PARAMETRIC TECHNOLOGY CORP, 10-K405, 2000-12-28

PARAMETRIC TECHNOLOGY CORP
10-K405, 2000-12-28
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: September 30, 2000

Commission File Number: 0-18059

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PARAMETRIC TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)

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Massachusetts 04-2866152
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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140 Kendrick Street, Needham, MA 02494
(Address of principal executive offices, including zip code)

(781) 370-5000
(Registrant's telephone number, including area code)

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Securities registered pursuant to Securities registered pursuant to
Section 12(b) of the Act: Section 12(g) of the Act:
None Common Stock, $.01 par value per share
(Title of Class)
</TABLE>

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Indicate by check mark whether the registrant has (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X]

The aggregate market value of our voting stock held by non-affiliates was
approximately $3,303,192,083 on October 31, 2000 based on the last reported
sale price of our common stock on The Nasdaq Stock Market on that day. There
were 268,279,560 shares of our common stock outstanding on that day.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement in connection with the Annual
Meeting of Stockholders to be held February 15, 2001 (2001 Proxy Statement) are
incorporated by reference into Part III.

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PARAMETRIC TECHNOLOGY CORPORATION

ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 2000

Table of Contents

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Page
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PART I.

Item 1. Business............................................................................... 1

Item 2. Properties............................................................................. 6

Item 3. Legal Proceedings...................................................................... 6

Item 4. Submission of Matters to a Vote of Security Holders.................................... 6

PART II.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 7

Item 6. Selected Financial Data................................................................ 7

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 7

Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................. 22

Item 8. Financial Statements and Supplementary Data............................................ 23

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 23

PART III.

Item 10. Directors and Executive Officers of the Registrant..................................... 23

Item 11. Executive Compensation................................................................. 24

Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 25

Item 13. Certain Relationships and Related Transactions......................................... 25

PART IV.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 25

Signatures............................................................................. 26

Exhibit Index.......................................................................... 27

APPENDIX A

Consolidated Financial Statements...................................................... F-1

Notes to Consolidated Financial Statements............................................. F-5

Report of Independent Accountants...................................................... F-23

Five Year Summary of Selected Financial Data........................................... F-24

Quarterly Financial Information........................................................ F-24
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Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements about our
anticipated financial results and growth, as well as about the development of
our products and our markets, which are based on our plans and assumptions.
Important information about the basis for these plans and assumptions and
certain factors that may cause our actual results to differ materially from
these statements is discussed in this report and contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 7 below.

PART I

ITEM 1: Business

Introduction

Parametric Technology Corporation (PTC), founded in 1985 and headquartered in
Needham, MA, develops, markets and supports collaborative product commerce
(CPC) software solutions that help companies manage the product development
process in order to better shape innovation and achieve sustained competitive
advantage. These solutions, which include a suite of flexible engineering MCAD
tools and a range of Internet-based collaboration technologies for both
enterprise and exchange level solutions, leverage our leadership in providing
software that streamlines engineering processes, improves product quality,
optimizes product information management and reduces cost and time-to-market
cycles. Our CPC software solutions are complemented by the strength and
experience of our Global Services Organization, as well as our systems
integrators and other strategic partners, who provide training, consulting,
implementation and support to customers worldwide.

Our CPC solutions include software and services that use Internet-based
architecture to permit individuals using different computer-based tools in
different locations with different roles in the commercialization of a product
to collaboratively develop, build and manage products throughout their entire
lifecycle. CPC subsumes many smaller, previously isolated markets that address
various phases of the product lifecycle, such as product data management (PDM),
component and supplier management (CSM), visualization and digital mockup,
mechanical computer-aided design, manufacturing and engineering (MCAD),
enterprise application integration (EAI), program and project management,
manufacturing planning and maintenance, repair and overhaul (MRO).

Our flexible engineering MCAD solutions, based on our flagship Pro/ENGINEER(R)
design software, provide our customers with industry-leading product
development and engineering solutions. MCAD has been our core business focus;
however, we believe there is growing demand for a broader suite of solutions
from manufacturers who, in order to stay competitive, must deliver more custom-
tailored goods faster and at lower prices while relying more than ever before
on geographically dispersed and dynamic supply chains. In order to pursue this
opportunity, we have expanded our focus to encompass the collaborative
solutions offered by our Windchill(R) software. This expanded CPC focus allows
us to increase the business impact our customers derive from our flexible
engineering solutions and provides our customers with the additional tools they
need to elevate their products into enterprise assets and to leverage these
assets into new business opportunities.

In the third quarter of fiscal 2000 we reorganized to provide more discrete
product line focus and to improve our overall profitability. The reorganization
resulted in the creation of the Windchill Solutions and MCAD Solutions business
units. Each unit is responsible for research and development, marketing,
professional services, customer support and indirect sales. All of our
solutions continue to be distributed primarily through our direct sales force.
Within our direct sales force, there are geographic divisions focused both on
the domestic market and on sales outside of the United States. Each division,
in turn, is further divided into two groups based on account type, with one
group focusing on major accounts and the other on all other (primary) accounts.
Moreover, we are attempting to broaden our indirect distribution channel and,
toward that end, have formed alliances with systems integrators, resellers,
strategic partners and entities with complementary software products. In fiscal
2000, we began working on a new initiative, called Windchill Netmarkets(TM),
that enables us

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to address opportunities to utilize our Windchill technology in the business-
to-business exchange marketplace. This initiative was integrated into our
Windchill Solutions business unit in November 2000.

Products and Services

Our family of MCAD flexible engineering software solutions encompasses a broad
spectrum of engineering disciplines essential to the development of virtually
all manufactured products, ranging from consumer products to jet aircraft.
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. These tools offer high-performance,
fully integrated solutions available on all leading hardware platforms,
including Windows(R) native solutions, that enable end-users to reduce their
time to market and manufacturing costs for their products and to improve
product quality by easily evaluating multiple design alternatives and sharing
data with bi-directional associativity. Our MCAD suite includes:

Pro/ENGINEER--our cornerstone mechanical design automation suite for 3D
solid modeling with next generation behavioral modeling technology.
Behavioral modeling is a knowledge management capability that provides a
unique method of capturing engineers' innovations by generating objective-
driven design solutions that then may be automatically optimized and re-
used on subsequent designs. Pro/ENGINEER is based on the industry's most
robust, parametric, feature-based solid modeler--enabling changes made
during the design process to be associatively updated throughout the
design. These features, along with its "Certified for Microsoft(R) Windows
2000" user-interface, allow companies to create more innovative,
differentiated and functional products more quickly and easily than ever
before. In addition to these Pro/ENGINEER Design Solutions, the suite
offers Pro/ENGINEER Production Solutions (Pro/NC), which provide
intelligent production and manufacturing tools, and Pro/ENGINEER
Shipbuilding Solutions, which make available Pro/ENGINEER's associative
features with industry specific functionality.

Pro/MECHANICA(R)--our functional simulation software allows users to
evaluate and optimize the mechanical performance of product designs in
real-world situations, reducing the need for expensive physical prototypes
and enhancing overall product quality.

DIVISION(TM)--our suite of visualization solutions ranging from readily
deployable 2D and 3D viewing and redlining, to digital virtual mockup,
behavior simulation and total-body virtual reality immersion.

ICEM(TM) Styling and Surfacing (including CDRS(TM))--provides advanced
interactive tools for free-form surface and shape modeling, from industrial
design to production surface development and engineering. ICEM Surf is a
premier Class A surface modeling product used in the automotive industry by
nearly all major manufacturers for modeling high-quality, Class A surfaces
as well as in the industrial design, tool design and consumer product
markets. CDRS is a complete set of integrated tools for quickly creating
realistic images with free-form surfaces that can be used throughout the
product design cycle to evaluate, explore and communicate ideas to
management and clients.

InPart(R)--our Internet-based library of CAD parts containing 2D and 3D
geometry, technical specifications and component selection software that
allows mechanical engineers to download over one million certified part
designs via the Internet, saving valuable time and expense.

Pro/INTRALINK(R)--our workgroup management solution for product development
using Pro/ENGINEER. It lets Pro/ENGINEER users facilitate design team
collaboration and manages the power of Pro/ENGINEER associativity. Its
dynamic collaborative environment supports Pro/ENGINEER's rapid and
effective design approach.

Pro/DESKTOP(TM)--our conceptual engineering solution which allows users to
easily explain design possibilities and rapidly capture ideas right at the
beginning of the product development process.

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CADDS(R)5i--our 3D mechanical design software, originally developed by
Computervision Corporation, offers production-proven product development
tools spanning concept, design, analysis, drafting and manufacturing. It is
used by many of the world's largest discrete manufacturing companies for
the design and engineering of airplanes, ships and automobiles.

MEDUSA(R)--our world-class 2D detailing and design documentation solution
with specific applications focused on plant design and electrical and
process related diagrams.

DIMENSION(TM) III--our comprehensive core product for plant design.
Available in both two-dimensional and three-dimensional versions, DIMENSION
III facilitates concurrent design engineering and quick access to model
data information.

Our MCAD solutions benefit from the unique level of interoperability provided
by our Associative Topology Bus (ATB) technology which allows for the exchange
of data between various CAD tools without the loss of any design geometry. When
changes occur, the ATB propagates those changes through the other MCAD solution
members, automatically updating affected deliverables, such as drawings and
tooling.

Our Windchill enterprise suite is a comprehensive set of business software
solutions for CPC. Built around Windchill's federated, Web-based architecture,
these solutions enable manufacturers to leverage the Internet in their product
development and delivery process from customer driven engineer-to-order through
development, manufacturing and retirement. Windchill enables manufacturers to
create innovative new products, deliver those products to market faster and
manage the complexities of an evolving supply chain. Windchill's core
capabilities include:

Collaboration. Provides an environment where businesses can share valuable
product and process information throughout the extended enterprise,
regardless of where that information resides or in what format it is.

Product Planning. Enables businesses to meet the increasing demand for
custom-tailored products while minimizing the overall number of product
variations. This is accomplished by providing the means to define flexible
engineered-to-order products, supply customer-specific portals and easily
identify existing variations for future reuse.

Engineering. Optimizes the product innovation and design environment to
reduce concept-to-design cycle times and improve team collaboration by
linking directly with the engineering team using MCAD interface and PDM
tools.

Sourcing. Gives manufacturers the ability to reduce global procurement and
product development costs by standardizing and consolidating part and
supplier information. The solution enables companies to identify re-usable
parts, commercially available solutions and preferred sources.

Product Management. Offers a complete set of enterprise scalable PDM
functionality to promote concurrent engineering and to create a single
source of product information available to all functional organizations,
facilitating product change management throughout the entire product life
cycle.

Manufacturing. Integrates a company's product development and design with
its manufacturing processes by creating and maintaining detailed process
plans and executing production analysis and process simulation. This
solution allows companies to increase information capture and reuse,
optimize manufacturing processes and share this knowledge across the
enterprise.

Production. Integrates Windchill with market-leading enterprise resource
planning systems allowing the exchange of valuable product-related
information including part masters, bills of material and engineering
change information, between Windchill and those systems.

Customization. Lets manufacturers rapidly create and deploy customized
Windchill lifecycle applications allowing them to leverage their own
internal processes and practices into a competitive advantage.

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Windchill Netmarkets, which is based on the Windchill collaboration technology,
provides collaborative product development capabilities on Internet exchanges,
portals and marketplaces. The solution permits all members of a globally
dispersed design chain (customers, suppliers, partners and internal product
teams) to connect beyond the corporate firewall on a self-service project
basis. Exchanges powered by Windchill Netmarkets may be either public
(available to the general commercial community to provide project management
capabilities) or private (sponsored by a single company or consortium for
managing specific collaboration projects with certain invitees). The Windchill
standards-based architecture permits the Windchill Netmarkets solution to
provide a flexible project environment that facilitates efficient communication
of high-level project management activities. Project leaders can create dynamic
management teams, establish business processes and roles, and define and track
project tasks, milestones and deliverables while utilizing automated processes
such as change management, escalation policies and requests for
information/quotation/proposal (RFI/RFQ/RFP).

Our CPC solutions are complemented by our systems integrators, resellers and
strategic partners, as well as our Global Services Organization (GSO), which is
committed to providing the expertise needed to meet the consulting, education
and technical support requirements of every type of company and user--in seven
major support centers and more than 70 educational facilities worldwide. Our
GSO, which has been one of the fastest growing areas of our business, focuses
on:

Consulting Services designed to transform a company's business process into
a competitive advantage by evaluating and recommending the tools and
practices needed to create more productive engineering and information
management environments, including long-range planning, process
improvement, system implementation and product program strategies.

Education Services offering expert, comprehensive and efficient training
programs for our entire product line tailored to the needs of each student
and combining hands-on and classroom training.

Technical Support Services providing fast, accurate answers to software and
product development questions through a variety of resources which are
available worldwide.

Product Development

In order to be competitive in the CPC marketplace, we must continually provide
our customers with new software and service solutions. As a result, we have
increased our spending on research and development, and we are constantly
looking for opportunities to acquire new technologies suited to our customers'
needs.

Our ability to rapidly develop new MCAD products that provide for flexible
engineering is facilitated by the modular structure of our software code, which
enables functional capabilities used in existing products to be accessed and
utilized by new software modules, thereby reducing the amount of new code
required to develop additional products. The major benefit of this approach is
rapid development of new functionality. Our Windchill products expand the
breadth of our offerings allowing a comprehensive CPC solution. The developing
CPC industry is characterized by new technologies, including Internet-centric,
Java-based, object-oriented software. The Windchill products depend upon these
new technologies as well as certain licensed third-party technologies.

We work closely with our customers to define improvements and enhancements to
be integrated into our products. Using this approach, customers become involved
in the product design process to validate feasibility and to influence
functionality early in the product's life cycle. In addition, we maintain an
Enterprise Software Partners program (successor to our Cooperative Software
Program) and a Windchill Technology Partner program. These programs are
designed to provide partners with access to our Windchill and MCAD products and
provide the mechanism and environment to facilitate the integration of
complementary products with our product lines. Through our open software
toolkits, program members can build tightly integrated solutions that satisfy
the various requirements of our customers.

Our fiscal year research and development expenses were $93.2 million in 1998,
$124.1 million in 1999 and $143.8 million in 2000.

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Sales and Marketing

We derived most of our revenue from products distributed directly by our sales
force to our end-user customers with the remainder offered through third-party
distributors. We also began offering some of our MCAD products over the
Internet during fiscal 2000. No single customer accounted for more than 10% of
our revenue in any of the last three fiscal years.

Within our direct sales force, we have created geographic divisions focused on
the domestic market and on sales outside the United States. Within these
geographic divisions there are both major and primary accounts focused units.
In addition, we are broadening our indirect distribution channel through
alliances with systems integrators, resellers and other strategic partners. The
systems integrators, which include Accenture (formerly Andersen Consulting),
Atos Origin, Deloitte Consulting and Computer Science Corporation, will work in
tandem with our direct sales force to locate and target potential CPC
opportunities. We have also signed an agreement with Rand A Technology
Corporation (Rand) as a distributor of our core flexible engineering MCAD
products. This agreement gives Rand the rights to distribute certain products
and their related maintenance services throughout North America, Europe and
parts of Asia/Pacific.

Information about our foreign and domestic operations and export sales, and the
risks thereof, may be found in Note M to the consolidated financial statements
and the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 7 below.

Competition

CPC is a relatively new industry, and there are a number of companies offering
solutions that address specific functional areas within CPC such as: Agile
Software Corp., Dassault Systemes, MatrixOne and Structural Dynamics Research
Corporation for PDM solutions; i2 Technologies Inc. for part sourcing
solutions; and Dassault Systemes and Engineering Animation, Inc. for
visualization and mock-up solutions. We also face competition from companies
that are developing these solutions in-house. In addition, larger, better-known
enterprise-solution companies with established customer bases may enter the CPC
market and offer more complete solutions. There are also an increasing number
of competitive MCAD products. In our traditional MCAD market, we compete most
directly with products developed by Dassault Systemes and marketed by IBM and
products developed by Unigraphics and Structural Dynamics Research Corporation.
For smaller manufacturing businesses, we, along with our resellers, compete
with products from companies like Solidworks, a subsidiary of Dassault
Systemes, and Autodesk, Inc.

Proprietary Rights

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.

We believe that, due to the rapid pace of innovation within our industry,
factors such as the technological and creative skills of our personnel are as
important to establishing and maintaining a technology leadership position
within the industry as are the various legal protections surrounding our
technology. We believe that our products, technology and trademarks do not
infringe any existing proprietary rights of others, although there can be no
assurance that third parties will not assert infringement claims in the future.
Certain of our

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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.

