AMENDMENT NO. 1 TO FORM 10-Q

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CmTIuWoqaOIjqSdlBeTRn3O/r3aQjEH8mgU2/HXLm4zkTqKoM5d4DTJ5W1rqND1O ibQwCUPegJPLwtunuWGdDg== 0001193125-05-248444.txt : 20051223 0001193125-05-248444.hdr.sgml : 20051223 20051223143642 ACCESSION NUMBER: 0001193125-05-248444 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050101 FILED AS OF DATE: 20051223 DATE AS OF CHANGE: 20051223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATRIXONE INC CENTRAL INDEX KEY: 0000786998 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 020372301 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-29309 FILM NUMBER: 051285127 BUSINESS ADDRESS: STREET 1: 210 LITTLETON ROAD CITY: WESTFORD STATE: MA ZIP: 01886 BUSINESS PHONE: 978-589-4000 MAIL ADDRESS: STREET 1: 210 LITTLETON ROAD CITY: WESTFORD STATE: MA ZIP: 01886 FORMER COMPANY: FORMER CONFORMED NAME: ADRA SYSTEMS INC DATE OF NAME CHANGE: 19971024 10-Q/A 1 d10qa.htm AMENDMENT NO. 1 TO FORM 10-Q AMENDMENT NO. 1 TO FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q/A

(Amendment No. 1)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended January 1, 2005

Commission file number 000-29309

MATRIXONE, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		02-0372301
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

210 Littleton Road

Westford, Massachusetts 01886

(Address of Principal Executive Offices, Including Zip Code)

(978) 589-4000

(Registrant’s Telephone Number, Including Area Code)

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

As of December 20, 2005, there were 52,148,099 shares of common stock, $0.01 par value per share, outstanding.

MATRIXONE, INC.

QUARTERLY REPORT ON FORM 10-Q/A

FOR THE FISCAL QUARTER ENDED JANUARY 1, 2005

TABLE OF CONTENTS


		Page
PART I - FINANCIAL INFORMATION

Item 1:	Financial Statements:

	Condensed Consolidated Balance Sheets as of January 1, 2005 (unaudited, as restated) and July 3, 2004 (as restated)	2
	Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended January 1, 2005 (unaudited, as restated) and January 3, 2004 (unaudited, as restated)	3
	Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended January 1, 2005 (unaudited, as restated) and January 3, 2004 (unaudited, as restated)	4
	Notes to Condensed Consolidated Financial Statements	5

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Risk Factors	48

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4:	Controls and Procedures	62

PART II - OTHER INFORMATION

Item 1:	Legal Proceedings	65

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	66

Item 5:	Other Information	67

Item 6:	Exhibits	67

Signatures		68

MATRIXONE, INC.

QUARTERLY REPORT ON FORM 10-Q/A

FOR THE FISCAL QUARTER ENDED JANUARY 1, 2005

Introductory Note - Restatement of Consolidated Financial Statements

In this Amendment No. 1 to our Quarterly Report on Form 10-Q, we are restating our condensed consolidated balance sheets as of January 1, 2005 and July 3, 2004 and our condensed consolidated statements of operations, statements of cash flows and related disclosures for the three and six month periods ended January 1, 2005 and January 3, 2004. The accompanying restated condensed consolidated financial statements should be read in conjuction with the consolidated financial statements, as restated, in the Company’s Annual report on Form 10-K for the fiscal year ended July 2, 2005, which the Company filed on November 9, 2005.

This Amendment No. 1 amends Part I, Items 1, 2,3 and 4 and Part II, Items 1 and 6 of the Quarterly Report on Form 10-Q for the quarter ended January 1, 2005. This Amendment No. 1 continues to reflect circumstances as of the date of the original filing of the Quarterly Report on Form 10-Q and we have not updated the disclosures contained therein to reflect events that occurred at a later date, except for items relating to the restatement or where otherwise indicated.

The financial statements for our first quarter of fiscal 2005 were restated as part of our Quarterly Report on Form 10-Q for our first quarter of fiscal 2006 filed on November 15, 2005. We do not anticipate filing amended Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for any periods prior to the second quarter of fiscal 2005. Previously filed financial statements for all periods prior to fiscal 2005 should no longer be relied upon. Our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q for fiscal 1999 through fiscal 2004 have not been revised to reflect the restatement and the financial statements contained in those reports should not be relied upon. Instead the financial statements for fiscal 2004 and fiscal 2003 included in our Annual Report on Form 10-K for the fiscal period ended July 2, 2005 should be relied upon.

