

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We adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” effective October 1, 2002 and, as a result, we no longer amortize goodwill and certain intangible assets with an indefinite useful life. As a result of adopting SFAS No. 142, amortization of goodwill and other intangible assets was $7.7 million lower in the first quarter of 2003, compared to the first quarter of 2002. In lieu of amortization, we are required to perform an initial impairment review of our goodwill in 2003 and an annual impairment review thereafter. We completed the initial impairment review and concluded that, as of October 1, 2002, no impairment charge was required. There can be no assurance that at the time subsequent impairment reviews are completed an impairment charge will not be recorded in light of the factors described in the preceding paragraph. If a charge is deemed necessary in the future, it would directly affect net income (loss) for the period in which the charge was taken.

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that it is more likely than not that all or a portion of deferred tax assets will not be realized, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Net deferred tax liabilities at December 28, 2002 were $0.8 million, comprised of deferred tax assets of $118.5 million, a valuation allowance of $96.0 million and deferred tax liabilities of $23.3 million. Our deferred tax assets consist primarily of net operating loss carryforwards. In 2002, we increased our deferred tax valuation allowance and recorded a corresponding $48.0 million charge to income tax expense. The decision to record the valuation allowance required significant judgment. Had we not recorded this valuation allowance, we would have reported materially different results. If the realization of deferred tax assets in the future is considered more likely than not, a reduction in the valuation allowance would increase net income in the period such determination was made.

Allowance for Accounts and Other Receivables

Management judgment is required in assessing the collectability of customer accounts and other receivables, for which we generally do not require collateral. We accordingly maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

Our accounts receivable balance was $159.2 million, net of an allowance for doubtful accounts of $5.5 million as of December 28, 2002. If the financial condition of our customers were to deteriorate, additional allowances may be required resulting in future operating expenses that are not included in the allowance for doubtful accounts. Concentration of credit risk with respect to trade receivables is not significant, except for a receivable from our largest distributor, Rand A Technology Corporation, which accounted for 6% of total receivables as of December 28, 2002. In the first quarter of 2003, we amended our distribution agreements with Rand covering certain territories, and Rand’s distribution rights under these agreements will now expire on December 31, 2003 rather than on October 1, 2005. We do not expect the revisions to the distribution agreement to have a material impact on our operating results.

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Restructuring Charges

We periodically record restructuring charges resulting from restructuring our operations, including consolidations and/or relocations of operations, changes in our strategic plan, or managerial responses to declines in demand, increasing costs, or other environmental factors. The determination of restructuring charges requires management’s judgment and may include costs related to employee benefits, such as costs of severance and termination benefits, and costs for future lease commitments on excess facilities, net of estimated future sublease income. In determining the amount of the facilities charge, we are required to estimate such factors as future vacancy rates, the time required to sublet properties and sublease rates. These estimates will be reviewed and potentially revised on a quarterly basis based on known real estate market conditions and the credit worthiness of subtenants, resulting in revisions to established facility reserves. In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. In SFAS No. 146, an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for the initial measurement of the liability. SFAS No. 146 was effective for exit or disposal activities initiated after December 31, 2002.

Accounting Changes

Accounting policies, guidelines and interpretations related to our Critical Accounting Policies are generally subject to numerous sources of authoritative guidance and are often reexamined by accounting standards rule makers and regulators. These rule makers and/or regulators may promulgate interpretations, guidance or regulations that may result in changes to our accounting policies which could result in a material impact on our financial position and results of operations.

Liquidity and Capital Resources

	December 28, 2002			December 29, 2001
Cash and investments	$	215,281		$	227,720
Cash provided (used) by operating activities		9,475			(5,559	)
Cash used by investing activities		(5,154	)		(3,399	)
Cash used by financing activities		—			(4,729	)
Cash disbursements for restructuring charges		(3,224	)		(16,125	)

Our operating activities, the proceeds from our issuance of stock under stock plans and existing cash and investments provided sufficient resources to fund our employee base, capital asset needs, stock repurchases, acquisitions and financing needs, in all periods presented.

As of December 28, 2002, cash and investments totaled $215.3 million, up from $210.4 million at September 30, 2002. Our investment portfolio is diversified among security types, industries and individual issuers. Our investments are generally liquid and investment grade. The portfolio is primarily invested in short-term securities to minimize interest rate risk and to ensure cash is available to meet requirements as needed. The increase in cash and investments during the first quarter of 2003 consisted primarily of $9.5 million provided by operations, partially offset by $5.2 million used for investing activities.

Cash provided by operations was $9.5 million in the first quarter of 2003, compared to $5.6 million of cash used by operations in the first quarter of 2002. Cash provided by operations was higher in the first quarter of 2003 primarily due to receipt of a U.S. federal income tax refund of $48.2 million and lower cash expenditures for restructuring charges incurred during the quarter ($3.2 million in 2003, compared to $16.1 million in 2002),

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partially offset by a $10.6 million cash contribution to a U.S. defined benefit pension plan in the first quarter of 2003, higher net losses of $11.4 million in the first quarter of 2003 compared to net losses of $6.0 million in the first quarter of 2002, and unfavorable changes in operating assets and liabilities.

Cash used to fund investing activities was $5.2 million in the first quarter of 2003, compared to $3.4 million in the first quarter of 2002. The increase in cash used to fund investing activities in 2003 is due primarily to lower net proceeds from sales and maturities of investments in 2003, partially offset by lower capital expenditures in 2003. In the first quarters of 2003 and 2002, we acquired $4.8 million and $10.5 million, respectively, of capital equipment and other intangible assets. Our expenditures for property and equipment consist primarily of computer equipment, software, office equipment and facility improvements.

Financing activities did not provide or use any cash in the first quarter of 2003, compared to cash used for financing activities of $4.7 million in the first quarter of 2002. The change is primarily because there were no stock repurchases in 2003, compared to $5.0 million used for stock repurchases in 2002. Through December 28, 2002, we had repurchased, at a cost of $366.7 million, a total of 31.1 million shares of the 40.0 million shares authorized by the Board of Directors to be repurchased under our repurchase program. In 2002, 13.5 million shares of treasury stock were retired and restored to the status of authorized but unissued shares. Unless otherwise determined by the Board, any shares of our common stock repurchased in the future will automatically be restored to the status of authorized and unissued shares.

We lease office facilities and certain equipment under operating leases that expire at various dates through 2014, including an operating lease agreement related to our headquarters office in Needham, Massachusetts entered into in 2000, which expires in December 2012, subject to certain renewal rights. These leases qualify for operating lease accounting treatment and, as such, were not included on our balance sheet. At September 30, 2002, our future minimum lease payments, net of sublease income, for the next five years under noncancellable operating leases with remaining terms of one or more years were $40.9 million, $32.2 million, $27.3 million, $21.5 million and $18.5 million for the years 2003 through 2007, respectively, and $80.0 million thereafter. For further information on our operating lease commitments, refer to Note G to the Consolidated Financial Statements included in our Form 10-K for the year ended September 30, 2002.