PTC, Parametric Technology Corporation, Pro/ENGINEER, Windchill, Windchill
Netmarkets and all product names in the PTC product family are trademarks or
registered trademarks of PTC or our subsidiaries in the United States and/or
other countries.

Backlog

We generally ship our products within 30 days after acceptance of a customer
purchase order and execution of a software license agreement. Accordingly, we
do not believe that our backlog at any particular point in time is indicative
of future sales levels.

Employees

As of September 30, 2000, we had 4,725 employees, including 1,702 in sales,
marketing and support activities; 1,405 in customer support, training and
consulting; 430 in general and administration; and 1,188 in product
development. Of these employees, 2,142 were located throughout the United
States and 2,583 were located in foreign countries.

ITEM 2: Properties

In December 1999, we sold land and certain improvements under construction and
entered into a lease covering approximately 381,000 square feet of office space
in Needham, MA to consolidate and replace our Waltham, MA operations. Our
corporate offices currently occupy 210,000 square feet in the new Needham
facility and we expect to occupy the remaining 171,000 square feet in the
second quarter of fiscal 2001, subject to completion of construction. Occupancy
and rent began in December 2000 and the lease expires in December 2012, subject
to certain renewal rights.

We also lease 175 offices in the United States and internationally through our
foreign subsidiaries, predominately as sales and/or support offices and for
development work. Of our total of approximately 1,470,000 square feet of leased
facilities, approximately 701,000 is located in the U.S. and 769,000 is located
outside the U.S. Several of our leased facilities were acquired in our merger
with Computervision, including 518,000 square feet of office space in Bedford,
MA still under lease. Approximately 456,000 square feet is not used for our
current operations and is primarily subleased to other entities. As described
in Notes B and G to the consolidated financial statements, these facilities
have been included in our restructuring provisions. We continue to engage in
subleasing and early lease termination initiatives to employ alternate uses for
these facilities. We believe that our facilities are adequate for our present
needs.

ITEM 3: Legal Proceedings

Certain class action lawsuits were filed by shareholders in the fourth quarter
of 1998 against us and certain of our current and former officers and directors
in the U.S. District Court in Massachusetts claiming violations of the federal
securities laws based on alleged misrepresentations regarding our anticipated
revenue and earnings for the third quarter of 1998. An amended complaint,
consolidating these lawsuits into one action, was filed in the second quarter
of 1999, seeking unspecified damages. We believe the claims made in the
consolidated action are without merit, and we intend to defend them vigorously.
In the third quarter of 1999 we filed a motion to dismiss the consolidated
action. We cannot predict the outcome of this motion or the ultimate resolution
of this action at this time, and there can be no assurance that the litigation
will not have a material adverse impact on our financial condition or results
of operations.

We are also subject to various legal proceedings and claims that arise in the
ordinary course of business. We currently believe that resolving these matters
will not have a material adverse impact on our financial condition or results
of operations.

ITEM 4: Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the last quarter
of fiscal 2000.

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PART II

ITEM 5: Market for Registrant's Common Equity and Related Stockholder Matters

Information with respect to this item may be found in the section captioned
"Quarterly Financial Information" on page F-24 below.

On September 30, 2000, our common stock was held by 6,565 shareholders of
record. We have not paid cash dividends on our common stock and have
historically retained earnings for use in our business. We intend to review our
policy with respect to the payment of dividends from time to time; however,
there can be no assurance that any dividends will be paid in the future.

ITEM 6: Selected Financial Data

Information with respect to this item may be found in the section captioned
"Five Year Summary of Selected Financial Data" on page F-24 below.

ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations

Introduction

In January 1998, we completed a merger with Computervision Corporation that has
been accounted for as a pooling of interests. Accordingly, we have restated our
consolidated financial statements to include the accounts and operations of
Computervision for all periods prior to the merger presented in this Annual
Report on Form 10-K. See Note B. This discussion and the accompanying
consolidated financial statements and notes to the consolidated financial
statements (Notes) reflect that restatement. Unless otherwise indicated, all
references to a year reflect our fiscal year that ends on September 30.

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements about our
anticipated financial results and growth, as well as about the development of
our products and our markets, which are based on our plans and assumptions.
Important information about the basis for these plans and assumptions and
certain factors that may cause our actual results to differ materially from
these statements is contained below and in "Important Factors That May Affect
Future Results" beginning on page 16.

Business Overview

Historically, our core business focus has been to provide MCAD solutions to
customers through our flagship Pro/ENGINEER(R) design software, and we remain
committed to providing our customers with industry leading flexible engineering
solutions based on this software. Additionally, we believe that there is
growing demand for additional collaborative product commerce (CPC) solutions
from manufacturers who, in order to stay competitive, must deliver more custom-
tailored goods faster and at lower prices while relying more than ever before
on geographically dispersed and dynamic supply chains. These CPC solutions
include software and services that utilize Internet technologies to permit
individuals - no matter what role they have in the commercialization of a
product, no matter what computer-based tools they use, no matter where they are
located geographically or in the supply chain - to collaboratively design,
develop, build and manage products throughout their entire lifecycle. In order
to pursue this opportunity, we expanded our focus in 1999 to encompass a
complete CPC solution and introduced our Web-based Windchill(R) information
management and collaboration software. We continued this CPC focus in 2000 and
will do so for the foreseeable future. This expanded focus allows us to
increase the business impact our customers derive from our flexible engineering
MCAD solutions and provides our customers with the additional tools they need
to elevate their products into enterprise assets and to leverage these assets
into new business opportunities.

As a result of the difficulty we experienced in transitioning from a one
product company to a multi-product company and in balancing our efforts between
our traditional MCAD solutions business and our growing CPC

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solutions business, in the third quarter of 2000 we reorganized ourselves to
provide more discrete product line focus and accountability and to improve our
overall profitability. The reorganization resulted in the creation of the
following business units:

. Windchill Solutions. This business unit is responsible for expanding our
reach in the CPC market in terms of product content, collaboration and
sourcing services. It encompasses our efforts to develop new
partnerships, business relationships and indirect channels of
distribution in support of our web infrastructure efforts. Our Windchill
exchange solutions, called Windchill Netmarkets(TM), provides these
collaborative capabilities on Internet exchanges, portals and
marketplaces, which, among other things, permits collaboration outside
the corporate firewall.

. MCAD Solutions. This business unit is responsible for the Pro/ENGINEER
product line as well as other applications within our MCAD suite of
flexible engineering solutions. It focuses full-time on the needs of the
MCAD marketplace.

Each unit is responsible for research and development, marketing, professional
services, customer support and indirect sales. All of our solutions continue to
be distributed primarily through our direct sales force. Within our direct
sales force, there are geographic divisions focused both on the domestic market
and on sales outside of the U.S. Each division, in turn, is further divided
into two groups based on account type, with one group focusing on major
accounts and the other on all other (primary) accounts. Moreover, we are
attempting to broaden our indirect distribution channel and, toward that end,
have formed alliances with systems integrators, resellers, strategic partners
and entities with complementary software products. In 2000, we began working on
a new initiative, called Windchill Netmarkets, that enables us to address
opportunities to utilize our Windchill technology in the business-to-business
exchange marketplace. This initiative was integrated into our Windchill
Solutions business unit in November 2000.

Results of Operations

The following is an overview of our results of operations for the last three
years:

. Total revenue was $1,018.0 million for 1998, $1,057.6 million for 1999
and $928.4 million for 2000.

. Our year-over-year revenue increased 4% from 1998 to 1999 and decreased
12% from 1999 to 2000.

. Windchill revenue increased from $13.4 million in 1998 to $81.3 million
in 1999 and to $174.7 million in 2000.

. MCAD revenue decreased from $1,004.6 million in 1998 to $976.3 million in
1999 and to $753.7 million in 2000.

. Income (loss) before extraordinary loss was $105.7 million in 1998,
$119.3 million in 1999 and ($4.0) million in 2000.

. Pro forma net income, which excludes the amortization of goodwill and
intangible assets, acquisition and nonrecurring charges and the
extraordinary loss, was $199.4 million in 1998, $184.4 million in 1999
and $38.9 million in 2000.

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

<TABLE>
<CAPTION>
September 30,
----------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Revenue:
License.................................................... 60% 53% 41%
Service.................................................... 40 47 59
--- --- ---
Total revenue............................................ 100 100 100
--- --- ---
Costs and expenses:
Cost of license revenue.................................... 2 1 2
Cost of service revenue.................................... 13 18 25
Sales and marketing........................................ 39 39 45
Research and development................................... 9 12 15
General and administrative................................. 6 6 8
Amortization of goodwill and other intangible assets....... -- 2 4
Acquisition and nonrecurring charges....................... 10 5 2
--- --- ---
Total costs and expenses................................. 79 83 101
--- --- ---
Operating income (loss)...................................... 21 17 (1)
Interest expense........................................... (1) -- --
Interest income............................................ 2 1 1
Other expense, net......................................... (1) (1) --
--- --- ---
Income (loss) before income taxes............................ 21 17 --
Provision (benefit) for income taxes....................... 10 6 --
--- --- ---
Income (loss) before extraordinary loss...................... 11 11 --
Extraordinary loss, net.................................... 2 -- --
--- --- ---
Net income (loss)............................................ 9% 11% --%
=== === ===
Pro forma, excluding amortization of goodwill and intangible
assets, acquisition and nonrecurring charges and
extraordinary loss:
Operating income............................................. 31% 24% 6%
Net income................................................... 20% 17% 4%
</TABLE>

Revenue

As a result of our expanded focus on providing CPC solutions, software and
service revenue from our Windchill products grew to 19% of total revenue in
2000, up from 8% in 1999 and 1% in 1998. Overall, however, total revenue
decreased 12% in 2000 compared to 1999 after an increase of 4% in 1999 compared
to 1998.

License revenue decreased 8% in 1999 and 33% in 2000. Several factors,
including those described below, contributed to these decreases. While we
continue to derive our license revenue primarily from our MCAD software
solutions, our Windchill software solutions are starting to comprise an
increasing percentage of total license revenue. In order to meet what we
believe is a large market opportunity for overall CPC solutions, over the past
two years we have channeled significant resources into the Windchill product
line. This emphasis on larger, more enterprise-wide solutions has resulted in
longer and less predictable sales cycles and increased dependence on
consummating larger transactions in general. The transfer of resources to
Windchill also reduced the sales capacity for the MCAD product line and
contributed to a loss of market share for MCAD.

In addition, we have experienced increased competition in the MCAD industry
from native Windows(R)-based products offering more limited functionality at
lower costs. In August 1998 we repackaged and repriced our

9
<PAGE>

core Pro/ENGINEER design software. Due in large part to these factors, the
average selling price of this software decreased by 16% in 1999 and 6% in 2000.
We also experienced some weakness with existing customers in North America and
Europe during 2000.

Furthermore, in order to better leverage the efforts of our direct sales force,
in October 1998 we appointed Rand A Technology Corporation as our exclusive
MCAD distributor to small businesses in the United States and Europe. Rand's
performance was impacted by the transition required by this relationship and
its level of revenue contribution has been lower than originally anticipated.
Our results could be adversely affected if Rand is unable to achieve certain
sales levels or make existing or future payments.

Due in large part to the factors described above, unit sales decreased 40% in
2000 compared to 1999 and increased 1% in 1999 compared to 1998. Additional
factors affecting our revenues and operating results are listed under
"Important Factors That May Affect Future Results" below.

We licensed over 90% of our products directly to end-user customers in each of
the last three fiscal years. The balance was licensed through third-party
distributors, primarily Rand. We expect the percentage of our MCAD products
that we license through third-party distributors may increase in the future as
we enter into new reseller and other distribution agreements.

Our service revenue is derived from the sale of software maintenance contracts
and the performance of training and consulting services. Service revenue, which
has a lower gross profit margin than license revenue, accounted for 40% of
total revenue in 1998, 47% in 1999 and 59% in 2000. Service revenue increased
21% in 1999 and 11% in 2000. This increase is the result of growth in our
installed customer base for both product lines and increased training and
consulting services performed for Windchill customers. We expect service
revenue to continue to increase in absolute dollars in 2001.

We derived 56%, 56% and 59% of our total revenue from sales to international
customers in 1998, 1999 and 2000, respectively. Direct export sales were $115.2
million, $166.2 million and $81.5 million in 1998, 1999 and 2000, respectively.

[GRAPH APPEARS HERE]

[Chart Showing Revenue By Geography (in millions)]

<TABLE>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
U.S. $449.9 $464.4 $378.6
Europe 408.1 390.0 341.9
Asia/Pacific 160.0 203.2 208.0

</TABLE>

Over the past year, we implemented a number of strategic actions designed to
improve profitability and provide a foundation for growth. For example, in
order to provide more discrete product line focus and accountability, in May
2000 we created separate business units with overall responsibility for the
company's different product lines. We also have established several new
alliances with leading systems integrators. In addition, in the fourth

10
<PAGE>

quarter of 2000, we modified our arrangement with Rand to remove Rand's
exclusivity in the small business segment while broadening Rand's distribution
rights on a non-exclusive basis. This allows us to increase the number of
distributors for our MCAD solutions to provide greater geographic coverage and
specialized focus on discrete products. Between September 2000 and November
2000 we entered into arrangements with over twenty new distributors.

Looking forward, our overall revenue levels will be dependent on our ability to
successfully balance our efforts between our traditional MCAD business and our
growing Windchill business. Our challenge is to effectively manage and improve
performance in our MCAD business while continuing to aggressively pursue a new
product area that presents significant growth opportunities. Toward this end,
we believe that our initiative in building separate business units and
expanding our alliances and indirect distribution channels are having a
positive impact on our transformation from a one product company to a multi-
product company and will result in improved and more consistent performance.
Factors affecting our revenues and operating results are listed under
"Important Factors That May Affect Future Results" below.

Costs and Expenses

All cost and expense categories in 1998, 1999 and 2000 were impacted by the
acquisition and/or nonrecurring charges taken in those periods. See Note B. Our
operating expenses are based on anticipated future revenue and are relatively
fixed for the short term. From the fourth quarter of 1998 through the second
quarter of 2000 we had been incurring expenses that would have supported
revenues in excess of the then current levels in order to implement our
strategic initiatives, particularly as they related to our Windchill solutions.
Given the lower than expected revenue in the first two quarters of 2000, we
reduced our existing cost structure during the third quarter of 2000 to improve
profitability (see "Nonrecurring Charges--Reorganization into Business Units"
below).

Cost of License Revenue

Our cost of license revenue consists of costs associated with reproducing and
distributing software and documentation and the payment of royalties. Cost of
license revenue as a percentage of license revenue was 3% for both 1998 and
1999 and 4% for 2000. The increase in cost of license revenue as a percentage
of license revenue is primarily a result of paying higher royalties to third
parties for technologies used in connection with the Windchill products.

Cost of Service Revenue

Our cost of service revenue includes costs associated with training and
consulting personnel, such as salaries and related costs and travel, and costs
related to software maintenance, including costs incurred for customer support
personnel and the release of maintenance updates. Cost of service revenue as a
percentage of service revenue was 34%, 39% and 42% in 1998, 1999 and 2000,
respectively. This increase reflects our investment in the staffing necessary
to support our new product offerings, principally our Windchill solutions.

Sales and Marketing

Our sales and marketing expenses primarily include salaries and benefits, sales
commissions, travel and facility costs. These costs increased 3% in 1999 and 2%
in 2000 primarily due to the growth of the sales force related to our Windchill
solutions, partially offset by reductions associated with the sales force
reorganizations. Total sales and marketing employees were 2,440 in 1998, 1,980
in 1999 and 1,702 in 2000. The higher costs in 1999 and 2000 are due to the
higher average cost per sales employee, as we are hiring a more experienced CPC
solutions focused sales force. International sales and marketing expenses
represented 59% in 1998, 57% in 1999 and 58% in 2000 of total sales and
marketing expenses.

Research and Development

Our research and development expenses consist principally of salaries and
benefits, expenses associated with product translations, costs of computer
equipment used in software development and facility expenses. Compared to the
prior years, research and development expenses increased 33% in 1999 and 16% in
2000. The

11
<PAGE>

increase in 1999 and 2000 is primarily attributable to our continued investment
in Windchill solutions, as well as our InPart, Division and auxilium
acquisitions in 1999. We expect our investment in research and development to
increase in absolute dollars in 2001.

General and Administrative

Our general and administrative expenses include the costs of our corporate,
finance, information technology, human resources and administrative functions.
These costs increased 10% in 1999 and 13% in 2000. These increases represent
our continued investment in information technology infrastructure, the
integration of acquired companies and higher costs associated with increasing
service revenue.

[GRAPH APPEARS HERE]

[Chart Showing Cost and Expenses (in millions)]

<TABLE>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cost of License Revenue $ 15.3 $ 16.5 $ 16.7
Cost of Service Revenue 140.6 191.1 228.3
Sales and Marketing 395.4 407.9 416.7
Research and Development 93.2 124.1 143.8
General and Administrative 57.0 62.9 71.3
Amortization of Goodwill and
Intangible Assets 2.7 22.9 38.4
Acquisition and Nonrecurring Charges 105.8 53.3 21.5
</TABLE>

Amortization of Goodwill and Other Intangible Assets

These costs represent the amortization of intangible assets acquired, including
developed technology, goodwill, customer lists, assembled work force and trade
names. The increase in amortization of $20.2 million in 1999 and $15.5 million
in 2000 compared to the prior years resulted principally from our 1999
acquisitions of InPart, Division and auxilium.

Acquisitions

Computervision. In January 1998, we merged with Computervision Corporation by
issuing 11.6 million shares of common stock in exchange for all of the
outstanding common stock of Computervision. In connection with the merger, we
incurred a nonrecurring charge of $76.8 million for merger-related integration,
consolidation and transaction costs in the second quarter of 1998. The charge
included $18.1 million of severance and termination benefits related to the
elimination of approximately 450 positions, $12.7 million for the write-off of
assets, $8.2 million for transaction costs, $17.4 million of contract costs
associated with revised estimates, $7.2 million for the closing of leased
facilities and $13.2 million of lease termination and other costs. For
additional information see Note B.

ICEM. In June 1998, we acquired ICEM Technologies, a division of Control Data
Systems, Inc. for $40.6 million in cash. Headquartered in Frankfurt, Germany,
ICEM provides advanced surfacing and reverse engineering software tools used by
body and styling engineers in the automotive and aerospace industries. The
acquisition was accounted for as a purchase. Accordingly, we allocated the
purchase price to the assets acquired and liabilities assumed based on our
estimates of fair value. The amounts allocated to tangible and intangible
assets acquired less the liabilities assumed exceeded the purchase price by
approximately $7.0 million. This excess value over the purchase price was
allocated to reduce proportionately the values assigned to long-term assets and

12
<PAGE>

purchased in-process research and development (R&D) in determining their
values. The values assigned included $2.1 million for net assets acquired,
$28.9 million for purchased in-process R&D, $8.0 million for developed
technology, $1.6 million for an assembled workforce and $1.0 million for trade
names.

InPart. In October 1998, we purchased InPart Design, Inc., a developer of
DesignSuite, a Web-based repository of 3D mechanical component data, as well as
the developer of enterprise software applications focused on Web-based
component and supplier management, which was founded in 1996. We allocated the
purchase price of $38.1 million to the assets acquired and liabilities assumed
based on our estimate of fair value. The values assigned included $741,000 for
net liabilities assumed, $10.6 million for purchased in-process R&D, $4.1
million for developed technology, $1.1 million for customer lists, $200,000 for
an assembled workforce and $300,000 for trade names. The excess purchase price
over the amounts allocated to assets acquired and liabilities assumed was
recorded as goodwill of $22.5 million.

Division. In March 1999, we purchased Division Group plc, a developer of
enterprise product data visualization, simulation and integration tools. We
allocated the purchase price of $48.1 million to the assets acquired and
liabilities assumed based on our estimates of fair value. The values assigned
included $555,000 for net assets acquired, $9.0 million for purchased in-
process R&D, $3.3 million for developed technology, $2.0 million for customer
lists, $970,000 for an assembled workforce and $2.5 million for trade names.
The excess purchase price over the amounts allocated to assets acquired and
liabilities assumed was recorded as goodwill of $29.8 million.

auxilium. In March 1999, we purchased auxilium inc., a developer of Web-based
software tools for the integration of legacy systems, databases and
applications, which was founded in 1997. We allocated the purchase price of
$101.7 million to the assets acquired and liabilities assumed based on our
estimates of fair value. The values assigned included $182,000 for net
liabilities assumed, $18.6 million for purchased in-process R&D, $700,000 for
developed technology, $5.0 million for customer lists, $630,000 for an
assembled workforce and $6.0 million for trade names. The excess purchase price
over the amounts allocated to assets acquired and liabilities assumed was
recorded as goodwill of $70.9 million.

In the opinion of management, the purchased in-process R&D for the acquisitions
of ICEM, InPart, Division and auxilium had not yet reached technological
feasibility and had no alternative future use. Accordingly, we recorded
nonrecurring charges of $28.9 million during the third quarter of 1998 related
to ICEM, $10.6 million in the first quarter of 1999 related to InPart and $27.6
million in the second quarter of 1999 related to Division and auxilium. The
values assigned to purchased in-process R&D were determined by identifying
research projects for which technological feasibility had not been established.
The values of the purchased in-process R&D were determined by estimating the
stage of completion, including consideration of the complexity of the work
completed, the costs incurred and the projected costs to complete, the
contribution of any core technology and other acquired assets and the projected
product introduction dates, estimating the resulting net cash flows from the
products developed and discounting the net cash flows back to their present
value. For each acquisition, the estimates were based on the following major
assumptions:

ICEM:

. Revenue was estimated to grow at a compound rate of 33% over the first
five years and 14% thereafter.

. Cost of revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to decline from 20% to 10% through
2006 based on ICEM's average historical cost of revenue and reflect
future economies of scale.

. Selling, general and administrative expenses were estimated to be 29% of
revenue for all periods, consistent with ICEM's historical average.

InPart:

. Revenue was estimated to begin late in 1999 and to grow based on industry
growth rates and InPart's specific product offerings.

13
<PAGE>

. Cost of revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to decline from 22% to 11% based on
InPart's average historical cost of revenue and reflect future economies
of scale.

. Selling, general and administrative expenses, as a percentage of revenue,
were estimated to be 99% in 1999, reflecting an initial investment in the
marketing of the in-process technology and declining to 40% thereafter.
These amounts were based on industry average historical selling, general
and administrative costs.

Division:

. Revenue was based on industry growth rates and Division's specific
product offerings.

. Cost of revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to be 15% based on Division's
average historical cost of revenue.

. Selling, general and administrative expenses, as a percentage of revenue,
were estimated to be 47% in 1999, reflecting an initial investment in the
marketing of the in-process technology and declining to 41% thereafter.
These amounts were based on industry average historical selling, general
and administrative costs.

auxilium:

. Revenue was based on industry growth rates and auxilium's specific
product offerings.

. Cost of revenue for the purchased in-process technology, expressed as a
percentage of revenue, was estimated to be between 32% and 26% based on
auxilium's average historical cost of revenue.

. Selling, general and administrative expenses, as a percentage of revenue,
were estimated to be 53% in 1999, reflecting an initial investment in the
marketing of the in-process technology and declining to 40% thereafter.
These amounts were based on industry average historical selling, general
and administrative costs.

The net cash flows also considered net working capital requirements and capital
spending needs related to the purchased in-process technology. The rates used
to discount net cash flows for the purchased in-process technology to its
present value for the ICEM (24%), InPart (28%), Division (25%) and auxilium
(26% to 30%) acquisitions were based on the weighted average cost of capital
and took into account the uncertainty surrounding the successful development of
the purchased in-process technology for each acquisition. If these projects are
not successfully developed, future revenue and profitability may be adversely
affected, and the value of intangible assets acquired may become impaired.

Nonrecurring Charges

Sales Force Reorganizations. During the first quarter of 1999, we reorganized
our sales force and, in connection with this action, incurred a restructuring
charge of $3.2 million for the severance and termination benefits of
approximately 170 people who were terminated during the first quarter of 1999
in accordance with management's plans. During the second quarter of 1999, we
incurred a restructuring charge of $5.8 million for the severance and
termination benefits of approximately 150 people in connection with the
integration of our sales and related support groups. All amounts related to
terminated employees were paid in 1999.

Facility Consolidation and Asset Impairment. During the second quarter of 1999,
we incurred a restructuring charge of $1.4 million for the consolidation of
certain excess leased facilities. Also, in the second quarter we recorded an
impairment loss of $4.7 million on certain intangible assets related to our
industrial design (CDRS) activities. Due to acquisitions and the development of
new technology, the carrying value of these assets was impaired.

Reorganization into Business Units. During the third quarter of 2000, we
recorded a $21.5 million nonrecurring charge primarily associated with our
reorganization into business units and with the development and execution of
management's plans to reduce our cost structure and improve profitability. The
nonrecurring charge is comprised

14
<PAGE>

of $11.9 million for severance and termination benefits of approximately 280
people who were notified or terminated during the third quarter of 2000 and
$9.6 million for facility consolidations. Of the $21.5 million nonrecurring
charge, $12.2 million was paid during 2000. We expect to pay $6.0 million over
the next twelve months.

Interest Expense

Our interest expense in 1998 related primarily to debt incurred by
Computervision prior to the merger that we paid off in the second quarter of
1998. See Note F.

Interest Income

Interest income relates to the earnings on the investment of our excess cash
balance in various financial instruments. The 41% decrease in interest income
in 1999 compared to 1998 resulted from lower average annual yields and lower
average cash balances of approximately $140.0 million. The 17% increase in
interest income in 2000 compared to 1999 resulted from higher average annual
yields and higher average cash balances of approximately $24.0 million.

Other Expense

A large portion of our revenue and expenses is transacted in foreign
currencies. In order to reduce our exposure to fluctuations in foreign exchange
rates, from time to time we engage in hedging transactions involving the use of
foreign exchange forward contracts and foreign exchange option contracts in the
primary European and Asian currencies. Our other expense includes the costs of
the hedging contracts, the gain or loss from the translation of results for
subsidiaries for which the U.S. dollar is the functional currency and other
charges incurred in connection with financing customer contracts. See Note A.

Income Taxes

Our effective income tax provision (benefit) rate was 48% in 1998, 34% in 1999
and (21)% in 2000. The higher effective tax rate in 1998 over the statutory
federal tax rate (35)% was due primarily to the non-deductibility of certain
expenses included in the acquisition of Computervision and nonrecurring
charges. The lower effective tax rate in 1999 resulted primarily from the use
of Computervision net operating losses, partially offset by the non-
deductibility of certain acquisition-related charges and net operating losses
of foreign entities which could not be benefited. The reduced effective tax
rate benefit in 2000 resulted primarily from the non-deductibility of certain
acquisition-related amortization and net operating losses of foreign entities
which could not be benefited. On a pro forma basis, which excludes amortization
of goodwill and intangible assets and acquisition and nonrecurring charges, our
tax rate was 34% in 1998, 27% in 1999 and 29% in 2000. See Note E.

Extraordinary Loss

In connection with the Computervision merger, we assumed a revolving note
payable and long-term debt obligations. During the second quarter of 1998, we
paid $275.7 million for settlement of the outstanding note, debt obligations,
accrued interest and related fees, and we incurred an extraordinary after-tax
loss of $19.0 million related to the write-off of deferred financing costs and
other prepayment costs associated with this debt. See Note F.

Liquidity and Capital Resources

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 years presented.

As of September 30, 2000, cash and investments totaled $375.1 million, up from
$353.9 million at September 30, 1999. The primary reasons for the increase in
cash and investments during 2000 was $79.6 million of proceeds from issuance of
common stock under our stock plans, cash provided by operating activities of
$51.9 million and $30.8 million from the sale of land and certain improvements
partially offset by the repurchase of $90.0 million of common stock and $37.0
million in expenditures to acquire property and

15
<PAGE>

equipment. 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 facilitate rapid deployment in the event
of immediate cash needs.

Cash generated from operating activities was $181.9 million in 1998, $150.8
million in 1999 and $51.9 million in 2000, including cash expenditures for
nonrecurring charges of $62.3 million in 1998, $34.2 million in 1999 and $30.3
million in 2000.

In 1998, 1999 and 2000, we acquired $35.8 million, $35.2 million and $37.0
million, respectively, of capital equipment consisting principally of computer
equipment, software and office equipment. We spent $40.6 million in 1998, $72.9
million in 1999 and $7.9 million in 2000 to acquire businesses. In December
1999, we sold land and certain improvements under construction for $30.8
million and entered into an operating lease covering approximately 381,000
square feet of office space in Needham, MA to consolidate and replace our
Waltham, MA operations. Our corporate offices currently occupy 210,000 square
feet in the new Needham facility and we expect to occupy the remaining 171,000
square feet in the second quarter of fiscal 2001, subject to completion of
construction. Occupancy and rent began in December 2000 and the lease expires
in December 2012, subject to certain renewal rights. In the first half of 2001
we expect to make approximately $25.0 million of capital expenditures primarily
for tenant improvements and furniture and fixtures related to the new facility.

We used net cash for financing activities in 1998, 1999 and 2000, primarily to
repurchase $50.0 million, $90.0 million and $90.0 million, respectively, of our
stock, and to pay off the Computervision debt in 1998 of $275.7 million. These
expenditures were partially offset by proceeds of $70.4 million, $23.9 million
and $79.6 million, in 1998, 1999 and 2000, respectively, from the issuance of
our common stock under our stock plans.

In September 1998, our Board of Directors authorized a plan allowing us to
repurchase up to 20.0 million shares of our common stock. Through September 30,
2000, we purchased 18.7 million shares at a cost of $230.0 million. In July
2000 our Board of Directors authorized an additional 20.0 million shares to be
repurchased. At September 30, 2000, 6.5 million shares were held in treasury.
These repurchased shares and any future repurchases will be used to issue
shares for stock option exercises, employee stock purchase plans and potential
acquisitions.

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 2001.

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 A.

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 Annual Report on Form 10-K and otherwise made by
us or on our behalf, because these factors 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,

16
<PAGE>

our reorganization into business units, our shift in business emphasis to a
more solutions-oriented sales process--undertaken in part to increase our
average order size--and our transition from a one product to a multi-product
company have resulted in longer and more unpredictable 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 also cause quarter-to-quarter revenue and earnings
fluctuation 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 revenue may adversely affect the size of our
installed base and our level of service revenue; and

. the 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,
may lessen the control we have over any particular sales cycle.

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.

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 divisionalized business unit
structure, including the realignment of internal functions, the
management of divisionalized processes and effective mitigation of
disruption that may result from organizational change;

. our ability to sustain the appropriate balance between our MCAD and
Windchill businesses;

. 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 force reorganization initiatives, including:

-- our shift from point sales to solution sales,

-- the effectiveness of our organizational sales model,

-- the ability of our sales reps to learn and sell our products, and

-- Rands' and other distributors' ability to perform successfully in the
MCAD arena;

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

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

. our ability to develop Windchill Netmarkets opportunities; and

17
<PAGE>

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

We may not be successful in integrating recently acquired businesses or
products

We have increased our product range and customer base in the recent past due in
part to acquisitions. We may acquire additional businesses or product lines in
the future. The success of any acquisition may be dependent upon our ability to
integrate the acquired business or products successfully and to retain key
personnel and customers associated with the acquisition. If we fail to do so,
or if the costs of or length of time for integration increase significantly, it
could negatively affect our business.

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.

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
standards in the Internet software industry. 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.

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 products with functionality that our customers want at a price
they can afford;

. build appropriate direct distribution channels;

. utilize the Internet for sales; and

. build appropriate indirect distribution channels through Rand or others.

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

18
<PAGE>

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

II. MCAD-Related Considerations

Increasing competition in the MCAD marketplace may reduce our revenues

There are an increasing number of competitive MCAD products. Despite our belief
that our products are technologically superior, some competitive products have
reached a level of functionality whereby product differentiation is less
likely, in and of itself, to dislodge incumbent MCAD systems, given the
training and other startup costs associated with system replacement. Increased
competition and market acceptance of these competitive products could have a
negative effect on pricing and revenues for our products, which could have a
material adverse affect on our results.

In addition, our MCAD 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 products by releasing updates. 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;

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

. customers fail to accept such products or services.

19
<PAGE>

Growth in the MCAD industry appears to have slowed

Growth in certain segments of the MCAD industry appears to have slowed and,
coupled with decreased functional differentiation among flexible engineering
tools, may affect our ability to penetrate the market for new customers and
recapture our market share. Over the long term, we believe our emphasis on CPC
solutions will allow us to differentiate our flexible engineering products 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. Windchill Strategy Considerations

We are implementing a new strategy to capitalize on an Internet-based,
business-to-business market opportunity known as Collaborative Product Commerce
(CPC). It may be that our assumptions about the CPC market opportunity are
wrong, which could adversely affect our results

We have identified CPC as a new market opportunity for us, and have devoted
significant resources toward capitalizing on that opportunity. CPC solutions
include software and services that utilize Internet technologies to permit
employees, customers, suppliers and others to collaboratively develop, build
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 or through other sources.

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 these efforts.

Our Windchill software, which is central to our CPC strategy, is relatively new
and is not yet well established in the marketplace

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

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

. ease of installation;

. ease of use;

. full capability, functionality and performance;

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

. quality and efficiency of the services we perform relating to
implementation and customization.