We believe that existing cash and short-term investments together with cash generated from operations and the issuance of common stock under our stock plans will be sufficient to meet our working capital, financing and capital expenditure requirements through at least the next twelve months. In the first quarter of 2003, we received a U.S. federal income tax refund of $48.2 million and we made a $10.6 million cash contribution to our U.S. defined benefit pension plan. Over the next twelve months, we expect to incur cash disbursements estimated at $10 million for restructuring charges incurred in prior periods. Capital expenditures for 2003 are currently anticipated to approximate capital expenditures incurred during 2002, but could be reduced if our operating results are lower than anticipated. Our cash position could be adversely affected should operating losses continue and should we continue to invest in our collaboration and control business without realizing business growth.

New Accounting Pronouncements

In accordance with recently issued accounting pronouncements, we will be required to comply with certain changes in accounting rules and regulations. See Note 5 of Notes to Consolidated Financial Statements included herein.

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Important Factors That May Affect Future Results

The following are some of the factors that could affect our future results. They should be considered in connection with evaluating forward-looking statements contained in this Quarterly Report on Form 10-Q and otherwise made by us or on our behalf, because these factors are among those that could cause actual results and conditions to differ materially from those projected in forward-looking statements.

I.    Operational Considerations

Our operating results fluctuate within each quarter and from quarter-to-quarter making our future revenues and operating results difficult to predict

While our sales cycle varies substantially from customer to customer, we usually realize a high percentage of our revenue in the third month of each fiscal quarter, and this revenue tends to be concentrated in the later part of that month. Our orders early in a quarter will not generally occur at a rate which, if sustained throughout the quarter, would be sufficient to assure that we will meet our revenue targets for any particular quarter. Moreover, our transition from a one-product to a multi-product company, our increased utilization of indirect distribution channels through alliances with third-party systems integrators, resellers and other strategic partners and our shift in business emphasis to a more solutions-oriented sales process have resulted in more unpredictable and often longer sales cycles for products and services. Accordingly, our quarterly results may be difficult to predict prior to the end of the quarter. Any inability to obtain large orders or orders in large volumes or to make shipments or perform services in the period immediately preceding the end of any particular quarter may cause the results for that quarter to fall short of our revenue targets. In addition, our operating expenses are based on expected future revenue and are relatively fixed for the short term. As a result, a revenue shortfall in any quarter could cause our earnings for that quarter to fall below expectations as well. Any failure to meet our quarterly revenue or earnings targets could adversely impact the market price of our stock.

Other factors that may cause quarter-to-quarter revenue and earnings fluctuations or that may affect our ability to make quarter end shipments include the following:

• our sales incentive structure is weighted more heavily toward the end of the fiscal year, and the rate of revenue growth for the first quarter historically has been lower and more difficult to predict than that for the fourth quarter of the immediately preceding fiscal year;

• variability in the levels of professional service revenues and the mix of our license and service revenues;

• declines in license sales may adversely affect the size of our installed base and our level of service revenue;

• our increased utilization of third parties, such as systems integrators, resellers, strategic partners and application service providers, as distribution mechanisms for our software products and related services, which may lessen the control we have over any particular sales cycle; and

• the outsourcing of our software distribution operations to third party vendors may lesson our ability to undertake corrective measures or alternative operations in the event shipping systems or processes are interrupted or are hampered due to conditions beyond our or our vendor’s control at the end of any particular quarter.

In addition, the levels of quarterly or annual software or service revenue in general, or for particular geographic areas, may not be comparable to those achieved in previous periods.

General economic and political conditions may impact our results

Our revenue growth and profitability depends on the overall demand for software and related services. This demand can be adversely affected by unfavorable economic conditions, as customers reduce or defer spending on

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information technology improvements. We may be especially prone to this as a result of the relatively large license transactions we have historically relied upon. Accordingly, general economic and business conditions may affect our future operating results. If the recent unfavorable economic conditions continue, the economic slowdown has the potential to materially and adversely affect us. A softening demand for software caused by a prolonged slowdown of the economy would result in decreased revenue or lower revenue growth rates.

Political/social events in recent years, including the September 11, 2001 tragedy, have put further pressure on economic conditions both domestically and internationally. The potential turmoil that may result from such events contributes to the uncertainty of the economic climate, further reducing predictability and our ability to develop and implement long-term strategic plans. In light of the foregoing, the impact of these or future similar events may have a materially adverse impact on our business, operating results, and financial position.

Moreover, the uncertain economic conditions have hampered our ability to make measured predictions as to our business, reducing our ability to develop and implement long-term business strategies and models.

We may not be able to implement new initiatives successfully

Part of our success in the past has resulted from our ability to implement new initiatives. Our future operating results will continue to depend upon:

• the successful implementation of a unified PLM product strategy, including the realignment of internal functions, the management of multiple development and distribution processes and effective mitigation of disruption that may result from organizational change;

• our ability to deliver an integrated and comprehensive suite of solutions and to capitalize on existing synergies through a common product strategy;

• our ability to appropriately allocate and implement cost cutting measures that increase profitability while maintaining adequate resources for effective and coordinated organizational performance;

• the success of our sales coverage reorganization and optimization initiatives, including:

— the effectiveness of our organizational sales model,

— the ability of our sales representatives to learn and sell our products,

— our ability to attract and efficiently utilize a diverse group of geographically dispersed distributors, and

— our ability to broaden and effectively utilize indirect distribution channels through alliances with systems integrators, resellers, strategic partners and application service providers;

• our ability to anticipate and meet evolving customer requirements in the PLM arena and successfully deliver products and services at an enterprise level;

• our ability to develop rapidly implementable point solutions that adequately address specific business challenges;

• our ability to identify and penetrate additional industry sectors that represent growth opportunities; and

• our ability to execute on customer satisfaction initiatives and programs in order to retain our customer base and to develop customer references upon which we can expand that base.

We are dependent on key personnel whose loss could cause delays in our product development and sales efforts

Our success depends upon our ability to attract and retain highly skilled technical, managerial and sales personnel. Competition for such personnel in the high technology industry is intense. We assume that we will continue to be able to attract and retain such personnel. The failure to do so, however, could have a material adverse effect on our business.

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We must continually modify and enhance our products to keep pace with changing technology, and we may experience delays in developing and debugging our software

We must continually modify and enhance our products to keep pace with changes in computer software, hardware and database technology, as well as emerging Internet standards. Our ability to remain competitive will depend on our ability to:

• enhance our current offerings and develop new products and services that keep pace with technological developments through:

— internal research and development,

— acquisition of technology, and

— strategic partnerships;

• meet evolving customer requirements, especially ease-of-use;

• provide adequate funding for development efforts; and

• license appropriate technology from third parties for inclusion in our products.

Also, as is common in the computer software industry, we may from time to time experience delays in our product development and “debugging” efforts. Our performance could be hurt by significant delays in developing, completing or shipping new or enhanced products. Among other things, such delays could cause us to incorrectly predict the fiscal quarter in which we will realize revenue from the shipment of the new or enhanced products and give our competitors a greater opportunity to market competing products.

We may be unable to price our products competitively or distribute them effectively

Our success is tied to our ability to price our products and services competitively and to deliver them efficiently, including our ability to:

• provide a range of products with functionality that our customers want at prices they can afford;

• build appropriate direct distribution channels;

• utilize the Internet for distribution; and

• build appropriate indirect distribution channels.

We may be adversely affected by a decline in demand for PLM solutions

We currently derive our license and service revenues from a group of related PLM software products and services and we expect this to continue into the future. As a result, factors affecting the demand for PLM software solutions or pricing pressures on this single category could have a material adverse effect on our financial condition and results of operations.

We depend on sales within the discrete manufacturing market

A large amount of our revenues are related to sales to customers in the discrete manufacturing sector. A decline in spending in this sector could have a material adverse effect on our financial condition and results of operations.

We depend on sales from outside the United States that could be adversely affected by changes in the international markets

A significant portion of our business comes from outside the United States. Accordingly, our performance could be adversely affected by economic downturns in Europe or the Asia/Pacific region. Another consequence of

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significant international business is that a large percentage of our revenues and expenses are denominated in foreign currencies that fluctuate in value. Although we may enter into foreign exchange forward contracts and foreign exchange option contracts to offset a portion of the foreign exchange fluctuations, unanticipated events may have a material impact on our results. Other risks associated with international business include:

• changes in regulatory practices and tariffs;

• staffing and managing foreign operations, including the difficulties in providing cost-effective, equity based compensation to attract skilled workers;

• longer collection cycles in certain areas;

• potential changes in tax and other laws;

• greater difficulty in protecting intellectual property rights; and

• general economic and political conditions.

We may not be able to obtain copyright or patent protection for the software products we develop or our other trademarks

Our software products and our other trademarks, including our company names, product names and logos, are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability contained in our agreements with other parties. Despite these measures, there can be no assurance that the laws of all relevant jurisdictions will afford adequate protection to our products and other intellectual property. The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. While we have not, to date, had any significant claims of this type asserted against us, there can be no assurance that someone will not assert such claims against us with respect to existing or future products or other intellectual property or that, if asserted, we would prevail in such claims. In the event a lawsuit of this type is filed, it could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not we ultimately prevail. Certain of our products also contain technology developed and licensed from third parties. We may likewise be susceptible to infringement claims with respect to these third party technologies.

II.    Design Solutions Related Considerations

Increasing competition in the computer aided design marketplace may reduce our revenues

There are an increasing number of competitive design products. Some competitive products have reached a level of functionality whereby product differentiation is less likely, in and of itself, to dislodge incumbent design systems, given the training and other startup costs associated with system replacement. We recently have introduced the next major release of our design solutions, Pro/ENGINEER Wildfire, which focuses on PLM interoperability and ease-of-use. Although Pro/ENGINEER Wildfire and other initiatives are designed to address these competitive pressures, increased competition and further market acceptance of competitive products could have a negative effect on pricing and revenue for our products, which could have a material adverse affect on our results.

In addition, our design software is capable of performing on a variety of platforms. Several of our competitors focus on single platform applications, particularly Windows-based platforms. There can be no assurance that we will have a competitive advantage with multiple platform applications.

We continue to enhance our existing product line by releasing updates as well as new products/modules. Our competitive position and operating results could suffer if:

• we fail to anticipate or to respond adequately to customer requirements or to technological developments, particularly those of our competitors;

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• we delay the development, production, testing, marketing or availability of new or enhanced products or services;

• customers fail to accept such new or enhanced products or services; or

• we fail to execute our common product strategy initiative.

Growth in the computer aided design industry has slowed

Growth in certain segments of the computer aided design solutions industry has slowed and, coupled with decreased functional differentiation among flexible engineering tools, may adversely affect our ability to penetrate the market for new customers and recapture our market share. Over the long term, we believe our emphasis on PLM solutions will allow us to differentiate our design solutions from the competition and invigorate sales of those products. However, the strategy may not be successful or may take longer than we plan. There could be a material adverse affect on our operating results in any quarter if these assumptions prove to be incorrect.

III.    Collaboration and Control Solutions and Overall PLM Related Considerations

We are attempting to capitalize on a web-based, business-to-business market opportunity known as Product Lifecycle Management (PLM). It may be that our assumptions about this market opportunity are wrong, which could adversely affect our results

We have identified PLM as a new market opportunity for us, and have devoted significant resources toward capitalizing on that opportunity. Our collaboration and control (Windchill-based) solutions, together with our design solutions, allow us to offer a suite of PLM solutions and related services targeted at this market. This suite includes software and services that utilize Internet technologies to permit our customers’ employees, suppliers and customers to collaboratively develop, build, distribute and manage products throughout their entire lifecycle. Because the market for software products that allow companies to collaborate on product information on an enterprise-wide level is newly emerging and because companies have not traditionally linked customers and suppliers in this process directly, we cannot be certain as to the size of this market, whether it will grow, or whether companies will elect to utilize our products rather than attempt to develop applications internally, acquire them from other sources or to forego PLM initiatives altogether.

In addition, companies that have already invested substantial resources in other methods of sharing product information in the design-through-manufacture process may be reluctant to adopt a new approach that may replace, limit or compete with their existing systems or methods. We expect that we will continue to need to pursue intensive marketing and sales efforts to educate prospective customers about the uses and benefits of our products. Demand for and market acceptance of our products will be affected by the success of those efforts.

Our Windchill technology, which is central to our PLM strategy, is not yet well established in the marketplace

The success of our PLM strategy will depend in large part on the ability of our Windchill-based solutions to meet customer expectations, especially with respect to:

• measuring and understanding the benefits of Windchill, including return on investment and value creation;

• ease and rapidity of installation;

• ease of use;

• full capability, functionality and performance;

• ability to support a large, diverse and geographically dispersed user base; and

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• quality and efficiency of the services we and our partners perform relating to implementation and configuration.

The software is still relatively new. If our customers cannot successfully deploy large-scale implementation projects or if they determine that we or our partners are unable to accommodate large-scale deployments, our operating results may be affected.

Our PLM point solutions strategy is developing

We are pursuing a strategy to provide a series of easily deployable PLM solutions that address specific business challenges that arise at points along the product lifecycle timeline. These PLM point solutions utilize our web-based Windchill architecture as well as components of our design solutions. Our strategy is designed to solve customers’ problems relating to costly, large scale implementation projects by providing pre-configured, fully integrated applications that can be implemented quickly. If we are unable to provide these solutions or are unable to meet customer expectations, our overall revenue may be adversely affected.

We utilize third parties, such as systems integrators, resellers and strategic partners for the distribution and implementation of Windchill-based software solutions, which makes it more difficult to manage the sales process

Our PLM enterprise level solutions may require large-scale organizational implementations that in today’s marketplace are often performed by third parties. We have entered into and are currently developing additional relationships with third parties and intend to continue to do so. Using third parties to both implement and promote our products can result in a reduction in our control over the sales process and the delivery of services to our customers. In addition, the successful utilization of third parties will depend on:

• our ability to enter into agreements with appropriate third parties that can deliver our products in appropriate markets;

• the third party’s ability to learn, promote and implement our products; and

• the effective coordination and management of joint activities (including sales, marketing, development, implementation and support) in order to deliver products and services that meet customer requirements.