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.

In addition, implementing a Windchill software solution on an enterprise level
takes longer and requires greater expertise than does installing our other
products. Our Windchill software must integrate with existing computer systems
and software programs used by our customers and their partners. Because we are
one of the first companies to offer a CPC solution, many customers will be
facing these integration issues for the first time, particularly in the context
of collaborating with members of the extended enterprise, including customers
and

20
<PAGE>

supply chain partners. Our customers could become dissatisfied with our
products or services if integrations prove to be difficult, costly or time
consuming, and our operating results may be affected.

We intend to utilize third parties, such as system integrators, resellers,
strategic partners and application service providers, for the distribution and
implementation of Windchill software, which may result in management
difficulties and customer retention problems

As an enterprise solution, Windchill 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 to both drive the sales process and service our customers. In
addition, the successful utilization of third parties will depend on:

. our ability to enter into definitive 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.

Competition among providers of CPC solutions may increase, which may reduce our
profits and limit or reduce our market share

The market for CPC 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:

. in-house development efforts by potential customers or partners;

. other vendors of engineering information management software; and

. larger, more well-known enterprise software providers seeking to extend
the functionality of their products to encompass CPC.

In addition, our Global Services Organization may face increasing competition
for follow-on customization services from other third-party consultants and
service providers.

If use of 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
partners may not adopt or continue to use the Internet as a medium of
exchanging product information. Our CPC strategy would be seriously harmed if:

. use of the Internet does not continue to increase or increases more
slowly than expected;

. the infrastructure for the Internet does not effectively 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
conducting commercial transactions.

Our CPC 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

21
<PAGE>

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.

Our Windchill Netmarkets solutions provides CPC capabilities on Internet
exchanges, portals and marketplaces. Accordingly, its 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 Net marketplaces that
are acceptable to customers and suitable for the evolving nature of the
Internet.

IV. Other Considerations

Our stock price, which may reflect an Internet valuation, 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 Internet-based solutions may
cause us to be viewed, in part, as an Internet company. The trading prices of
Internet stocks in general have been unusually high under conventional
valuation standards such as price-to-earnings and price-to-sales ratios and
have experienced fluctuations unrelated or disproportionate to the operating
performance of these companies. The trading prices and valuations of these
stocks, and of ours, may not be sustained. 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, a large percentage of our common stock traditionally has been held by
institutional investors. Consequently, actions with respect to 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.

We are currently defending a securities class action lawsuit in which we could
be liable for damages

ITEM 7A: Quantitative and Qualitative Disclosures about Market Risk

We face exposure to financial market risks, including adverse movements in
foreign currency exchange rates and changes in interest rates. These exposures
may change over time as business practices evolve and could have a material
adverse impact on our financial results. Our primary exposure has been related
to local currency revenue and operating expenses in Europe and the Asia/Pacific
region. Historically, we have hedged currency exposures associated with certain
accounts receivable denominated in local currencies and certain anticipated
foreign currency revenue transactions. The goal of our hedging activity is to
offset the impact of currency fluctuations on certain local currency accounts
receivable and foreign currency revenue transactions. The success of this
activity depends upon forecasts of transaction activity denominated in various
currencies. To the extent that these forecasts are overstated or understated
during periods of currency volatility, we could experience unanticipated
currency gains or losses. Outstanding forward foreign exchange contracts at
September 30, 2000 matured within three months, and did not have a material
impact on our financial results.

22
<PAGE>

The carrying amounts reflected in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, and accounts payable approximate fair
value at the balance sheet date due to the short maturities of these
instruments.

We maintain investment portfolio holdings of various issuers, types and
maturities. These securities are generally classified as available for sale,
and consequently, are recorded on the balance sheet at fair market value with
unrealized gains or losses included in stockholders' equity. Given the short
maturities and investment grade quality of the portfolio holdings at September
30, 2000, a sharp rise in interest rates should not have a material adverse
impact on the fair value of our investment portfolio. As a result, we do not
currently hedge these interest rate exposures.

The following table presents hypothetical changes in fair values in our
financial instruments at September 30, 2000 that are sensitive to changes in
interest rates. Our modeling technique measures the change in fair value
arising from selected potential changes in interest rates. Movements in
interest rates of plus or minus 50 basis points (BP) and 100 BP reflect
immediate hypothetical shifts in the fair value of these investments. Fair
value represents the market principal plus accrued interest and dividends of
certain interest-rate-sensitive securities considered cash equivalents or
investments for financial reporting purposes at September 30, 2000.

<TABLE>
<CAPTION>
Valuation of Valuation of
Securities given an Securities given an
Type of Security interest rate decrease interest rate increase
---------------- ------------------------- No change in ------------------------
(100 BP) (50 BP) interest rates 50 BP 100 BP
(in millions) ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Municipal debt
securities............. $ 59 $ 58 $ 58 $ 58 $ 57
Mutual funds............ 68 68 68 68 68
Government agencies..... 19 19 19 19 19
----------- ----------- ---- ----------- -----------
Total................. $ 146 $ 145 $145 $ 145 $ 144
=========== =========== ==== =========== ===========
</TABLE>

The Federal Reserve has adjusted the Federal Funds Rate by a 50 BP move nine
times during the last 40 quarters, whereas they have never adjusted the Federal
Funds Rate by a 100 BP move during the same period. The last 50 BP move
occurred in May 2000.

ITEM 8: Financial Statements and Supplementary Data

The consolidated financial statements and notes to the consolidated financial
statements are attached as APPENDIX A below.

ITEM 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

ITEM 10: Directors and Executive Officers of the Registrant

Information with respect to our directors may be found in the sections
captioned "Proposal 1: Elect Two Directors" and "Who Are Our Directors"
appearing in our 2001 Proxy Statement. Such information is incorporated herein
by reference.

Our executive officers are:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
C. Richard Harrison..... 45 Chief Executive Officer and President
Edwin J. Gillis......... 52 Executive Vice President, Chief Financial Officer and Treasurer
Barry F. Cohen.......... 56 Executive Vice President, Marketing
James E. Heppelmann..... 36 Executive Vice President, General Manager--Windchill Solutions
Jon R. Stevenson........ 40 Executive Vice President, General Manager--MCAD Solutions
Trenton H. Brown........ 36 Executive Vice President, International Sales
Paul J. Cunningham...... 38 Executive Vice President, Americas Sales
David R. Friedman....... 39 Senior Vice President, General Counsel and Clerk
Thomas L. Beaudoin...... 47 Senior Vice President, Finance
</TABLE>

23
<PAGE>

Mr. Harrison has been Chief Executive Officer and President since March 2000.
Prior to that, Mr. Harrison served as President and Chief Operating Officer
since August 1994.

Mr. Gillis has been Executive Vice President since October 1996 and Chief
Financial Officer and Treasurer since October 1995. Mr. Gillis had served as
Senior Vice President of Finance and Administration from October 1995 to
September 1996. Prior to joining PTC, Mr. Gillis was Senior Vice President of
Finance and Operations and Chief Financial Officer at Lotus Development
Corporation from August 1991 until September 1995.

Mr. Cohen has been Executive Vice President, Marketing since January 1998.
Prior to joining PTC, Mr. Cohen was Senior Vice President, Human Development
and Organizational Productivity at Computervision Corporation from November
1993 to January 1998.

Mr. Heppelmann has been Executive Vice President, General Manager-Windchill
Solutions since November 2000. He had served as Executive Vice President and
General Manager of Windchill Netmarkets from July 2000 to November 2000 and
Senior Vice President of Windchill from January 1998 to July 2000. Prior to
joining PTC, Mr. Heppelmann was Vice President of Marketing and Chief
Technology Officer of Windchill Technology, Inc. from September 1997 to January
1998. From October 1992 to September 1997, he held various positions at
Metaphase Technology Inc. including Chief Technology Officer.

Mr. Stevenson has been Executive Vice President, General Manager-MCAD Solutions
since May 2000. Mr. Stevenson was Senior Vice President, Research & Development
from March 1999 to May 2000 and was Senior Vice President, Designwave from
January 1998 to March 1999. Prior to joining PTC, Mr. Stevenson was employed by
Computervision Corporation as Vice President, Research & Development from April
1996 to January 1998 and Director of Research and Development from February
1995 to April 1996.

Mr. Brown has been Executive Vice President, International Sales since July
2000. Mr. Brown was Divisional Vice President, Asia Pacific from April 2000 to
July 2000 and Sector Vice President from October 1999 to April 2000. Prior to
that, he was Area Vice President-Sales from October 1998 to October 1999 and
Regional Director from April 1998 to October 1998. He also served as District
Manager from December 1997 to April 1998. Prior to joining PTC, Mr. Brown
served as District Manager of Nalco Chemical Inc. from September 1989 to
December 1997.

Mr. Cunningham has served as Executive Vice President, Americas Sales since
July 2000 and from October 1998 to June 2000 he was Executive Vice President,
Primary Sales. Mr. Cunningham was Senior Vice President, European Sales from
April 1997 to October 1998 and Senior Vice President, North America West Sales
from October 1996 to April 1997. Prior to that, he was Area Vice President-
Sales from January 1996 to October 1996 and Vice President, Western Operations
& Sales Development from October 1994 to January 1996.

Mr. Friedman has served as Senior Vice President, General Counsel and Clerk
since October 1999. Mr. Friedman had served as Vice President, General Counsel
and Clerk from October 1998 to September 1999 and as Associate Corporate
Counsel from September 1996 to September 1998. Prior to joining PTC,
Mr. Friedman was a Partner at the law firm of Palmer & Dodge LLP from January
1994 to August 1996.

Mr. Beaudoin has been Senior Vice President, Finance since joining PTC in
October 2000. Prior to joining PTC, Mr. Beaudoin was Chief Financial Officer,
Infinite Supply at i2 Technologies Inc. from June 2000 to September 2000. Mr.
Beaudoin has served in the following positions at Compaq Computer Corporation:
Vice President Finance, Enterprise from July 1999 to June 2000; Vice President,
Services from January 1998 to July 1999; and, Vice President, Asia Pacific from
January 1995 to January 1998.

ITEM 11: Executive Compensation

Information with respect to executive compensation may be found under the
headings captioned "How We Compensate Our Directors" and "Information About
Executive Compensation" appearing in our 2001 Proxy Statement. Such information
is incorporated herein by reference.

24
<PAGE>

ITEM 12: Security Ownership of Certain Beneficial Owners and Management

Information with respect to security ownership may be found under the heading
captioned "Information About PTC Common Stock Ownership" appearing in our 2001
Proxy Statement. Such information is incorporated herein by reference.

ITEM 13: Certain Relationships and Related Transactions

Information with respect to this item may be found under the heading
"Information About Certain Insider Relationships" appearing in our 2001 Proxy
Statement. Such information is incorporated herein by reference.

PART IV

ITEM 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Documents Filed as Part of Form 10-K
1. Financial Statements
-- Consolidated Balance Sheets as of September 30, 1999 and 2000
-- Consolidated Statements of Income for the years ended September
30, 1998, 1999 and 2000
-- Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1999 and 2000
-- Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1998, 1999 and 2000
-- Consolidated Statements of Comprehensive Income for the years
ended September 30, 1998, 1999 and 2000
-- Notes to Consolidated Financial Statements
-- Report of Independent Accountants

2. Financial Statement Schedules
-- Schedules have been omitted since they are either not required,
not applicable, or the information is otherwise included.

3. Exhibits
-- As part of this Annual Report on Form 10-K, we hereby file and
incorporate by reference the Exhibits listed in the Exhibit Index
immediately preceding such Exhibits.

(b) Reports on Form 8-K

None.

As part of this Annual Report on Form 10-K, we hereby file the Exhibits listed
in the attached Exhibit Index.

(d) Financial Statement Schedules

None.

25
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 20th day of
December, 2000.

Parametric Technology Corporation

By /s/ C. Richard Harrison
----------------------------------
C. Richard Harrison,
Chief Executive Officer and
President

POWER OF ATTORNEY

We, the undersigned officers and directors of Parametric Technology
Corporation, hereby severally constitute Edwin J. Gillis and David R. Friedman,
Esq., and each of them singly, our true and lawful attorneys with full power to
them, and each of them singly, to sign for us and in our names in the
capacities indicated below any and all subsequent amendments to this report,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact may do or cause to be done
by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated below.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
(i) Principal Executive Officer:
/s/ C. Richard Harrison Chief Executive Officer December 20, 2000
-------------------------------- and President
C. Richard Harrison

(ii) Principal Financial and
Accounting Officer:
/s/ Edwin J. Gillis Executive Vice President, Chief December 20, 2000
-------------------------------- Financial Officer and
Edwin J. Gillis Treasurer

(iii) Board of Directors:
/s/ Noel G. Posternak Chairman of the Board of December 20, 2000
--------------------------------- Directors
Noel G. Posternak

/s/ C. Richard Harrison Director December 20, 2000
---------------------------------
C. Richard Harrison

/s/ Robert N. Goldman Director December 20, 2000
---------------------------------
Robert N. Goldman

/s/ Donald K. Grierson Director December 20, 2000
---------------------------------
Donald K. Grierson

/s/ Oscar B. Marx, III Director December 20, 2000
---------------------------------
Oscar B. Marx, III

/s/ Michael E. Porter Director December 20, 2000
---------------------------------
Michael E. Porter

</TABLE>

26
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <C> <S>
2.1(a) -- Agreement and Plan of Reorganization dated as of November 3,
1997 by and among Parametric Technology Corporation, PTC
Acquisition and Computervision Corporation (filed as
Exhibit 2.1 to our Current Report on Form 8-K filed November 4,
1997 and incorporated herein by reference).
2.1(b) -- Agreement and Plan of Reorganization dated as of March 8, 1999
by and among Parametric Technology Corporation, Northstar
Acquisition Corporation, auxilium inc. and the stockholders of
auxilium inc. (filed as Exhibit 2.1 to our Current Report on
Form 8-K filed March 23, 1999 and incorporated herein by
reference).
3.1(a) -- Restated Articles of Organization of Parametric Technology
Corporation adopted February 4, 1993 (filed as Exhibit 3.1 to
our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 30, 1996 and incorporated herein by reference).
3.1(b) -- Articles of Amendment to Restated Articles of Organization
adopted February 9, 1996 (filed as Exhibit 4.1(b) to our
Registration Statement on Form S-8 (Registration No. 333-01297)
and incorporated herein by reference).
3.1(c) -- Articles of Amendment to Restated Articles of Organization
adopted February 13, 1997 (filed as Exhibit 4.1(b) to our
Registration Statement on Form S-8 (Registration No. 333-22169)
and incorporated herein by reference).
3.1(d) -- Articles of Amendment to Restated Articles of Organization
adopted February 10, 2000 (filed as Exhibit 3.1 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended
April 1, 2000 and incorporated herein by reference).
3.1(e) -- Certificate of Vote of Directors establishing Series A Junior
Participating Preferred Stock (filed herewith).
3.2 -- By-Laws, as amended and restated, of Parametric Technology
Corporation (filed herewith).
4.1 -- Rights Agreement effective as of January 5, 2001 between
Parametric Technology Corporation and American Stock Transfer &
Trust Company (filed herewith).
10.1* -- Parametric Technology Corporation 2000 Equity Incentive Plan
(filed as Exhibit 10.7 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended April 1, 2000 and incorporated herein
by reference).
10.2* -- Parametric Technology Corporation 1997 Incentive Stock Option
Plan (filed as Exhibit 10.1 to our Quarterly Report on Form 10-
Q for the fiscal quarter ended March 29, 1997 and incorporated
herein by reference).
10.3* -- Parametric Technology Corporation 1987 Incentive Stock Option
Plan, as amended (filed as Exhibit 10.2 to our Annual Report on
Form 10-K for the fiscal year ended September 30, 1999 and
incorporated herein by reference).
10.4* -- Parametric Technology Corporation 1992 Director Stock Option
Plan, as amended (filed as Exhibit 10.10 to our Annual Report
on Form 10-K for the fiscal year ended September 30, 1996 and
incorporated herein by reference).
10.5* -- Parametric Technology Corporation 1996 Directors Stock Option
Plan, as amended (filed as Exhibit 10.4 to our Annual Report on
Form 10-K for the fiscal year ended September 30, 1999 and
incorporated herein by reference).
10.6* -- Computervision Corporation 1992 Stock Option Plan as amended
September 15, 1994, April 18, 1995 and December 5, 1996 (filed
as Exhibit 10.3 to the Annual Report on Form 10-K of
Computervision Corporation for the fiscal year ended December
31, 1996 (File No. 1-7760/0-20290) and incorporated herein by
reference).
</TABLE>