Our utilization of third party service providers and our PLM point solutions offerings may crowd out service revenue

Our utilization of these third party service providers, as well as our introduction of PLM point solutions, which provide customers more autonomy over solving their problems, may have an adverse affect on our service revenue. We believe that entering into these relationships and offering these solutions will best serve to expand the coverage of our PLM software solutions, generate additional license revenue and provide the necessary expertise for their implementation and support. If these assumptions prove to be inaccurate or projected additional license revenue and/or broader market coverage does not materialize, our revenues may be adversely affected.

PLM software solutions must meet our customer’s expectations for integration with existing systems to generate references for new accounts

Our PLM software must integrate with our customers’ and their partners’ existing computer systems and software programs. Ours is one of the first PLM solutions, and thus many customers will be facing these integration issues for the first time, particularly in the context of collaborating with customers, supply chain partners and other members of the extended enterprise. Our customers could become dissatisfied with our products or services if systems integration proves to be difficult, costly or time consuming, and thus our operating results may be adversely affected. Moreover, due to the emerging nature of the industry and

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technology, the sales process relies in large part on customer references. Accordingly, if our customers become dissatisfied, future business and revenues may be adversely affected.

Competition may increase, which may reduce our profits and limit or reduce our market share

The market for our PLM software solutions is new, highly fragmented, rapidly changing and increasingly competitive. We expect competition to intensify, which could result in price reductions for our products and services, reduced gross margins and loss of market share. Our primary competition comes from:

• larger, more well-known enterprise software providers who may seek to extend the functionality of their products to encompass PLM or who may develop and/or purchase PLM technology; and

• other vendors of engineering information management software.

In addition, our services organization may face increasing competition for follow-on consulting, implementation and education services from other third-party consultants and service providers.

If the Internet does not continue to develop or reliably support the demands placed on it by electronic commerce, we may experience a loss of sales

Our success depends upon continued growth in the use of the Internet as a medium of commerce. Although the Internet is experiencing rapid growth in the overall number of users, this growth is a recent phenomenon and may not continue. Furthermore, the use of the Internet for commerce is still relatively new. As a result, a sufficiently broad base of companies and their supply chain may not adopt or continue to use the Internet as a medium of exchanging product information. Our PLM strategy would be seriously harmed if:

• the infrastructure for the Internet does not efficiently support enterprises and their supply chain partners;

• the Internet does not create a viable commercial marketplace, thereby inhibiting the development of electronic commerce and reducing the demand for our products; or

• concerns over the secure transmission of confidential information over public networks inhibit the growth of the Internet as a means of collaborating across enterprises and/or conducting commercial transactions.

Our PLM strategy will also be seriously harmed if the Internet infrastructure is not able to support the demands placed on it by increased usage or the limited capacity of networks to transmit large amounts of data, or if delays in the development or adoption of new equipment standards or protocols required to handle increased levels of Internet activity, or increased governmental regulation, cause the Internet to lose its viability as a means of communication between manufacturers and their customers and supply chain partners.

Certain of our Windchill-based solutions provide the ability to utilize PLM capabilities on Internet exchanges, portals and marketplaces. Accordingly, their success will be highly dependent upon the success of the Internet as a viable collaboration medium and on our successful development and integration of the technologies necessary to offer tools for exchanges, portals, and other forms of Internet marketplaces that are acceptable to customers and suitable for the evolving nature of the Internet.

IV.    Other Considerations

Our stock price has been highly volatile; this may make it harder to resell your shares at the time and at a price that is favorable to you

Market prices for securities of software companies have generally been volatile. In particular, the market price of our common stock has been and may continue to be subject to significant fluctuations.

In addition, our expanded focus on delivering web-based solutions may cause us to be viewed, in part, as an Internet company. Until the third quarter of 2000, the trading prices of Internet stocks in general were unusually high under conventional valuation standards such as price-to-earnings and price-to-sales ratio. Since then, they have experienced fluctuations unrelated or disproportionate to the operating performance of these companies.

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The trading prices and valuations of these stocks, and of ours, may not be predicted. Negative changes in the public’s perception of the prospects of Internet or e-commerce companies, or of PTC as an Internet company, could depress our stock price regardless of our results.

Also, traditionally, a large percentage of our common stock has been held by institutional investors. Purchases and sales of our common stock by certain of these institutional investors could have a significant impact on the market price of the stock. For more information, please see our proxy statement with respect to our most recent annual meeting of stockholders and Schedules 13D and 13G filed with the SEC with respect to our common stock.

Short-term liquidity

Should losses continue, our liquidity position may be adversely affected, which may lead to a diminished ability to implement strategic initiatives and/or make investments in our operational infrastructure.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Other than as disclosed in this report on Form 10-Q, there have been no significant changes in our market risk exposure as described in Item 7A: “Quantitative and Qualitative Disclosures About Market Risk” to our 2002 Annual Report on Form 10-K.

ITEM 4.  CONTROLS AND PROCEDURES

(a)    Evaluation of disclosure controls and procedures.    Our chief executive officer and our acting chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this quarterly report, have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that the information required to be disclosed in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the requisite time periods.

(b)    Changes in internal controls.    There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the Evaluation Date.

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PART II—OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)    Exhibits

10.1	Executive Agreement with C. Richard Harrison, Chief Executive Officer, dated January 21, 2003.
10.2	Form of Executive Agreement with certain Executive Officers, together with schedule identifying each Executive Officer.
99.1	Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.

(b)    Reports on Form 8-K

Form 8-K dated November 12, 2002 reporting that on November 12, 2002, Edwin J. Gillis resigned as the company’s Chief Financial Officer and that, effective immediately, Thomas L. Beaudoin was named acting Chief Financial Officer.

SIGNATURE

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

PARAMETRIC TECHNOLOGY CORPORATION
By:	/s/    THOMAS L. BEAUDOIN
	Thomas L. Beaudoin Senior Vice President, Finance and Acting Chief Financial Officer (Principal Financial Officer)

Date: February 11, 2003

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CERTIFICATIONS

I, C. Richard Harrison, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Parametric Technology Corporation;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.    The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:    February 11, 2003

/s/    C. RICHARD HARRISON        

C. Richard Harrison

Chief Executive Officer

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I, Thomas L. Beaudoin, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Parametric Technology Corporation;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.    The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:    February 11, 2003

/s/    THOMAS L. BEAUDOIN        

Thomas L. Beaudoin

Acting Chief Financial Officer

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EX-10.1

EXHIBIT 10.1

EXECUTIVE AGREEMENT

This Agreement is entered into as of the 21st day of January, 2003 between Parametric Technology Corporation, a Massachusetts corporation (the “Company”), and C. Richard Harrison, (the “Executive”), and supersedes the Agreement dated August 19, 1994 with the Executive, as amended and restated to date (the “Prior Agreement”).

WHEREAS, the Executive is the Chief Executive Officer and President of the Company; and

WHEREAS, to provide incentive for the Executive to remain with the Company, the Company desires to make the following arrangements with the Executive concerning certain payments and benefits to be provided to the Executive in the event of the termination of his employment without cause or in the event of certain other events specified herein;

NOW, THEREFORE, the Company and the Executive hereby agree as follows:

1.    Termination Notice.    The Company agrees that it may not terminate the employment of the Executive unless (i) it does so for Cause (as defined below) or (ii) the Company has delivered to the Executive a written notice of such termination of employment (the “Termination Notice”) at least eighteen (18) months in advance of the effective date thereof. The duties of the Executive during the period from the date of delivery of a Termination Notice until the termination of his employment shall be as determined by the Board of Directors.

2.    Salary and Benefits.

(a)    During the period from the date of delivery of a Termination Notice (the “Notice Date”) until the earlier of (i) the date eighteen (18) months after the Notice Date, or (ii) the date the Executive commences employment with another company or organization, it being agreed that the Executive shall immediately notify the Company of such event (the “Severance Period”), and so long as the Executive is in compliance with the terms of this Agreement and any material provision of any other written agreement with the Company, the Company shall (A) pay to the Executive, per normal payroll practice, a salary (the “Severance Period Salary”) at a rate equal, on an annualized basis, to one and one third (1 1/3) times the highest annual salary (excluding any bonuses) in effect with respect to the Executive during the six-month period immediately preceding the Termination Notice and (B) provide the Executive with employee benefits, including health insurance, dental insurance, life insurance, participation in the Company’s 401(k) plan and Employee Stock Purchase Plan and short-term and long-term disability coverage, pursuant to the same terms and conditions under which the Company makes such benefits available to employees generally, all subject to the terms and conditions of the respective plans and applicable law (collectively, the “Severance Period Benefits”).

(b)    In the event that a Change in Status (as defined below) of the Executive occurs prior to the Notice Date, and so long as the Executive is in compliance with the terms of this Agreement and any material provision of any other written agreement with the Company, the Company shall pay the Severance Period Salary and provide the Severance Period Benefits to the Executive during the period from the effective date of the Change in Status until the earlier of (i) the date eighteen (18) months after such date or (ii) the date the Executive commences employment with another company or organization, it being agreed that the Executive shall immediately notify the Company of such event. Such compensation and benefits, and those provided under Section 3, shall be in lieu of any other compensation and benefits to the Executive with respect to any continuing employment during such period, and the Company shall have no obligation to make any payments or provide any benefits to the Executive under Section 2(a) above.

3.    Stock Options and Other Equity Awards.

(a)    Effective upon (i) a Change in Control (as defined below) of the Company or (ii) the death or Disability (as defined below) of the Executive; (A) all outstanding stock options and stock appreciation rights (“SARs”) granted under any Stock Plan (as defined below) held by Executive shall immediately become exercisable in full, (B) all restrictions applicable to restricted stock held by Executive under any Stock Plan shall immediately lapse, and (C) all other criteria for vesting of any award granted under any Stock Plan and held by Executive shall be deemed to have been met, notwithstanding any vesting schedule or other provisions to the contrary in the agreements evidencing such stock options, SARs, restricted stock or other award. The Company and Executive hereby agree that such agreements are hereby and will be deemed amended to give effect to this provision.

(b)    Effective upon (i) the Notice Date or (ii) a Change in Status of the Executive: (A) all outstanding stock options and SARs granted under any Stock Plan held by Executive shall become exercisable for such number of shares of common stock for which such stock options would have been exercisable had the Executive’s employment with the Company continued for one year following the Notice Date or the effective date of the Change in Status, as the case may be, (B) restrictions applicable to restricted stock held by Executive under any Stock Plan shall lapse with respect to such number of shares as would be applicable had the Executive’s employment with the Company continued for one year following the Notice Date or the effective date of the Change in Status, as the case may be, and (C) all other criteria for vesting of any award granted under any Stock Plan and held by Executive shall be deemed to have been met, notwithstanding any vesting schedule or other provisions to the contrary in the agreements evidencing such stock options, SARs, restricted stock or other award. Thereafter, the Executive shall continue during the remainder of the Severance Period to vest in any remaining unvested option, SAR or restricted stock grant in accordance with its terms. The Company and Executive hereby agree that such agreements are hereby and will be deemed amended to give effect to this provision.

4.    Definitions.

(a)    The Company shall be deemed to have terminated the Executive’s employment for “Cause” if it does so (i) for the Executive’s willful and continued failure to substantially perform his duties to the Company (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness or any such actual or anticipated failure after a Change in Status of the Executive), provided that the Company has delivered a written demand for substantial performance to the Executive specifically identifying the manner in which the Company believes that the Executive has not substantially performed his duties and that the Executive has not cured such failure within 30 days after such demand, (ii) for willful conduct by the Executive which is demonstrably and materially injurious to the Company, (iii) because the Executive has been convicted of, or has pled guilty or nolo contendere to, a felony or (iv) for the Executive’s willful violation of any material provision of any confidentiality, nondisclosure, assignment of invention, noncompetition or similar agreement entered into by the Executive in connection with his employment by the Company. For purposes of this paragraph, no act or failure to act on the Executive’s part shall be deemed “willful” unless done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interests of the Company.

(b)    A “Change in Control” of the Company shall mean the occurrence of any of the following events: (i) any “person”, as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock in the Company) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities (other than as a result of acquisitions of such securities from the Company); (ii) individuals who, as of the date

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hereof, constitute the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company) shall be, for purposes of this Agreement, considered to be a member of the Incumbent Board; (iii) the consummation of a merger, share exchange or consolidation of the Company or any subsidiary of the Company with any other corporation (each a “Business Combination”), other than (A) a Business Combination that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of another entity) beneficial ownership, directly or indirectly, of a majority of the combined voting power of the Company or the surviving entity (including any person that, as a result of such transaction, owns all or substantially all of the Company’s assets either directly or through one or more subsidiaries) outstanding immediately after such Business Combination or (B) a merger, share exchange or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “person” (as defined above) is or becomes the beneficial owner of 50% or more of the combined voting power of the Company’s then outstanding securities; or (iv) the stockholders of the Company approve (A) a plan of complete liquidation of the Company; or (B) an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets but excluding a sale or spin-off of a product line, business unit or line of business of the Company if the remaining business is significant as determined by the Company’s board of directors in its sole discretion.

(c)    A “Change in Status” of the Executive shall mean the occurrence, without the Executive’s written consent and without Cause, of any of the following circumstances (unless such circumstances constitute an isolated, insubstantial and inadvertent action not taken in bad faith and are fully remedied by the Company within 30 days after receipt of notice thereof by the Executive): (i) any diminution or change in a manner adverse to the Executive of (A) his title, office or position with the Company, (B) his salary or other benefits, or (C) his duties, responsibilities or employment condition, (ii) the Company’s requiring the Executive (without his consent) to be based at any office or location more than fifty (50) miles from the location of his principal office on the date of this Agreement, or (iii) the failure by the Company to pay to the Executive any portion of his compensation within ninety (90) days after such compensation is due.