27
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <C> <S>
10.7* -- Amended and Restated Severance Agreement with Steven C. Walske
dated March 1, 2000 (filed as Exhibit 10.2 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended April 1, 2000
and incorporated herein by reference).
10.8* -- Amended and Restated Severance Agreement with C. Richard
Harrison dated February 10, 2000 (filed as Exhibit 10.3 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended April
1, 2000 and incorporated herein by reference).
10.9* -- Amended and Restated Severance Agreement with Edwin J. Gillis
dated February 10, 2000 (filed as Exhibit 10.4 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended April 1, 2000
and incorporated herein by reference).
10.10* -- Severance Agreement with Barry F. Cohen dated February 10, 2000
(filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended April 1, 2000 and incorporated herein
by reference).
10.11* -- Severance Agreement with Paul J. Cunningham dated October 29,
1998 (filed herewith).
10.12* -- Severance Agreement with James E. Heppelmann dated May 18, 2000
(filed herewith).
10.13* -- Severance Agreement with Jon R. Stevenson dated May 18, 2000
(filed herewith).
10.14* -- Consulting Agreement with Michael E. Porter dated November 17,
1995 (filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended June 28, 1997 and incorporated
herein by reference).
10.15* -- Amendment #1 to Consulting Agreement with Michael E. Porter
dated May 15, 1997 (filed as Exhibit 10.4 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended June 28, 1997
and incorporated herein by reference).
10.16* -- Amendment #2 to Consulting Agreement with Michael E. Porter
dated January 6, 1998 (filed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended April 4, 1998
and incorporated herein by reference).
10.17* -- Amendment #3 to Consulting Agreement with Michael E. Porter
dated July 20, 1998 (filed as Exhibit 10.24 to our Annual Report
on Form 10-K for the fiscal year ended September 30, 1998 and
incorporated herein by reference).
10.18* -- Amendment #4 to the Consulting Agreement with Michael E. Porter
dated February 11, 1999 (filed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended April 3, 1999
and incorporated herein by reference).
10.19* -- Amendment #5 to the Consulting Agreement with Michael E. Porter
dated February 10, 2000 (filed as Exhibit 10.6 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended April 1, 2000
and incorporated herein by reference).
10.20* -- Amendment #6 to the Consulting Agreement with Michael E. Porter
dated September 14, 2000 (filed herewith).
10.21 -- Lease dated December 14, 1999 by and between PTC and Boston
Properties Limited Partnership (filed herewith).
10.22 -- Lease dated May 22, 1987 by and between PTC and the Trustees of
128 Technology Trust (filed as Exhibit 10.4 to our Registration
Statement on Form S-1 (Registration No. 33-31620) and
incorporated herein by reference).
10.23 -- Lease Amendment No. 1 dated March 10, 1988 by and between PTC
and the Trustees of 128 Technology Trust (filed as Exhibit 10.6
to our Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
</TABLE>

28
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <C> <S>
10.24 -- Lease Amendment No. 2 dated November 9, 1988 by and between PTC
and the Trustees of 128 Technology Trust (filed as Exhibit 10.7
to our Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
10.25 -- Lease Amendment No. 3 dated November 8, 1989 by and between PTC
and the Trustees of 128 Technology Trust (filed as Exhibit 10.8
to our Annual Report on Form 10-K for the fiscal year ended
September 30, 1996 and incorporated herein by reference).
10.26 -- Lease Amendment No. 4 dated January 21, 1991 by and between PTC
and the Trustees of 128 Technology Trust (filed as Exhibit 10.7
to our Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 and incorporated herein by reference).
10.27 -- Lease Amendment No. 5 dated March 6, 1992 by and between PTC and
the Trustees of 128 Technology Trust (filed as Exhibit 10.18 to
our Annual Report on Form 10-K for the fiscal year ended
September 30, 1992 (File No. 0-18059) and incorporated herein by
reference).
10.28 -- Lease Amendment No. 5A dated November 18, 1992 by and between
PTC and the Trustees of 128 Technology Trust (filed as Exhibit
10.19 to our Annual Report on Form 10-K for the fiscal year
ended September 30, 1992 (File No. 0-18059) and incorporated
herein by reference).
10.29 -- Lease Amendment No. 6 dated June 8, 1993 by and between PTC and
the Trustees of 128 Technology Trust (filed as Exhibit 10.21 to
our Annual Report on Form 10-K for the fiscal year ended
September 30, 1993 (File No. 0-18059) and incorporated herein by
reference).
10.30 -- Lease Amendment No. 7 dated April 14, 1994 by and between PTC
and the Trustees of 128 Technology Trust (filed as Exhibit 10.22
to our Annual Report on Form 10-K for the fiscal year ended
September 30, 1994 (File No. 0-18059) and incorporated herein by
reference).
10.31 -- Lease Amendment No. 8 dated July 19, 1995 by and between PTC and
the Trustees of 128 Technology Trust (filed as Exhibit 10.23 to
our Annual Report on Form 10-K for the fiscal year ended
September 30, 1995 (File No. 0-18059) and incorporated herein by
reference).
10.32 -- Lease Amendment No. 9 dated January 23, 1996 by and between PTC
and the Trustees of 128 Technology Trust (filed as Exhibit 10.20
to our Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 (File No. 0-18059) and incorporated herein by
reference).
10.33 -- Lease Amendment No. 10 dated May 10, 1996 by and between PTC and
the Trustees of 128 Technology Trust (filed as Exhibit 10.25 to
our Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
10.34 -- Lease Amendment No. 11 dated January 24, 1997 by and between PTC
and the Trustees of 128 Technology Trust (filed as Exhibit 10.26
to our Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
10.35 -- Lease Amendment No. 12 dated December 4, 1998 by and between PTC
and the Trustees of 128 Technology Trust (filed as Exhibit 10.29
to our Annual Report on Form 10-K for the fiscal year ended
September 30, 1999 and incorporated herein by reference).
10.36 -- Lease Amendment No. 13 dated December 8, 1998 by and between PTC
and the Trustees of 128 Technology Trust (filed as Exhibit 10.30
to our Annual Report on Form 10-K for the fiscal year ended
September 30, 1999 and incorporated herein by reference).
10.37 -- Amended and Restated Lease Agreement dated as of January 1, 1995
between United Trust Fund Limited Partnership and (filed as
Exhibit 10.20 to the Annual Report on Form 10-K of
Computervision Corporation for the fiscal year ended December
31, 1995 (File No. 0-18059) and incorporated herein by
reference).
21.1 -- Subsidiaries of Parametric Technology Corporation (filed
herewith).
</TABLE>

29
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <C> <S>
23.1 -- Consent of PricewaterhouseCoopers LLP (filed herewith).
27.1 -- Financial Data Schedule for the year ended September 30, 2000
(filed herewith).
</TABLE>
--------
* Identifies a management contract or compensatory plan or arrangement in
which an executive officer or director of PTC participates.

30
<PAGE>

APPENDIX A

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS
(in thousands)

<TABLE>
<CAPTION>
September 30,
------------------------
1999 2000
----------- -----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 239,789 $ 325,872
Short-term investments............................. 101,217 22,969
Accounts receivable, net of allowance for doubtful
accounts of $6,400 and $6,270..................... 221,889 183,804
Prepaid expenses................................... 47,068 47,727
Other current assets............................... 95,141 48,061
----------- -----------
Total current assets............................. 705,104 628,433
Marketable investments............................... 12,889 26,300
Property and equipment, net.......................... 64,176 66,879
Goodwill, net of accumulated amortization of $20,464
and $45,771......................................... 113,011 88,034
Other intangible assets, net of accumulated
amortization of $9,233 and $22,864.................. 53,836 43,645
Other assets......................................... 67,604 71,592
----------- -----------
Total assets..................................... $ 1,016,620 $ 924,883
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................... $ 40,879 $ 30,944
Accrued expenses................................... 67,135 46,200
Accrued compensation and severance................. 55,590 52,112
Deferred revenue................................... 213,059 231,495
Income taxes....................................... 80,520 1,601
----------- -----------
Total current liabilities........................ 457,183 362,352
Other liabilities.................................... 38,333 33,989
Commitments and contingencies (Note G)
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000 shares
authorized; none issued........................... -- --
Common stock, $0.01 par value; 500,000 shares
authorized; 272,277 and 276,053 shares issued..... 2,723 2,761
Additional paid-in capital......................... 1,583,846 1,641,513
Treasury stock, at cost, 2,113 and 6,456 shares.... (27,727) (66,647)
Accumulated deficit................................ (1,022,357) (1,036,456)
Accumulated other comprehensive loss............... (15,381) (12,629)
----------- -----------
Total stockholders' equity....................... 521,104 528,542
----------- -----------
Total liabilities and stockholders' equity....... $ 1,016,620 $ 924,883
=========== ===========
</TABLE>

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

F-1
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)

<TABLE>
<CAPTION>
Year ended September 30,
------------------------------
1998 1999 2000
--------- --------- --------
<S> <C> <C> <C>
Revenue:
License....................................... $ 609,239 $ 561,220 $378,618
Service....................................... 408,731 496,381 549,796
--------- --------- --------
Total revenue.............................. 1,017,970 1,057,601 928,414
--------- --------- --------
Costs and expenses:
Cost of license revenue....................... 15,299 16,508 16,718
Cost of service revenue....................... 140,625 191,147 228,266
Sales and marketing........................... 395,352 407,936 416,665
Research and development...................... 93,162 124,131 143,763
General and administrative.................... 57,031 62,852 71,263
Amortization of goodwill and other intangible
assets....................................... 2,715 22,888 38,432
Acquisition and nonrecurring charges (Note B). 105,766 53,347 21,534
--------- --------- --------
Total costs and expenses................... 809,950 878,809 936,641
--------- --------- --------
Operating income (loss)........................ 208,020 178,792 (8,227)
Interest expense.............................. 13,329 622 367
Interest income............................... (19,131) (11,283) (13,228)
Other expense, net............................ 9,815 8,211 9,701
--------- --------- --------
Income (loss) before income taxes and
extraordinary loss............................ 204,007 181,242 (5,067)
Provision (benefit) for income taxes.......... 98,293 61,949 (1,087)
--------- --------- --------
Income (loss) before extraordinary loss........ 105,714 119,293 (3,980)
Extraordinary loss, net of income tax benefit
of $2,183 (Note F)........................... (19,017) -- --
--------- --------- --------
Net income (loss).............................. $ 86,697 $ 119,293 $ (3,980)
========= ========= ========
Earnings (loss) per share (Note A):
Basic:
Income (loss) before extraordinary loss....... $ 0.39 $ 0.44 $ (0.01)
Extraordinary loss............................ (0.07) -- --
--------- --------- --------
Net income (loss)............................. $ 0.32 $ 0.44 $ (0.01)
========= ========= ========
Diluted:
Income (loss) before extraordinary loss....... $ 0.38 $ 0.43 $ (0.01)
Extraordinary loss............................ (0.07) -- --
--------- --------- --------
Net income (loss)............................. $ 0.31 $ 0.43 $ (0.01)
========= ========= ========
</TABLE>

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

F-2
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------
1998 1999 2000
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 86,697 $119,293 $ (3,980)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Extraordinary loss on early extinguishment of
debt......................................... 19,017 -- --
Non-cash portion of nonrecurring charges...... 15,876 4,693 2,499
Depreciation and amortization................. 29,930 62,283 78,769
Deferred income taxes......................... 5,526 (16,914) (4,838)
Provision for loss on accounts receivable..... 5,822 4,445 7,589
Charge for purchased in-process research and
development.................................. 28,941 38,244 --
Changes in assets and liabilities which
provided (used) cash, net of effects of
purchased businesses:
Accounts receivable........................ 766 (35,393) 29,427
Accounts payable and accrued expenses...... (2,720) (35,663) (19,210)
Accrued compensation and severance......... (10,999) (26,898) (7,218)
Deferred revenue........................... 30,276 64,012 18,436
Income taxes............................... 19,387 16,556 (55,601)
Other current assets....................... (32,841) (35,109) 6,245
Other noncurrent assets and liabilities.... (13,789) (8,708) (267)
--------- -------- --------
Net cash provided by operating activities....... 181,889 150,841 51,851
--------- -------- --------
Cash flows from investing activities:
Additions to property and equipment............ (35,794) (35,246) (37,032)
Additions to other intangible assets........... -- (24,133) (2,784)
Acquisitions of businesses..................... (40,599) (72,925) (7,922)
Construction in progress....................... -- (28,284) (4,106)
Proceeds from sale of construction in
progress...................................... -- -- 30,836
Purchases of investments....................... (413,522) (95,416) (53,732)
Proceeds from sales and maturities of
investments................................... 593,406 196,918 115,262
--------- -------- --------
Net cash provided (used) by investing
activities..................................... 103,491 (59,086) 40,522
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 70,440 23,866 79,621
Purchases of treasury stock.................... (49,972) (89,968) (90,020)
Repayment of indebtedness...................... (275,694) -- --
--------- -------- --------
Net cash used by financing activities........... (255,226) (66,102) (10,399)
--------- -------- --------
Elimination of net cash activity of acquired
company for the three months ended December 31,
1997........................................... 11,567 -- --
Effect of exchange rate changes on cash......... (4,359) 8,165 4,109
--------- -------- --------
Net increase in cash and cash equivalents....... 37,362 33,818 86,083
Cash and cash equivalents, beginning of year.... 168,609 205,971 239,789
--------- -------- --------
Cash and cash equivalents, end of year.......... $ 205,971 $239,789 $325,872
========= ======== ========
</TABLE>

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

F-3
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Common stock
Balance--beginning of year................ $ 2,680 $ 2,723 $ 2,723
Issued for employee stock purchase and
option plans............................ 43 -- 38
---------- ---------- ----------
Balance--end of year...................... 2,723 2,723 2,761
---------- ---------- ----------
Additional paid-in capital
Balance--beginning of year................ 1,450,132 1,528,647 1,583,846
Issued for employee stock purchase and
option plans............................ 57,218 7,812 40,148
Tax benefit related to stock option
plans................................... 21,297 2,500 17,519
Issuance of treasury stock for
acquisitions............................ -- 44,887 --
---------- ---------- ----------
Balance--end of year...................... 1,528,647 1,583,846 1,641,513
---------- ---------- ----------
Treasury stock
Balance--beginning of year................ (24,169) (43,134) (27,727)
Repurchased.............................. (49,972) (89,968) (90,020)
Issued for employee stock purchase and
option plans............................ 31,007 42,117 51,100
Issuance of treasury stock for
acquisitions............................ -- 63,258 --
---------- ---------- ----------
Balance--end of year...................... (43,134) (27,727) (66,647)
---------- ---------- ----------
Accumulated deficit
Balance--beginning of year................ (1,215,393) (1,123,399) (1,022,357)
Net income (loss)........................ 86,697 119,293 (3,980)
Treasury shares issued for employee stock
purchase and option plans............... (14,913) (18,251) (10,119)
Change in year end of acquired company... 20,210 -- --
---------- ---------- ----------
Balance--end of year...................... (1,123,399) (1,022,357) (1,036,456)
---------- ---------- ----------
Accumulated other comprehensive loss
Balance--beginning of year................ (8,699) (29,333) (15,381)
Foreign currency translation adjustment.. (3,232) 3,596 2,483
Unrealized gain (loss) on investments.... 327 (478) 80
Minimum pension liability adjustment..... (17,729) 10,834 189
---------- ---------- ----------
Balance--end of year...................... (29,333) (15,381) (12,629)
---------- ---------- ----------
Total stockholders' equity................ $ 335,504 $ 521,104 $ 528,542
========== ========== ==========

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

<CAPTION>
Year ended September 30,
----------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Comprehensive income:
Net income (loss)......................... $ 86,697 $ 119,293 $ (3,980)
---------- ---------- ----------
Other comprehensive income (loss), net of
tax provision (benefit):
Foreign currency translation adjustment,
net of tax of ($1,740), $1,936 and
$1,337.................................. (3,232) 3,596 2,483
Unrealized gain (loss) on securities, net
of tax of $176, ($257) and $43.......... 327 (478) 80
Minimum pension liability adjustment, net
of tax of ($2,744), $1,301 and ($170)... (17,729) 10,834 189
---------- ---------- ----------
Other comprehensive income (loss)......... (20,634) 13,952 2,752
---------- ---------- ----------
Comprehensive income (loss)............... $ 66,063 $ 133,245 $ (1,228)
========== ========== ==========
</TABLE>

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

F-4
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. Summary of Significant Accounting Policies

Business

Parametric Technology Corporation (PTC) develops, markets and supports
collaborative product commerce (CPC) solutions that help manufacturing
companies shape innovation and achieve sustainable competitive advantage in the
Internet age. These B2B e-commerce solutions employ powerful Web-based
collaboration and flexible engineering technologies to streamline product
development and delivery processes. Our software solutions are complemented by
the strength and experience of our Global Services Organization, which provides
training, consulting, support, and e-commerce services to customers worldwide.
With our CPC solutions, manufacturers can take advantage of the Internet to
improve product quality, reduce costs and shorten time-to-market cycles. We
operate in a single segment-computer software and related services.