(d)    “Disability” shall mean such physical or mental incapacity as to make the Executive unable to perform the essential functions of his employment duties for a period of at least 60 consecutive days with or without reasonable accommodation. If any question shall arise as to whether during any period the Executive is so disabled as to be unable to perform the essential functions of his employment duties with or without reasonable accommodation, the Executive may, and at the request of the Company shall, submit to the Company a certification in reasonable detail by a physician selected by the Company to whom the Executive or the Executive’s guardian has no reasonable objection as to whether the Executive is so disabled or how long such disability is expected to continue, and such certification shall for the purposes of this Agreement be conclusive of the issue. The Executive shall cooperate with any reasonable request of the physician in connection with such certification. If such question shall arise and the Executive shall fail to submit such certification, the Company’s determination of such issue shall be binding on the Executive.

(e)    A “Stock Plan” of the Company shall mean any stock option or equity compensation plan of the Company in effect at any time, including without limitation the 1987 Incentive Stock Option Plan, the 1997 Incentive Stock Option Plan, the 1997 Nonqualified Stock Option Plan and the 2000 Equity Incentive Plan.

5.    Taxes.

(a)    Withholding.    All payments to be made to the Executive under this Agreement will be subject to any required withholding of federal, state and local income and employment taxes.

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(b)    Payment Limitation.    Notwithstanding anything in this Agreement to the contrary, if the Company determines, based on the opinion of its independent accountants serving as such immediately prior to the Change in Control (the “Accounting Firm”), that any of the payments provided for in this Agreement, together with any other payments that must be included in such determination, would constitute an “Excess Parachute Payment” (as defined in Section 280G (or any successor provision thereof) of the Internal Revenue Code of 1986, as amended (the “Code”), and proposed and final regulations thereunder), the payments pursuant to this Agreement shall be reduced to the maximum amount that would permit a determination that the Executive has not received an Excess Parachute Payment (the “Maximum Amount”) unless the after-tax amount payable to the Executive hereunder without regard to the foregoing limitation (“Uncapped After-Tax Amount,” as defined below) exceeds the after-tax amount payable to the Executive with regard to such limitation (“Capped After-Tax Amount,” as defined below) by 10% or more. Any such determination or reduction in amounts payable pursuant to this Agreement shall be made in accordance with the following provisions.

(i)    For purposes of determining whether the amounts payable to the Executive pursuant to this Agreement shall be reduced to the Maximum Amount, the following terms shall have the meaning indicated.

(A)    The “Uncapped After-Tax Amount” shall be equal to the sum of the amounts payable pursuant to this Agreement (without regard to this paragraph 5(b)) and pursuant to all benefit and compensation plans and arrangements that must, pursuant to the Code, be included in determining whether an Excess Parachute Payment has been made, less the Income Tax Amount on such sum and the 20% excise tax under Section 4999 of the Code that would be due on all Excess Parachute Payments.

(B)    The “Capped After-Tax Amount” shall be equal to the sum of the Maximum Amount and all amounts payable pursuant to all benefit and compensation plans and arrangements that must, pursuant to the Code, be included in determining whether an Excess Parachute Payment has been made, less the Income Tax Amount on such sum.

(C)    The “Income Tax Amount” shall be equal to the amount of federal, state and local income taxes and the Executive’s share of Federal Insurance Contributions Act taxes that would be due on a payment (after taking into account the deductibility of state and local income taxes for federal income tax purposes) if the highest marginal federal, state and local income tax rate in effect at the time of the Change in Control were imposed on the value of the payments, assuming that the amounts payable pursuant to this Agreement and all benefit and compensation plans and arrangements shall be treated as paid in full on the date of the Change in Control.

(ii)    If the Accounting Firm determines that payments pursuant to this Agreement should be reduced to the Maximum Amount, the Company shall promptly give the Executive notice to that effect and a copy of the detailed calculation thereof, and the Executive may then elect, in his sole discretion, which and how much of the payments shall be eliminated or reduced (as long as, after such election, the present value of the aggregate payments equals the Maximum Amount), and shall advise the Company in writing of his election within 10 days of his receipt of notice. If no such election is made by the Executive within such period, the Company may elect which and how much of the payments shall be eliminated or reduced (as long as, after such election, the present value of the aggregate payments equals the Maximum Amount) and shall notify the Executive promptly of such election. All determinations made by the Accounting Firm under this paragraph 5 shall be (i) based upon Sections 280G and 4999 of the Code (or successor provisions thereof) and on proposed or final regulations for applying those Code sections, or on substantial authority within the meaning of Section 6662 of the Code, (ii) binding upon the Company and the Executive and (iii) made within 60 days of the Notice Date. As promptly as practicable following such determination, the Company shall pay to or distribute for the Executive’s benefit such payments as are then due to the Executive under this Agreement and shall promptly pay to or distribute for the Executive’s benefit in the future such payments as become due to the Executive under this Agreement.

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(iii)    As a result of possible uncertainty in the application of Section 280G of the Code at the time of the determinations by the Accounting Firm hereunder, amounts may be paid that should not be paid (“Overpayment”), or additional amounts may not be paid that could be paid (“Underpayment”), in each case, consistent with the calculations required to be made hereunder. In the event that the Internal Revenue Service asserts a deficiency against the Executive or the Company in such a case and the Accounting Firm determines that an Overpayment has been made, the Executive shall reimburse the Company the amount of such Overpayment together with interest at the applicable federal rate under Section 7872(f)(2)(B) of the Code within 60 days (or such shorter period as may be required by law) after receipt by the Executive of written notice of such determination by the Accounting Firm, including the amount of the Overpayment and interest calculation; provided, however that no such amount shall be payable by the Executive to the Company if and to the extent such reimbursement is prohibited by applicable law or would not eliminate either the excise tax under Section 4999 of the Code or the disallowance of the deduction under Section 280G(a) of the Code, for the amounts previously paid to the Executive. In the event that the Accounting Firm determines that an Underpayment has been made, the Company shall promptly pay such Underpayment to the Executive, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code.

6.    Term.    This Agreement shall continue in effect until February 25, 2006, unless extended by the mutual written consent of the Company and the Executive.

7.    Successor.

(a)    This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution.

(b)    This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

(c)    The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as defined above and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement.

8.    Miscellaneous.

(a)    This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws.

(b)    This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

(c)    This Agreement constitutes the entire understanding and agreement between the parties hereto with regard to the compensation and benefits payable to the Executive in the circumstances described herein, superseding all prior understandings and agreements, whether oral or written, including without limitation the Prior Agreement.

(d)    The Company agrees to pay as incurred and within 20 days after submission of supporting documentation, to the full extent permitted by law, all legal fees and expenses the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), but not more than an aggregate of $50,000 in the event Company prevails thereon, plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code.

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(e)    All notices and other communications hereunder shall be in writing and shall be delivered by hand delivery, by a reputable overnight courier service, or by registered or certified mail, return receipt requested, postage prepaid, in each case addressed as follows:

If to the Company:

Parametric Technology Corporation

140 Kendrick Street

Needham, MA 02494

Attention: General Counsel

If to the Executive

C. Richard Harrison

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Any notice or communication shall be deemed to be delivered upon the date of hand delivery, one day following delivery to an overnight courier service, or three days following mailing by registered or certified mail.

EXECUTED as of the date first written above.

PARAMETRIC TECHNOLOGY CORPORATION

By:    /s/    BARRY F. COHEN                                         

Title: Executive Vice President, Strategic Services

          & Partners 

C. RICHARD HARRISON

/s/    C. RICHARD HARRISON                                           

Name: C. Richard Harrison

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EX-10.2

EXHIBIT 10.2

FORM OF EXECUTIVE AGREEMENT

The following Executive Agreement has been entered into with the following officers as of the date indicated opposite their name:

Thomas V. Butta Executive Vice President and Chief Marketing Officer	January 21, 2003
Barry F. Cohen Executive Vice President, Strategic Services and partners	January 21, 2003
Paul J. Cunningham Executive Vice Presidnet, Worldwide Sales	January 21, 2003
James E. Heppelmann Executive Vice President, Software Solutions and Chief Technology Officer	January 21, 2003

EXECUTIVE AGREEMENT

This Agreement is entered into as of the              day of             , 200_ between Parametric Technology Corporation, a Massachusetts corporation (the “Company”), and [Executive], [Address] (the “Executive”).

WHEREAS, the Executive is the [Executive Title] of the Company; and

WHEREAS, to provide incentive for the Executive to remain with the Company, the Company desires to make the following arrangements with the Executive concerning certain payments and benefits to be provided to the Executive in the event of the termination of his employment without cause or in the event of certain other events specified herein;

NOW, THEREFORE, the Company and the Executive hereby agree as follows:

1.    Termination Notice.    The Company agrees that it may not terminate the employment of the Executive unless (i) it does so for Cause (as defined below) or (ii) the Company has delivered to the Executive a written notice of such termination of employment (the “Termination Notice”) at least twelve (12) months in advance of the effective date thereof. The duties of the Executive during the period from the date of delivery of a Termination Notice until the termination of his employment shall be as determined by the Board of Directors.

2.    Salary and Benefits.

(a)    During the period from the date of delivery of a Termination Notice (the “Notice Date”) until the earlier of (i) the date twelve (12) months after the Notice Date, or (ii) the date the Executive commences employment with another company or organization, it being agreed that the Executive shall immediately notify the Company of such event (the “Severance Period”), and so long as the Executive is in compliance with the terms of this Agreement and any material provision of any other written agreement with the Company, the Company shall (A) pay to the Executive, per normal payroll practice, a salary (the “Severance Period Salary”) at a rate equal, on an annualized basis, to the highest annual salary (excluding any bonuses) in effect with respect to the Executive during the six month period immediately preceding the Termination Notice and (B) provide the Executive with employee benefits, including health insurance, dental insurance, life insurance, participation in the Company’s 401(k) plan and Employee Stock Purchase Plan and short-term and long-term disability coverage, pursuant to the same terms and conditions under which the Company makes such benefits available to employees generally, all subject to the terms and conditions of the respective plans and applicable law (collectively, the “Severance Period Benefits”).

(b)    In the event that (i) there is a Change in Control (as defined below) of the Company and (ii) within twelve (12) months thereafter, a Change in Status (as defined below) of the Executive occurs, and so long as the Executive is in compliance with the terms of this Agreement and any material provision of any other written agreement with the Company, the Company shall pay the Severance Period Salary and provide the Severance Period Benefits to the Executive during the period from the effective date of the Change in Status until the earlier of (i) the date twelve (12) months after such date or (ii) the date the Executive commences employment with another company or organization, it being agreed that the Executive shall immediately notify the Company of such event. Such compensation and benefits, and those provided under Section 3, shall be in lieu of any other compensation and benefits to the Executive with respect to any continuing employment during such period, and the Company shall have no obligation to make any payments or provide any benefits to the Executive under Section 2(a) above.

3.    Stock Options and Other Equity Awards.    Effective upon a Change in Control, (i) all outstanding stock options and stock appreciation rights (“SARs”) granted under any Stock Plan (as defined below) held by Executive shall immediately become exercisable in full, (ii) all restrictions applicable to restricted stock held by Executive under any Stock Plan shall immediately lapse, and (iii) all other criteria for vesting of any award

1

granted under any Stock Plan and held by Executive shall be deemed to have been met, notwithstanding any vesting schedule or other provisions to the contrary in the agreements evidencing such stock options, SARs, restricted stock or other award. The Company and Executive hereby agree that such agreements are hereby and will be deemed amended to give effect to this provision.

4.    Definitions.

(a)    The Company shall be deemed to have terminated the Executive’s employment for “Cause” if it does so (i) for the Executive’s willful and continued failure to substantially perform his duties to the Company (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness or any such actual or anticipated failure after a Change in Status of the Executive), provided that the Company has delivered a written demand for substantial performance to the Executive specifically identifying the manner in which the Company believes that the Executive has not substantially performed his duties, and that the Executive has not cured such failure within 30 days after such demand, (ii) for willful conduct by the Executive which is demonstrably and materially injurious to the Company, (iii) because the Executive has been convicted of, or has pled guilty or nolo contendere to, a felony or (iv) for the Executive’s willful violation of any material provision of any confidentiality, nondisclosure, assignment of invention, noncompetition or similar agreement entered into by the Executive in connection with his employment by the Company. For purposes of this paragraph, no act or failure to act on the Executive’s part shall be deemed “willful” unless done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interests of the Company.

(b)    A “Change in Control” of the Company shall mean the occurrence of any of the following events: (i) any “person”, as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock in the Company) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities (other than as a result of acquisitions of such securities from the Company); (ii) individuals who, as of the date hereof, constitute the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company) shall be, for purposes of this Agreement, considered to be a member of the Incumbent Board; (iii) the consummation of a merger, share exchange or consolidation of the Company or any subsidiary of the Company with any other corporation (each a “Business Combination”), other than (A) a Business Combination that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of another entity) beneficial ownership, directly or indirectly, of a majority of the combined voting power of the Company or the surviving entity (including any person that, as a result of such transaction, owns all or substantially all of the Company’s assets either directly or through one or more subsidiaries) outstanding immediately after such Business Combination or (B) a merger, share exchange or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “person” (as defined above) is or becomes the beneficial owner of 50% or more of the combined voting power of the Company’s then outstanding securities; or (iv) the stockholders of the Company approve (A) a plan of complete liquidation of the Company; or (B) an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets but excluding a sale or spin-off of a product line, business unit or line of business of the Company if the remaining business is significant as determined by the Company’s board of directors in its sole discretion.

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(c)    A “Change in Status” of the Executive shall mean the occurrence, without the Executive’s written consent and without Cause, of any of the following circumstances (unless such circumstances constitute an isolated, insubstantial and inadvertent action not taken in bad faith and are fully remedied by the Company within 30 days after receipt of notice thereof by the Executive): (i) any diminution or change in a manner adverse to the Executive of (A) his title, office or position with the Company, (B) his salary or other benefits (other than diminutions that are made generally with respect to substantially all executives of similar rank), or (C) his duties, responsibilities or employment condition, (ii) the Company’s requiring the Executive (without his consent) to be based at any office or location more than fifty (50) miles from the location of his principal office on the date of this Agreement, or (iii) the failure by the Company to pay to the Executive any portion of his compensation within ninety (90) days after such compensation is due.