Basis of Presentation

Our fiscal year-end is September 30. The consolidated financial statements
include the parent company and its wholly owned subsidiaries, including those
operating outside the U.S. All significant intercompany balances and
transactions have been eliminated in the financial statements. Certain
reclassifications have been made for consistent presentation. We prepare our
financial statements under generally accepted accounting principles that
require management to make estimates and assumptions that affect the amounts
reported and the related disclosures. Actual results could differ from these
estimates.

As described in Note B, in January 1998, we merged with Computervision
Corporation. The merger was accounted for as a pooling of interests.
Accordingly, the accompanying consolidated financial statements and notes have
been restated for all prior periods presented.

Foreign Currency Translation

For our foreign operations where the functional currency is the local currency,
we translate assets and liabilities at rates in effect at the balance sheet
date and record translation adjustments in stockholders' equity. For our
foreign operations where the U.S. dollar is the functional currency, we
translate monetary assets and liabilities using exchange rates in effect at the
balance sheet date and nonmonetary assets and liabilities at historical rates
and record translation adjustments in income. We translate income statement
amounts at average rates for the period. Transaction gains and losses are
recorded in other expense in the statement of income.

Revenue Recognition

Our revenue is derived from the licensing of computer software products and
from service revenue consisting of training, consulting and maintenance.
License revenue is recognized upon contract execution, provided all shipment
obligations have been met, fees are fixed or determinable and collection is
probable. Revenue from software maintenance contracts is recognized ratably
over the contract period. Revenue from consulting and training is recognized
upon performance.

Cash, Cash Equivalents and Investments

Our cash is invested in debt instruments of financial institutions, government
entities, corporations and mutual funds. We have established guidelines
relative to credit ratings, diversification and maturities that maintain safety
and liquidity. Our cash equivalents include highly liquid investments with
maturity periods of three months or less when purchased. Our short-term
investments include those investments with maturities in excess of three months
but less than one year. Our marketable investments are those with maturities in
excess of one year but less than two years. Our cash equivalents and short-term
and marketable investments are classified as available for sale and reported at
fair value with unrealized gains and losses included in the accumulated other

F-5
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

comprehensive loss component of stockholders' equity. We have not had any
significant losses related to our investments.

Concentration of Credit Risk and Fair Value of Financial Instruments

The amounts reflected in the consolidated balance sheets for cash and cash
equivalents, accounts receivable and accounts payable approximate their fair
value due to their short maturities. Financial instruments that potentially
subject us to concentration of credit risk consist primarily of investments,
trade receivables and derivatives. Our cash, cash equivalents, investments and
derivatives are held with financial institutions with high credit standings.
Our customer base consists of large numbers of geographically diverse customers
dispersed across many industries. As a result, concentration of credit risk
with respect to trade receivables is not significant except for a receivable
from our preferred distributor, which accounts for 13% and 12% of total
receivables as of September 30, 1999 and 2000, respectively.

Trade Accounts Receivable Allowance for Doubtful Accounts

Our allowance for doubtful accounts was $7.7 million, $6.4 million and $6.3
million as of September 30, 1998, 1999 and 2000, respectively. Uncollectible
trade accounts receivable written-off, net of recoveries was $5.5 million, $5.7
million and $7.7 million for 1998, 1999 and 2000, respectively.

Transfers of Financial Assets

We offer our customers the option to purchase software and services through
payment plans, financing or leasing contracts. In general, we transfer future
payments under certain of these contracts to financing institutions on a non-
recourse basis. We record such transfers as sales of the related accounts
receivable when we surrender control of such receivables under the provisions
of Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

Derivatives

Derivatives are financial instruments whose value is derived from one or more
underlying financial instruments, such as foreign currency. We enter into
derivative transactions, specifically foreign exchange forward contracts and
foreign exchange option contracts, to manage our exposure to fluctuations in
foreign exchange rates. The contracts are primarily in European currencies and
Japanese yen and have maturities less than one year. Any derivative we enter
into is designated at inception as a hedge of risks associated with specific
assets, liabilities or future commitments and is monitored to determine if it
remains an effective hedge. The effectiveness of the derivative as a hedge is
based on changes in its market value being highly correlated with changes in
market value of the underlying hedged items. We do not enter into or hold
derivatives for trading or speculative purposes.

We use forward exchange contracts to hedge specific foreign currency
denominated receivables. These contracts, which are one year or less in length,
require us to exchange foreign currencies for U.S. dollars at maturity at rates
agreed to at inception of the contracts. We enter into transactions denominated
in foreign currencies and include the exchange gain or loss arising from such
transactions in other expense. As of September 30, 1999 and 2000, we had
approximately $190.0 million and $116.0 million, respectively, of forward
contracts outstanding. Net unrealized and realized gains and losses associated
with exchange rate fluctuations on forward contracts and the underlying foreign
currency exposure being hedged were immaterial for all periods presented. Cash
flows from forward contracts are classified with the related receivables.

From time to time, we purchase foreign exchange option contracts to limit
potential losses from adverse exchange-rate movements on certain anticipated
revenue transactions. Premiums to purchase option contracts

F-6
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

are capitalized in other assets and amortized to other expense over the life of
the contract. Gains on option contracts, if any, are included in license and
service revenue in the period in which the related local currency revenue is
reported. There were no outstanding option contracts at September 30, 1999 or
2000.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-
line method over their estimated useful lives. Computer hardware and software
are typically amortized over three to five years, and furniture and fixtures
three to eight years. Leasehold improvements are amortized over the shorter of
their useful lives or the remaining terms of the related leases. Property and
equipment under capital leases are amortized over the lesser of the lease terms
or their estimated useful lives. Maintenance and repairs are charged to expense
when incurred; additions and improvements are capitalized. When an item is sold
or retired, the cost and related accumulated depreciation is relieved, and the
resulting gain or loss, if any, is recognized in income.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets includes the values attributable to
intangible assets acquired and are amortized using the straight-line method.
Goodwill is amortized over five to seven years and other intangible assets,
such as assembled workforces, customer lists and developed technology, are
amortized over three to five years, and trademarks, which is also included in
other intangible assets, are amortized over seven years.

Management regularly evaluates the net realizable value of long lived assets
including property and equipment, computer software costs and goodwill and
other intangible assets relying on a number of factors including operating
results, business plans, budgets and economic projections.

Computer Software Costs

We incur costs to develop computer software to be licensed or otherwise
marketed to customers. Development costs incurred in the research and
development of new software products and enhancements to existing products are
expensed in the period incurred, unless these costs qualify for capitalization.
Capitalized computer software costs are amortized over the economic lives of
the related products, typically three to five years, beginning at their initial
shipment date. Net capitalized computer software costs are included in other
assets and were immaterial at September 30, 1999 and 2000. Amortization charged
to cost of license revenue was $521,000, $220,000 and $17,000 for fiscal 1998,
1999 and 2000, respectively.

Income Taxes

Our income tax expense includes U.S. and international income taxes. Certain
items of income and expense are not reported in tax returns and financial
statements in the same year. The tax effect of these differences are reported
as deferred tax assets and liabilities. Deferred tax assets are recognized, net
of valuation allowances, for the estimated future tax effects of deductible
temporary differences and tax operating loss and credit carryforwards. Changes
in deferred tax assets and liabilities are recorded in the provision for income
taxes.

F-7
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Earnings Per Share (EPS)

Basic EPS is calculated by dividing net income by the weighted average number
of shares outstanding during the period. Diluted EPS is calculated by dividing
net income by the weighted average number of shares outstanding plus the
dilutive effect, if any, of outstanding stock options using the "treasury
stock" method. The following table, adjusted for stock dividends, presents the
calculation for both basic and diluted EPS:

<TABLE>
<CAPTION>
Year ended September 30,
---------------------------
1998 1999 2000
-------- -------- ---------
(in thousands, except per
share)
<S> <C> <C> <C>
Net income (loss)................................. $ 86,697 $119,293 $ (3,980)
======== ======== =========
Weighted average shares outstanding............... 268,977 269,526 273,081
Dilutive effect of employee stock options......... 8,287 5,549 --
-------- -------- ---------
Diluted shares outstanding........................ 277,264 275,075 273,081
======== ======== =========
Basic earnings (loss) per share................... $ 0.32 $ 0.44 $ (0.01)
Diluted earnings (loss) per share................. $ 0.31 $ 0.43 $ (0.01)
</TABLE>

Options to purchase shares of our common stock of 11.7 million shares for 1998,
18.2 million shares for 1999 and 13.3 million shares for 2000 were outstanding
but were not included in the computations of diluted EPS because the price of
the options was greater than the average market price of the common stock for
the period reported. For 2000, the dilutive effect of an additional 8.5 million
shares was excluded from the computation of diluted EPS, as the effect was
anti-dilutive with the net loss.

Stock-Based Compensation

We account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25), and related interpretations. Under APB No.
25, no compensation cost is recognized because the option price is equal to the
market price of the underlying stock on the date of grant. An alternative
method of accounting is SFAS No. 123, Accounting for Stock-Based Compensation.
Under SFAS No. 123, employee stock options are valued at the grant date using a
valuation model, and compensation cost is recognized ratably over the vesting
period. The impact of recording stock-based compensation under the provisions
of SFAS No. 123 is disclosed in Note J.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS No.
133 requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting for
changes in fair value, gains or losses, depends on the intended use of the
derivative and its resulting designation. In June 2000, the FASB issued SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an amendment of FASB Statement No. 133 which amended SFAS No. 133
for a limited number of issues that have caused application difficulties. The
statement is effective for all quarters of fiscal years beginning after June
15, 2000. We plan to implement SFAS No. 133 in our fiscal year 2001. The
adoption of this statement will not have a significant effect on our
consolidated financial statements.

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements,
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 is effective for the fourth

F-8
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

quarter of our fiscal 2001. We do not expect the implementation of SAB 101 to
have a significant effect on our consolidated financial statements.

In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 140 replaces SFAS
No. 125 but it carries over most of SFAS No. 125's provisions. The statement is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. We believe the adoption of this
statement will not have a significant effect on our consolidated financial
statements.

B. Acquisitions and Nonrecurring Charges

Acquisitions

Computervision

In January 1998, we merged with Computervision Corporation by issuing 11.6
million shares of common stock in exchange for all of the outstanding common
stock of Computervision. In connection with the merger, we incurred a
nonrecurring charge of $76.8 million for merger-related integration,
consolidation and transaction costs, which are described in the acquisition and
nonrecurring charges activity table below.

As our fiscal year-end differed from Computervision's, we combined financial
information for dissimilar year-ends. Computervision's results of operations
for its fiscal year ended December 31, 1997 were combined with our results of
operations for the fiscal year ended September 30, 1997. In order to conform
Computervision's fiscal year-end to ours, Computervision's results of
operations for the three months ended December 31, 1997 were combined with our
results of operations for the three months ended January 3, 1998.
Computervision's net loss of $20.2 million for the three months ended December
31, 1997, which has been included in the consolidated statements of income for
the fourth quarter of fiscal 1997 and the first quarter of fiscal 1998, has
been reflected as an adjustment to our beginning balance of fiscal 1998
accumulated deficit. Due to the change in Computervision's year-end, their cash
flow activity for the three-month period ended December 31, 1997 has been shown
as a separate component of the cash flow statement. Adjustments recorded to
conform Computervision's accounting policies to ours were not material to the
consolidated financial statements. The following table shows revenue and net
income of the separate companies during the period preceding the combination:

<TABLE>
<CAPTION>
Three Months Ended
January 3, 1998
------------------
(in thousands)
<S> <C>
Revenue:
Parametric Technology...................................... $223,007
Computervision............................................. 35,861
--------
Combined revenue............................................. $258,868
========
Net income (loss):
Parametric Technology...................................... $ 62,343
Computervision............................................. (20,210)
--------
Combined net income.......................................... $ 42,133
========
</TABLE>

ICEM

In June 1998, we acquired ICEM Technologies (ICEM), a division of Control Data
Systems, Inc., for $40.6 million in cash. Headquartered in Frankfurt, Germany,
ICEM provides advanced surfacing and reverse-

F-9
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

engineering software tools used by body and styling engineers in the automotive
and aerospace industries. The acquisition was accounted for as a purchase.
Accordingly, we allocated the purchase price to the assets acquired and
liabilities assumed based on our estimates of fair value. The fair value
assigned to intangible assets acquired consisted of purchased in-process
research and development (R&D), developed technology, an assembled workforce
and trade names. The amounts allocated to tangible and intangible assets
acquired less the liabilities assumed exceeded the purchase price by
approximately $7.0 million. This excess value over the purchase price was
allocated to reduce proportionately the values assigned to long-term assets and
purchased in-process R&D in determining their values. The values assigned
included $2.1 million for net assets acquired, $28.9 million for purchased in-
process R&D, $8.0 million for developed technology, $1.6 million for an
assembled workforce and $1.0 million for trade names.

InPart

In October 1998, we acquired all of the outstanding stock in InPart Design,
Inc. by issuing 2.0 million shares of our common stock. As of September 30,
1999, we issued 600,000 additional shares to satisfy certain contingent
conditions, which were included in the purchase price described below. In
addition, we reserved 386,000 shares of common stock for outstanding InPart
options assumed. The acquisition was accounted for as a purchase. Accordingly,
we allocated the purchase price of $38.1 million to the assets acquired and
liabilities assumed based on our estimates of fair value. The values assigned
included $741,000 for net liabilities assumed, $10.6 million for purchased in-
process R&D, $4.1 million for developed technology, $1.1 million for customer
lists, $200,000 for an assembled workforce and $300,000 for trade names. The
excess purchase price over the amounts allocated to assets acquired and
liabilities assumed was recorded as goodwill of $22.5 million.

Division

In March 1999, we acquired Division Group plc for $37.3 million in cash and
593,000 shares of our common stock. The acquisition was accounted for as a
purchase. Accordingly, we allocated the purchase price of $48.1 million to the
assets acquired and liabilities assumed based on our estimates of fair value.
The values assigned included $555,000 for net assets acquired, $9.0 million for
purchased in-process R&D, $3.3 million for developed technology, $2.0 million
for customer lists, $970,000 for an assembled workforce and $2.5 million for
trade names. The excess purchase price over the amounts allocated to assets
acquired and liabilities assumed was recorded as goodwill of $29.8 million.

auxilium

In March 1999, we acquired all of the outstanding stock of auxilium inc. in
exchange for 2.6 million shares of our common stock and $39.4 million in cash.
In addition, we reserved 1.1 million shares of common stock for outstanding
auxilium options assumed. The acquisition was accounted for as a purchase.
Accordingly, we allocated the purchase price of $101.7 million to the assets
acquired and liabilities assumed based on our estimates of fair value. The
values assigned included $182,000 for net liabilities assumed, $18.6 million
for purchased in-process R&D, $700,000 for developed technology, $5.0 million
for customer lists, $630,000 for an assembled workforce and $6.0 million for
trade names. The excess purchase price over the amounts allocated to assets
acquired and liabilities assumed was recorded as goodwill of $70.9 million.

The operating results of ICEM, InPart, Division and auxilium have been included
in our results of operations from the date of each acquisition. Our purchases
of ICEM, InPart, Division and auxilium did not require the presentation of pro
forma information.

F-10
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and auxilium. The values assigned to purchased in-process R&D were determined
by identifying research projects for which technological feasibility had not
been established. The values of the purchased in-process R&D were determined by
estimating the stage of completion, including consideration of the complexity
of the work completed, the costs incurred and the projected cost to complete,
the contribution of any core technology and other acquired assets and the
projected product introduction dates, estimating the resulting net cash flows
from the products developed and discounting the net cash flows back to their
present value. The discount rates used included a factor that took into account
the uncertainty surrounding the successful development of the purchased in-
process technology for each acquisition. If these projects are not successfully
developed, future revenue and profitability may be adversely affected, and the
value of intangible assets acquired, which aggregated $160.6 million at the
time of acquisition, may become impaired.

Nonrecurring Charges

Sales Force Reorganizations

During the first quarter of 1999, we reorganized our sales force and, in
connection with this action, incurred a restructuring charge of $3.2 million
for the severance and termination benefits of approximately 170 people who were
terminated during the first quarter of 1999 in accordance with management's
plan. During the second quarter of 1999, we incurred a restructuring charge of
$5.8 million primarily for the severance and termination benefits of
approximately 150 people in connection with the integration of our sales and
related support groups. All amounts related to terminated employees were paid
in 1999.

Facility Consolidation and Asset Impairment

During the second quarter of 1999, we incurred a restructuring charge of $1.4
million for the consolidation of certain excess leased facilities. Also, in the
second quarter we recorded an impairment loss of $4.7 million on certain
intangible assets related to our industrial design (CDRS) activities. Due to
recent acquisitions and the development of new technology, the carrying value
of these assets was impaired.

Reorganization into Business Units

During the third quarter of 2000, we recorded a $21.5 million nonrecurring
charge primarily associated with our reorganization into business units and
with the development and execution of management's plans to reduce our cost
structure and improve profitability. The nonrecurring charge is comprised of
$11.9 million for severance and termination benefits of approximately 280
people who were notified or terminated during the third quarter of 2000 and
$9.6 million for facility consolidations. Of the $21.5 million nonrecurring
charge, $12.2 million was paid through September 30, 2000. We expect to pay
$6.0 million over the next twelve months.

F-11
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes all of our acquisition and nonrecurring charges
activity:

<TABLE>
<CAPTION>
September 30,
-----------------------------
1998 1999 2000
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Beginning balance............................... $ 70,983 $ 69,601 $ 45,860
--------- -------- --------
Charges to operations:
Employee severance and termination............ 18,110 8,242 11,908
Purchased in-process R&D...................... 28,941 38,244 --
Asset write-offs.............................. 12,737 4,693 920
Facility closures and related costs........... 7,158 1,912 8,706
Additional costs to meet existing contract
obligations.................................. 17,400 -- --
Transaction costs............................. 8,154 -- --
Lease terminations and other.................. 13,266 256 --
--------- -------- --------
Total charges to operations..................... 105,766 53,347 21,534
--------- -------- --------
Costs incurred:
Employee severance and termination benefits... (22,753) (11,422) (9,934)
Purchased in-process R&D...................... (28,941) (38,244) --
Asset write-offs.............................. (12,737) (4,693) (920)
Facility closures and related costs........... (17,573) (17,475) (17,966)
Additional costs to meet existing contract
obligations.................................. (8,026) (4,100) (3,061)
Transaction costs............................. (7,977) -- --
Lease terminations and other.................. (9,141) (1,154) (927)
--------- -------- --------
Total costs incurred............................ (107,148) (77,088) (32,808)
--------- -------- --------
Ending balance.................................. $ 69,601 $ 45,860 $ 34,586
========= ======== ========
Cash expenditures:
Employee severance and termination benefits... $ 22,753 $ 11,422 $ 8,354
Facility closures and related costs........... 17,573 17,475 17,966
Additional costs to meet existing contract
obligations.................................. 8,026 4,100 3,061
Transaction costs............................. 7,977 -- --
Lease terminations and other.................. 6,002 1,154 927
--------- -------- --------
Total cash expenditures......................... $ 62,331 $ 34,151 $ 30,308
========= ======== ========
Number of employee severances................... 450 320 280
========= ======== ========
</TABLE>

As of September 30, 2000, of the $34.6 million remaining in accrued acquisition
and nonrecurring charges, $18.1 million was included in current liabilities and
$16.5 million in other liabilities.

F-12
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

C. Investments

The fair values of our investments have been determined through information
obtained from market sources and management estimates. We use a specific
identification cost method to determine the gross realized gains and losses on
the sale of our securities. Realized gains and losses on the sale of
investments were immaterial for 1998, 1999 and 2000.

<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Municipal debt securities............. $ 74,061 $76 $(225) $ 73,912
Mutual funds.......................... 14,909 -- -- 14,909
Commercial paper...................... 29,034 -- (18) 29,016
Government agencies................... 39,256 3 (21) 39,238
-------- --- ----- --------
Total investments..................... $157,260 $79 $(264) $157,075
======== === ===== ========
Amounts included in:
Cash and cash equivalents........... $ 42,969 $-- $ -- $ 42,969
Short-term investments.............. 101,355 77 (215) 101,217
Marketable investments.............. 12,936 2 (49) 12,889
-------- --- ----- --------
Total investments..................... $157,260 $79 $(264) $157,075
======== === ===== ========
<CAPTION>
September 30, 2000
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Municipal debt securities............. $ 57,778 $25 $ (54) $ 57,749
Mutual funds.......................... 68,219 -- -- 68,219
Government agencies................... 18,767 11 (44) 18,734
-------- --- ----- --------
Total investments..................... $144,764 $36 $ (98) $144,702
======== === ===== ========
Amounts included in:
Cash and cash equivalents........... $ 95,433 $-- $ -- $ 95,433
Short-term investments.............. 23,000 23 (54) 22,969
Marketable investments.............. 26,331 13 (44) 26,300
-------- --- ----- --------
Total investments..................... $144,764 $36 $ (98) $144,702
======== === ===== ========
</TABLE>

D. Property and Equipment

Our property and equipment consisted of the following:

<TABLE>
<CAPTION>
September 30,
------------------
1999 2000
-------- --------
(in thousands)
<S> <C> <C>
Computer hardware and software.............................. $104,817 $128,686
Furniture and fixtures...................................... 15,605 15,885
Leasehold improvements...................................... 14,651 16,671
-------- --------
Gross property and equipment................................ 135,073 161,242
Accumulated depreciation and amortization................... (70,897) (94,363)
-------- --------
Net property and equipment.................................. $ 64,176 $ 66,879
======== ========
</TABLE>

F-13
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Depreciation expense was $26.4 million in 1998, $33.3 million in 1999 and $35.9
million in 2000. There were no capital leases as of September 30, 1999 or 2000.

E. Income Taxes

Our income (loss) before taxes consisted of the following:

<TABLE>
<CAPTION>
September 30,
----------------------------
1998 1999 2000
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Domestic................................. $191,518 $211,580 $(22,801)
Foreign.................................. 12,489 (30,338) 17,734
-------- -------- --------
Total.................................... $204,007 $181,242 $ (5,067)
======== ======== ========

Our provision (benefit) for income taxes consisted of the following:

<CAPTION>
September 30,
----------------------------
1998 1999 2000
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Current:
Federal................................ $ 70,787 $ 59,191 $ (9,046)
State.................................. 10,756 9,250 (3,858)
Foreign................................ 11,224 10,422 16,655
-------- -------- --------
92,767 78,863 3,751
-------- -------- --------
Deferred:
Federal................................ 4,806 (17,553) (8,028)
State.................................. 720 (2,250) 4,301
Foreign................................ -- 2,889 (1,111)
-------- -------- --------
5,526 (16,914) (4,838)
-------- -------- --------
Total provision (benefit) for income
taxes.................................. $ 98,293 $ 61,949 $ (1,087)
======== ======== ========

The reconciliation between the statutory federal income tax rate and our
effective income tax rate is shown below:
<CAPTION>
September 30,
----------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income taxes........... 35% 35% (35)%
State income taxes, net of federal
tax benefit............................. 4 3 6
Tax exempt interest income............... (2) (2) (36)
Benefit of foreign sales corporations.... (4) (1) (1)
Valuation allowance...................... -- (9) (93)
Acquisition-related charges.............. 11 7 157
Other, net............................... 4 1 (19)
-------- -------- --------
Effective income tax rate................ 48% 34% (21)%
======== ======== ========
</TABLE>

We paid $71.3 million in 1998, $57.7 million in 1999 and $52.0 million in 2000
for income taxes.

F-14
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The significant temporary differences that create deferred tax assets and
liabilities are shown below:

<TABLE>
<CAPTION>
September 30,
------------------
1999 2000
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible......................... $ 2,407 $ 5,921
Restructuring reserves not currently deductible........... 9,503 14,673
Net operating loss carryforwards.......................... 91,569 84,980
Amortization of intangible assets......................... 15,679 10,435
Depreciation.............................................. 1,824 2,274
Other..................................................... 7,044 1,747
-------- --------
Gross deferred tax assets................................... 128,026 120,030
Valuation allowance......................................... (63,828) (59,137)
-------- --------
Total deferred tax assets................................... $ 64,198 $ 60,893
-------- --------
Deferred tax liabilities:
Investment in foreign subsidiaries........................ (28,512) (25,308)
Deferred revenue.......................................... (2,585) (2,313)
Other..................................................... (2,289) (7,298)
-------- --------
Total deferred tax liabilities.............................. (33,386) (34,919)
-------- --------
Net deferred tax assets..................................... $ 30,812 $ 25,974
======== ========
</TABLE>

For U.S. tax return purposes, net operating losses (NOLs) and tax credit
carryforwards are generally available to be carried forward to future years.
However, the Internal Revenue Code limits a corporation's use of NOLs and tax
credits after a change of more than 50% of the ownership of the corporation.
Our merger with Computervision in January 1998 changed their ownership more
than 50%. This change limits our usage of the Computervision NOLs to $14.0
million per year and $196.0 million cumulatively through 2011, plus any built-
in gains which existed at the time of the ownership change. There are other
limitations imposed on the utilization of such NOLs that could further restrict
the recognition of such tax benefits. We have foreign NOLs that are also
subject to various limitations. Due to these limitations, we recorded a
valuation allowance for the tax benefit of a majority of NOLs since realization
of these future benefits was not sufficiently assured. During 1999 and 2000, we
reduced our valuation allowance $22.1 million and $4.7 million, respectively,
primarily due to anticipated future benefits from the utilization of certain
NOLs in 1999 and 2000.

F. Debt

In connection with the Computervision merger, we acquired debt obligations,
which were paid in full during the second quarter of fiscal 1998. The total
cash outlay for settlement of these obligations plus accrued interest and
related fees was $275.7 million. We incurred an extraordinary after-tax loss of
$19.0 million related to the write-off of deferred financing costs and other
prepayment costs associated with the payment of these debt obligations. We paid
interest of $10.7 million in 1998 related to these debt obligations.

F-15
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

G. Commitments and Contingencies

Leasing Arrangements

We lease office facilities and certain equipment under operating leases
expiring at various dates through 2014. In addition to rent, certain leases
require us to pay directly for taxes, insurance, maintenance and other
operating expenses. Lease expense, net of sublease income, was $45.0 million in
1998, $54.6 million in 1999 and $54.1 million in 2000. At September 30, 2000,
our future minimum lease payments under noncancellable operating leases with
remaining terms of one or more years are as follows:

<TABLE>
<CAPTION>
September 30,
2000
--------------
(in thousands)
<S> <C>
2001.......................................................... $ 54,105
2002.......................................................... 43,077
2003.......................................................... 31,732
2004.......................................................... 24,211
2005.......................................................... 22,421
Thereafter.................................................... 122,882
--------
Total minimum lease payments.................................. $298,428
========
</TABLE>

As a result of Computervision's cost saving initiatives in prior years, our
merger with Computervision and our cost saving initiatives in 1999 and 2000,
certain leased facilities were considered excess. As of September 30, 2000 we
had $24.9 million reserved for facility obligations in excess of sublease
income.

In December 1999, we sold land and certain improvements under construction for
$30.8 million and entered into an operating lease covering approximately
381,000 square feet of office space in Needham, MA that will allow us to
consolidate and replace our Waltham, MA operations. Our corporate offices
currently occupy 210,000 square feet in the new Needham facility and we expect
to occupy the remaining 171,000 square feet in the second quarter of fiscal
2001, subject to completion. Occupancy and rent began in December 2000 and the
lease expires in December 2012, subject to certain renewal rights. In the first
half of 2001 we expect to make approximately $25.0 million of capital
expenditures primarily for tenant improvements and furniture and fixtures
related to the new facility. As of September 30, 2000, we have letters of
credit outstanding of approximately $25.5 million primarily related to the
lease of the new facility.

Legal Proceedings

F-16
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

H. Stockholders' Equity

Preferred Stock

We may issue up to 5.0 million shares of our preferred stock in one or more
series. Our Board of Directors is authorized to fix the rights and terms for
any series of preferred stock without additional shareholder approval. As of
September 30, 1999 and 2000, there were no outstanding shares of preferred
stock.

In November 2000, our Board of Directors authorized and designated 500,000
shares of preferred stock as Series A Junior Participating Preferred Stock for
issuance pursuant to our Shareholder Rights Plan (discussed below in Note I).

Common Stock

Our Articles of Organization authorize us to issue up to 500 million shares of
our common stock. Shares of common stock outstanding are shown below:

<TABLE>
<CAPTION>
September 30,
-------------------------
1998 1999 2000
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Beginning balance.................................... 266,919 268,142 270,164
Common stock issued.................................. 4,310 -- 3,776
Treasury shares repurchased.......................... (4,734) (6,270) (7,727)
Treasury shares issued............................... 1,647 8,292 3,384
------- ------- -------
Ending balance....................................... 268,142 270,164 269,597
======= ======= =======
</TABLE>

On February 12, 1998, our Board of Directors declared a one-for-one stock
dividend on our common stock to all stockholders of record on February 27,
1998. Our consolidated financial statements and notes have been retroactively
adjusted to reflect this stock dividend.

In September 1998, our Board of Directors authorized a plan that allows us to
repurchase up to 20.0 million shares. Through September 30, 2000, we
repurchased 18.7 million shares at a cost of $230.0 million. Our treasury stock
is held on a first in, first out cost basis. The repurchased shares are used to
issue shares for stock option exercises, employee stock purchase plans and
potential acquisitions. In July 2000, our Board of Directors authorized an
additional 20.0 million shares to be repurchased.

I. Shareholder Rights Plan

In November 2000, our Board of Directors adopted a Shareholder Rights Plan and
declared a dividend distribution of one share purchase right (a "Right") for
each outstanding share of our common stock to stockholders of record at the
close of business on January 5, 2001. Each share of common stock newly issued
after the date also will carry with it one Right. Each Right will entitle the
record holder to purchase from us one one-thousandth of a share of our Series A
Junior Participating Preferred Stock at an exercise price of $60.00 per unit
subject to adjustment. The Rights become exercisable ten (10) days after the
earlier of our announcement that a person has acquired 15% or more of our
outstanding common stock or an announcement of a tender offer which would
result in a person or group acquiring 15% or more of our common stock; in
either case, the Board of Directors can extend the 10 day period. If we have
not redeemed or exchanged the Rights and a person becomes the beneficial owner
of 15% or more of our common stock (a "Triggering Event"), each holder of a
Right will have the right to purchase shares of our common stock having a value
equal to two times the exercise price of the Right. If, at any time following
the Triggering Event, we are acquired in a merger or other business combination
transaction in which we are not the surviving corporation or more than 50% of
its assets or earning power is sold to a person or group, each holder of a
Right shall have the

F-17
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

right to purchase shares of common stock of the acquiring person, group or
company having a value equal to two times the exercise price of the Right. The
Rights expire on January 5, 2011, and may be redeemed by us for $.001 per
Right.

J. Stock Plans

Employee Stock Purchase Plans

We offer an employee stock purchase plan for all eligible employees. Under the
plan offered through September 1999, up to 4.0 million shares of our common
stock could be purchased at 85% of the lower of the fair market value of the
stock on the first or the last day of each six-month offering period. Each
employee could have elected to have up to 10% of his or her base pay withheld
and applied toward the purchase of shares in such offering, up to a maximum of
ten thousand dollars withheld in any year. On September 16, 1999, our Board of
Directors approved a new employee stock purchase plan that terminates on
September 30, 2009 (the "2000 Plan"). The 2000 Plan qualifies as an "employee
stock purchase plan" under Section 423 of the Internal Revenue Code and its
terms are similar to the prior plan, except that employee purchases in any year
are limited to the lesser of $25,000 worth of stock, determined by the fair
market value of the common stock at the time the offering begins, or 15% of his
or her base pay. We have reserved 2.0 million shares of common stock for
issuance under the 2000 Plan. During fiscal 1998, 1999 and 2000, employees
purchased 677,000, 1.0 million and 757,000 shares at average prices of $11.36,
$9.20 and $11.67, respectively. On November 17, 2000 the Board of Directors
approved, subject to shareholder approval, an increase in the number of shares
issuable under the 2000 Plan from 2.0 million shares to 10.0 million shares.

Stock Option Plans

We have stock option plans for employees, directors, officers and consultants
that provide for issuance of nonqualified and incentive stock options. The
option exercise price is typically the fair market value at the date of grant.
These options generally vest over four years and expire ten years from the date
of grant. As of September 30, 2000, 18.2 million shares were available for
grant and 78.1 million shares were reserved for future issuance under stock
option plans.

In conjunction with the Computervision merger on January 12, 1998, we reserved
1.6 million shares of our common stock for outstanding Computervision options
assumed. These assumed options were granted at prices equal to the fair market
value at the date of grant, become exercisable generally in annual installments
over four to five years and expire ten years from the date of grant.