(d)    A “Stock Plan” of the Company shall mean any stock option or equity compensation plan of the Company in effect at any time, including without limitation the 1987 Incentive Stock Option Plan, the 1997 Incentive Stock Option Plan, the 1997 Nonqualified Stock Option Plan and the 2000 Equity Incentive Plan.

5.    Taxes.

(a)    Withholding.    All payments to be made to the Executive under this Agreement will be subject to any required withholding of federal, state and local income and employment taxes.

(b)    Payment Limitation.    Notwithstanding anything in this Agreement to the contrary, if the Company determines, based on the opinion of its independent accountants serving as such immediately prior to the Change in Control (the “Accounting Firm”), that any of the payments provided for in this Agreement, together with any other payments that must be included in such determination, would constitute an “Excess Parachute Payment” (as defined in Section 280G (or any successor provision thereof) of the Internal Revenue Code of 1986, as amended (the “Code”), and proposed and final regulations thereunder), the payments pursuant to this Agreement shall be reduced to the maximum amount that would permit a determination that the Executive has not received an Excess Parachute Payment (the “Maximum Amount”) unless the after-tax amount payable to the Executive hereunder without regard to the foregoing limitation (“Uncapped After-Tax Amount,” as defined below) exceeds the after-tax amount payable to the Executive with regard to such limitation (“Capped After-Tax Amount,” as defined below) by 10% or more. Any such determination or reduction in amounts payable pursuant to this Agreement shall be made in accordance with the following provisions.

(i)    For purposes of determining whether the amounts payable to the Executive pursuant to this Agreement shall be reduced to the Maximum Amount, the following terms shall have the meaning indicated.

(A)    The “Uncapped After-Tax Amount” shall be equal to the sum of the amounts payable pursuant to this Agreement (without regard to this paragraph 5(b)) and pursuant to all benefit and compensation plans and arrangements that must, pursuant to the Code, be included in determining whether an Excess Parachute Payment has been made, less the Income Tax Amount on such sum and the 20% excise tax under Section 4999 of the Code that would be due on all Excess Parachute Payments.

(B)    The “Capped After-Tax Amount” shall be equal to the sum of the Maximum Amount and all amounts payable pursuant to all benefit and compensation plans and arrangements that must, pursuant to the Code, be included in determining whether an Excess Parachute Payment has been made, less the Income Tax Amount on such sum.

(C)    The “Income Tax Amount” shall be equal to the amount of federal, state and local income taxes and the Executive’s share of Federal Insurance Contributions Act taxes that would be due on a payment (after taking into account the deductibility of state and local income taxes for federal income tax purposes) if the highest marginal federal, state and local income tax rate in effect at the time of the Change in

3

Control were imposed on the value of the payments, assuming that the amounts payable pursuant to this Agreement and all benefit and compensation plans and arrangements shall be treated as paid in full on the date of the Change in Control.

(ii)    If the Accounting Firm determines that payments pursuant to this Agreement should be reduced to the Maximum Amount, the Company shall promptly give the Executive notice to that effect and a copy of the detailed calculation thereof, and the Executive may then elect, in his sole discretion, which and how much of the payments shall be eliminated or reduced (as long as, after such election, the present value of the aggregate payments equals the Maximum Amount), and shall advise the Company in writing of his election within 10 days of his receipt of notice. If no such election is made by the Executive within such period, the Company may elect which and how much of the payments shall be eliminated or reduced (as long as, after such election, the present value of the aggregate payments equals the Maximum Amount) and shall notify the Executive promptly of such election. All determinations made by the Accounting Firm under this paragraph 5 shall be (i) based upon Sections 280G and 4999 of the Code (or successor provisions thereof) and on proposed or final regulations for applying those Code sections, or on substantial authority within the meaning of Section 6662 of the Code, (ii) binding upon the Company and the Executive and (iii) made within 60 days of the Notice Date. As promptly as practicable following such determination, the Company shall pay to or distribute for the Executive’s benefit such payments as are then due to the Executive under this Agreement and shall promptly pay to or distribute for the Executive’s benefit in the future such payments as become due to the Executive under this Agreement.

(iii)    As a result of possible uncertainty in the application of Section 280G of the Code at the time of the determinations by the Accounting Firm hereunder, amounts may be paid that should not be paid (“Overpayment”), or additional amounts may not be paid that could be paid (“Underpayment”), in each case, consistent with the calculations required to be made hereunder. In the event that the Internal Revenue Service asserts a deficiency against the Executive or the Company in such a case and the Accounting Firm determines that an Overpayment has been made, the Executive shall reimburse the Company the amount of such Overpayment together with interest at the applicable federal rate under Section 7872(f)(2)(B) of the Code within 60 days (or such shorter period as may be required by law) after receipt by the Executive of written notice of such determination by the Accounting Firm, including the amount of the Overpayment and interest calculation; provided, however that no such amount shall be payable by the Executive to the Company if and to the extent such reimbursement is prohibited by applicable law or would not eliminate either the excise tax under Section 4999 of the Code or the disallowance of the deduction under Section 280G(a) of the Code, for the amounts previously paid to the Executive. In the event that the Accounting Firm determines that an Underpayment has been made, the Company shall promptly pay such Underpayment to the Executive, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code.

6.    Term.    This Agreement shall continue in effect until February 25, 2006, unless extended by the mutual written consent of the Company and the Executive.

7.    Successor.

(a)    This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution.

(b)    This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

(c)    The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company

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would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as defined above and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement.

8.    Miscellaneous.

(a)    This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws.

(b)    This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

(c)    This Agreement constitutes the entire understanding and agreement between the parties hereto with regard to the compensation and benefits payable to the Executive in the circumstances described herein, superseding all prior understandings and agreements, whether oral or written.

(d)    The Company agrees to pay as incurred and within 20 days after submission of supporting documentation, to the full extent permitted by law, all legal fees and expenses the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), but not more than an aggregate of $50,000, in the event the Company prevails thereon plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code.

(e)    All notices and other communications hereunder shall be in writing and shall be delivered by hand delivery, by a reputable overnight courier service, or by registered or certified mail, return receipt requested, postage prepaid, in each case addressed as follows:

If to the Company:

Parametric Technology Corporation

140 Kendrick Street

Needham, MA 02494

Attention: General Counsel

If to the Executive

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Any notice or communication shall be deemed to be delivered upon the date of hand delivery, one day following delivery to an overnight courier service, or three days following mailing by registered or certified mail.

EXECUTED as of the date first written above.

PARAMETRIC TECHNOLOGY CORPORATION

By:                                                                     

Title:

Name:

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EX-99.1

EXHIBIT 99.1

Parametric Technology Corporation

Certification of Periodic Financial Report

Pursuant to 18 U.S.C. Section 1350

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Parametric Technology Corporation (the “Company”) certifies that the Quarterly Report on Form 10-Q of the Company for the quarter ended December 28, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:    February 11, 2003
/S/    C. RICHARD HARRISON             C. Richard Harrison Chief Executive Officer

Date:    February 11, 2003
/S/    THOMAS L. BEAUDOIN             Thomas L. Beaudoin Acting Chief Financial Officer