F-18
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In July 1998, our Board of Directors approved a one-for-one stock option
exchange program that provided employees the opportunity to exchange stock
options previously granted for new options with a current market price and new
vesting period. Executive officers and directors were not eligible to
participate in the program. The new options were priced at $13.63 based on the
closing price of our common stock as reported by the Nasdaq Stock Market on
August 3, 1998, vest in equal installments over four years from the August 3,
1998 grant date and expire on August 3, 2008. A total of 20.0 million options
with exercise prices ranging from $15.06 to $33.50 per share were exchanged
under the program. The exchange of such options is presented in the following
table of stock option activity as cancellations and subsequent grants:

<TABLE>
<CAPTION>
September 30,
----------------------------------------------------
1998 1999 2000
----------------- ---------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------ -------- ------- --------
(shares in thousands)
<S> <C> <C> <C> <C> <C> <C>
Outstanding:
Beginning balance........ 38,234 $18.67 48,888 $15.03 55,435 $14.52
Granted and assumed...... 40,190 17.91 17,169 13.28 21,413 13.41
Cancelled................ (24,254) 25.85 (8,564) 16.75 (10,429) 15.08
Exercised................ (5,282) 12.01 (2,058) 7.03 (5,800) 12.22
------- ------ ------ ------ ------- ------
Ending Balance........... 48,888 $15.03 55,435 $14.52 60,619 $14.30
======= ====== ====== ====== ======= ======
Exercisable................ 11,418 $14.53 19,687 $14.50 23,110 $15.30
</TABLE>

Certain employees have disposed of stock acquired through the employee stock
purchase plan and the exercise of incentive stock options earlier than the
mandatory holding period required for certain tax treatment. These
dispositions, together with the tax benefits realized from the exercise of
nonqualified stock options, create tax benefits that have been recorded as
increases to additional paid-in capital.

For various price ranges, information for options outstanding and exercisable
at September 30, 2000 was as follows:

<TABLE>
<CAPTION>
Exercisable
Outstanding Options Options
------------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Shares Life (years) Price Shares Price
------ ------------ -------- ------ --------
(shares in thousands)
<S> <C> <C> <C> <C> <C>
$ 0.09- 9.34 13,128 8.60 $ 8.55 2,085 $ 6.75
9.35-13.19 11,343 7.88 11.16 4,656 10.68
13.20-13.63 11,709 7.85 13.62 5,324 13.62
13.64-15.69 10,660 7.93 15.24 4,106 15.13
15.70-24.00 11,660 7.41 21.14 5,944 21.26
24.01-72.55 2,119 7.38 28.14 995 29.04
------ ---- ------ ------ ------
$ 0.09-72.55 60,619 7.93 $14.30 23,110 $15.30
====== ==== ====== ====== ======
</TABLE>

F-19
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Valuation of Stock Plans

We have not recognized compensation expense in connection with stock option
grants to employees, directors and officers under our plans. We have recognized
compensation expense of $0 in 1998, $927,000 in 1999 and $652,000 in 2000 in
connection with stock option grants to consultants as prescribed by APB No. 25
and FASB Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB Opinion No. 25. However, had
compensation expense for stock option and employee stock purchase plans been
determined based on fair value at the grant dates as prescribed by SFAS No.
123, pro forma net income (loss) and earnings (loss) per share would have been:

<TABLE>
<CAPTION>
September 30,
-------------------------
1998 1999 2000
------ ------- ----------
(in thousands, except
per share amounts)
<S> <C> <C> <C>
Pro forma net income (loss).......................... $9,824 $32,848 $ (89,566)
Pro forma earnings (loss) per share:
Basic.............................................. $ 0.04 $ 0.12 $ (0.33)
Diluted............................................ $ 0.04 $ 0.12 $ (0.33)
</TABLE>

The pro forma disclosures above include the amortization of the fair value of
all options vested between 1996 and 2000, regardless of the grant date. If only
options granted after 1996 were valued, as prescribed by SFAS No. 123, pro
forma net income (loss) and pro forma diluted EPS would have been $22.4 million
and $0.09 for 1998, $39.4 million and $0.14 for 1999 and $(89.6) million and
$(0.33) for 2000. The effects on pro forma disclosures of applying SFAS No. 123
are not necessarily representative of the effects on pro forma disclosures of
future years.

The fair value of options granted has been estimated at the date of grant using
the Black-Scholes option-pricing model assuming the following weighted-average
assumptions:

<TABLE>
<CAPTION>
September 30,
----------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Expected life (years)......................................... 6.0 6.0 6.0
Risk-free interest rates...................................... 5.6% 5.0% 6.2%
Volatility.................................................... 50% 50% 50%
Dividend yield................................................ -- -- --
</TABLE>

The weighted average fair value of employee stock options granted was $9.95 in
1998, $7.96 in 1999 and $7.46 in 2000. The expected life used for stock
purchase plans was six months. The weighted average fair value of shares
granted under the stock purchase plan was $7.77 in 1998, $3.80 in 1999 and
$4.10 in 2000.

The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
our options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in the opinion of management, the existing
models do not necessarily provide a reliable measure of the fair value of our
options.

F-20
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

K. Employee Benefit Plans

We offer a savings plan (PTC plan) to eligible employees. The plan is intended
to qualify under Section 401(k) of the Internal Revenue Code. Participating
employees may defer up to 15% of their pre-tax compensation, as defined, but
not more than statutory limits. We contribute 50% of the amount contributed by
the employee, up to a maximum of 10% of the employee's earnings. Our matching
contributions vest at a rate of 25% per year of service. We made matching
contributions of $3.2 million, $4.7 million and $5.1 million in 1998, 1999 and
2000, respectively.

L. Pension Plans

We maintain a defined benefit pension plan covering certain employees of
Computervision. Benefits are based upon length of service and average
compensation and generally vest after five years of service. Accrued pension
costs have been included in other liabilities.

U.S. Pension Plan

Effective April 1, 1990, the benefits under the U.S. pension plan were frozen
indefinitely. We contribute all amounts deemed necessary on an actuarial basis
to satisfy Internal Revenue Service funding requirements. Based upon the
actuarial valuations, we contributed $3.8 million in 1998, $13.7 million in
1999 and $0 in 2000. Due to the changes in actuarial assumptions and
underperformance of plan investments, as shown below, we were required to
record a minimum pension liability adjustment of $7.8 million in 1998. This
minimum pension liability did not change significantly in 2000 and was reduced
by $3.7 million in 1999 due to contributions and fund performance. Plan assets
consist primarily of indexed funds.

Foreign Pension Plans

The accrued international pension cost was actuarially computed using
assumptions applicable to each subsidiary plan and economic environment. We
adjusted our minimum pension liability related to our foreign plans due to the
changes in actuarial assumptions and performance of plan investments, as shown
below. Plan assets consist of investments in equities and guaranteed investment
contracts with several insurance companies and banks.

The following table presents the actuarial assumptions used in accounting for
the pension plans:

<TABLE>
<CAPTION>
U.S. Plan Foreign Plans
------------------------- ----------------------------------
1998 1999 2000 1998 1999 2000
------- ------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Discount rate........... 6.3% 7.5% 7.5% 5.8 to 6.3% 6.3 to 6.5% 6.3 to 6.5%
Rate of increase in
future compensation.... -- -- -- 3.0 to 5.0% 3.5 to 5.0% 3.5 to 5.0%
Rate of return on plan
assets................. 7.5% 7.5% 7.5% 6.8 to 8.5% 6.3 to 7.0% 5.3 to 7.0%

The actuarially computed components of net periodic pension cost are show
below:

<CAPTION>
U.S. Plan Foreign Plans
------------------------- ----------------------------------
1998 1999 2000 1998 1999 2000
------- ------- ------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service costs of
benefits earned during
the period............. $ -- $ -- $ -- $ 853 $ 6 $ --
Interest cost of
projected benefit
obligation............. 2,262 3,224 3,663 2,189 2,853 2,542
Expected return on plan
assets................. (1,721) (2,568) (3,389) (2,344) (2,698) (2,192)
Amortization of prior
service cost........... -- -- -- 13 17 17
Recognized actuarial
loss................... 529 1,191 950 (35) 381 165
------- ------- ------- ---------- ---------- ----------
Net periodic pension
cost................... $ 1,070 $ 1,847 $ 1,224 $ 676 559 $ 532
======= ======= ======= ========== ========== ==========
</TABLE>

F-21
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following tables display the change in benefit obligation, plan assets and
funded status:

<TABLE>
<CAPTION>
U.S. Plan Foreign Plans
---------------- ----------------
1999 2000 1999 2000
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Beginning benefit obligation............... $50,622 $49,043 $50,051 $42,480
Service cost............................... -- -- 6 --
Interest cost.............................. 3,224 3,663 2,853 2,542
Actuarial loss (gain)...................... (3,006) 358 (5,001) (1,681)
Foreign exchange impact.................... -- -- (2,254) (4,552)
Benefits paid.............................. (1,797) (1,348) (3,175) (8,004)
------- ------- ------- -------
Ending benefit obligation.................. $49,043 $51,716 $42,480 $30,785
======= ======= ======= =======
Beginning plan assets at fair value........ $31,742 $45,751 $34,770 $36,607
Actual return on plan assets............... 2,087 2,283 5,989 320
Employer contributions..................... 13,719 -- 5 5
Foreign exchange impact.................... -- -- (1,107) (3,573)
Benefits paid.............................. (1,797) (1,348) (3,050) (7,881)
------- ------- ------- -------
Ending plan assets at fair value........... 45,751 46,686 36,607 25,478
Benefit obligation at end of year.......... 49,043 51,716 42,480 30,785
------- ------- ------- -------
Funded status.............................. (3,292) (5,030) (5,873) (5,307)
Unrecognized actuarial loss (gain)......... 17,880 18,394 2,048 1,952
Unrecognized prior service cost............ -- -- 324 272
------- ------- ------- -------
Net prepaid (accrued) benefit cost......... $14,588 $13,364 $(3,501) $(3,083)
======= ======= ======= =======
</TABLE>

The following table shows the amounts recognized in the balance sheet:

<TABLE>
<CAPTION>
U.S. Plan Foreign Plans
---------------- ----------------
1999 2000 1999 2000
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Accrued benefit liability.................. $(3,292) $(5,030) $(8,039) $(7,036)
Intangible asset........................... -- -- 324 272
Accumulated other comprehensive income..... 17,880 18,394 4,214 3,681
------- ------- ------- -------
Net amount recognized...................... $14,588 $13,364 $(3,501) $(3,083)
======= ======= ======= =======
</TABLE>

M. Segment Information

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 operate within a single industry segment--computer software and related
services. We have two major product categories within that one segment: (1) our
MCAD solutions including our flagship Pro/ENGINEER(R) design software, which
provides flexible engineering solutions to our customers and (2) our Web-based
Windchill(R) software which provides collaborative information management
solutions to our customers using Internet technologies. These CPC solutions
permit customers to collaboratively develop, build and manage products
throughout their entire lifecycle. Our products are sold worldwide by our sales
force and distributors.

F-22
<PAGE>

PARAMETRIC TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

While we are predominately a computer software company, our business is
organized geographically. Data for the geographic regions in which we operate
is presented below:
<TABLE>
<CAPTION>
September 30,
-------------------------------
1998 1999 2000
---------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Revenue:
MCAD solutions............................... $1,004,556 $ 976,257 $ 753,685
Windchill solutions.......................... 13,414 81,344 174,729
---------- ---------- ---------
Total revenue.............................. $1,017,970 $1,057,601 $ 928,414
========== ========== =========
Revenue:
North America................................ $ 449,931 $ 464,445 $ 378,564
Europe....................................... 408,057 389,969 341,859
Asia/Pacific................................. 159,982 203,187 207,991
---------- ---------- ---------
Total revenue.............................. $1,017,970 $1,057,601 $ 928,414
========== ========== =========
Long-lived assets:
North America................................ $ 47,910 $ 165,212 $ 155,236
Europe....................................... 26,878 66,826 51,955
Asia/Pacific................................. 18,979 23,503 22,527
---------- ---------- ---------
Total long-lived assets.................... $ 93,767 $ 255,541 $ 229,718
========== ========== =========
</TABLE>

We license products to customers worldwide. Our sales and marketing operations
outside the United States are conducted principally through our foreign sales
subsidiaries throughout Europe and the Asia/Pacific region. Intercompany sales
and transfers between geographic areas are accounted for at prices that are
designed to be representative of unaffiliated party transactions. Total exports
were $115.2 million, $166.2 million and $81.5 million in 1998, 1999 and 2000,
respectively.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of Parametric Technology
Corporation:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Parametric Technology Corporation and its subsidiaries at
September 30, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2000 in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
October 16, 2000, except for Note I,
as to which the date is November 17, 2000

F-23
<PAGE>

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA(1)

<TABLE>
<CAPTION>
September 30,
----------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue................. $1,077,321 $1,062,018 $1,017,970 $1,057,601 $928,414
Operating income
(loss)................. 259,729 229,335 208,020 178,792 (8,227)
Net income (loss)....... 159,567 87,660 86,697 119,293 (3,980)
Earnings (loss) per
share:(2)
Basic.................. 0.60 0.33 0.32 0.44 (0.01)
Diluted................ 0.57 0.32 0.31 0.43 (0.01)
Total assets............ 889,241 919,129 801,060 1,016,620 924,883
Working capital......... 356,109 311,299 174,239 247,921 266,081
Long term liabilities,
less current portion... 323,102 263,949 46,014 38,333 33,989
Stockholders' equity.... 195,648 204,551 335,504 521,104 528,542
Pro forma:(3)
Revenue................ $ 902,937 $ 979,794 $1,017,970 $1,057,601 $928,414
Operating income....... 298,567 288,823 316,501 255,027 51,739
Net income............. 184,106 146,196 199,359 184,356 38,907
Earnings per share:(2)
Basic................ 0.70 0.55 0.74 0.68 0.14
Diluted.............. 0.66 0.53 0.72 0.67 0.14
</TABLE>

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
January 2, April 3, July 3, September 30,
1999 1999 1999 1999
---------- -------- -------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue........................... $250,117 $263,248 $264,140 $280,096
Operating income.................. 46,097 20,840 49,747 62,108
Net income........................ 29,991 10,549 35,419 43,334
Earnings per share:(2)
Basic............................ 0.11 0.04 0.13 0.16
Diluted.......................... 0.11 0.04 0.13 0.16
Pro forma:(3)
Operating income................. $ 62,414 $ 63,964 $ 58,244 $ 70,405
Net income....................... 44,850 45,904 42,917 50,685
Earnings per share:(2)
Basic.......................... 0.17 0.17 0.16 0.19
Diluted........................ 0.16 0.17 0.16 0.18
Common stock prices:(4)
High............................. $ 18.13 $ 21.00 $ 19.38 $ 16.19
Low.............................. 8.94 12.50 11.94 13.00
<CAPTION>
January 1, April 1, July 1, September 30,
2000 2000 2000 2000
---------- -------- -------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue........................... $239,037 $227,105 $227,254 $235,018
Operating income (loss)........... 13,976 (8,401) (22,112) 8,310
Net income (loss)................. 10,381 (5,846) (15,427) 6,912
Earnings (loss) per share:(2)
Basic............................ 0.04 (0.02) (0.06) 0.03
Diluted.......................... 0.04 (0.02) (0.06) 0.03
Pro forma:(3)
Operating income................. $ 23,404 $ 1,376 $ 9,076 $ 17,883
Net income....................... 17,554 518 7,125 13,709
Earnings per share:(2)
Basic.......................... 0.06 0.00 0.03 0.05
Diluted........................ 0.06 0.00 0.03 0.05
Common stock prices:(4)
High............................. $ 32.88 $ 31.94 $ 11.63 $ 13.81
Low ............................. 13.94 19.06 8.00 9.94
</TABLE>
--------
(1) All financial information has been retroactively restated to reflect the
merger with Computervision in 1998 (Note B).
(2) Per share data has been retroactively adjusted to reflect the one-for-one
stock dividends in 1996 and 1998 (Note H).
(3) The pro forma results exclude (i) the amortization of goodwill and
intangible assets; (ii) acquisition and related costs of $35.6 million in
1996, $105.8 million in 1998, $10.6 million in the first quarter of 1999
and $27.6 million in the second quarter of 1999 (Note B); (iii)
nonrecurring charges of $11.0 million in 1996, $45.0 million in 1997,
$3.2 million in the first quarter of 1999, $11.9 million in the second
quarter of 1999 and $21.5 million in the third quarter of 2000 (Note B);
(iv) an extraordinary loss of $19.0 million in 1998 (Note F); and (v) the
results of Computervision's other services business unit for 1996 and
through the date it was sold in 1997.
(4) Our common stock is traded on the Nasdaq National Market under the symbol
"PMTC". The common stock prices are based on the Nasdaq Stock Market daily
closing stock price.

F-24