PART I - FINANCIAL INFORMATION

ITEM 1:

FINANCIAL STATEMENTS

MATRIXONE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)


	January 1, 2005			July 3, 2004
	(As Restated) (unaudited)			(As Restated)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	108,456		$	118,414
Accounts receivable, less allowance for doubtful accounts of $815 (as restated) and $867 (as restated)		32,497			25,862
Prepaid expenses and other current assets		6,652			5,963

Total current assets		147,605			150,239
PROPERTY AND EQUIPMENT, NET		6,600			7,062
GOODWILL		12,043			—
OTHER INTANGIBLE ASSETS, NET		8,072			—
OTHER ASSETS		2,178			2,077

	$	176,498		$	159,378

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	4,743		$	3,862
Accrued expenses		18,021			14,592
Deferred revenue		29,022			31,250

Total current liabilities		51,786			49,704

LONG TERM DEFERRED REVENUE		3,394			1,728
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value per share, 5,000 shares authorized; 0 shares issued and outstanding		—			—
Common stock, $0.01 par value per share; 100,000 shares authorized; 51,533 and 48,733 shares issued and outstanding		515			487
Additional paid-in capital		226,830			213,152
Accumulated deficit		(109,812	)		(107,767	)
Accumulated other comprehensive income		3,785			2,074

Total stockholders’ equity		121,318			107,946

	$	176,498		$	159,378

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

MATRIXONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)


	Three Months Ended						Six Months Ended
	January 1, 2005			January 3, 2004			January 1, 2005			January 3, 2004
	(As Restated)			(As Restated)			(As Restated)			(As Restated)
REVENUES:
Software license	$	16,684		$	10,142		$	27,858		$	17,543
Service		19,157			17,460			36,665			34,707

Total revenues		35,841			27,602			64,523			52,250

COST OF REVENUES:
Software license		1,449			723			2,414			1,740
Amortization of purchased technology		199			—			332			—
Service ⁽¹⁾		12,133			11,822			23,573			23,164

Total cost of revenues		13,781			12,545			26,319			24,904

GROSS PROFIT		22,060			15,057			38,204			27,346

OPERATING EXPENSES:
Selling and marketing ⁽¹⁾		11,816			9,049			21,703			18,159
Research and development ⁽¹⁾		7,397			5,507			13,735			11,631
General and administrative ⁽¹⁾		2,661			2,573			5,282			5,015
Amortization of intangible assets		106			—			176			—
Stock-based compensation ⁽¹⁾		—			188			—			567
Restructuring charges		—			1,884			—			1,884
Asset impairment and disposal charges		—			1,680			—			1,680

Total operating expenses		21,980			20,881			40,896			38,936

INCOME(LOSS) FROM OPERATIONS		80			(5,824	)		(2,692	)		(11,590	)

OTHER INCOME (EXPENSE):
Interest income		448			320			798			630
Other income (expense), net		(25	)		15			(43	)		19

Total other income (expense)		423			335			755			649

INCOME(LOSS) BEFORE INCOME TAXES		503			(5,489	)		(1,937	)		(10,941	)
PROVISION FOR INCOME TAXES		57			50			108			(47	)

NET INCOME(LOSS)	$	446		$	(5,539	)	$	(2,045	)	$	(10,894	)

BASIC NET INCOME(LOSS) PER SHARE	$	0.01		$	(0.11	)	$	(0.04	)	$	(0.23	)

SHARES USED IN COMPUTING BASIC NET INCOME(LOSS) PER SHARE		51,378			48,210			50,836			48,086

DILUTED NET INCOME(LOSS) PER SHARE	$	0.01		$	(0.11	)	$	(0.04	)	$	(0.23	)

SHARES USED IN COMPUTING DILUTED NET INCOME(LOSS) PER SHARE		53,980			48,210			50,836			48,086


⁽¹⁾ The following summarizes the allocation of stock-based compensation:

Cost of service revenues	$	—		$	64		$	—		$	172
Selling and marketing		—			64			—			165
Research and development		—			26			—			107
General and administrative		—			34			—			123

Total stock-based compensation	$	—		$	188		$	—		$	567

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

MATRIXONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Six Months Ended
	January 1, 2005			January 3, 2004
	(As Restated)			(As Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,045	)	$	(10,894	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,590			2,525
Amortization of purchased technology and intangible assets		508			—
Asset impairment and disposal charge		—			1,680
Stock-based compensation		—			567
Reduction in doubtful accounts		(68	)		(170	)
Changes in assets and liabilities, net of business combination:
Accounts receivable		(1,430	)		47
Prepaid expenses and other current assets		(468	)		166
Accounts payable		194			(797	)
Accrued expenses		1,680			(411	)
Deferred revenues		(4,429	)		(2,710	)

Net cash used in operating activities		(4,468	)		(9,997	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(851	)		(587	)
Other assets		75			(1,024	)
Cash paid for business combinations, net of cash acquired of $790		(6,463	)		—

Net cash used in investing activities		(7,239	)		(1,611	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of line of credit assumed in business combination		(1,512	)		—
Proceeds from stock option exercises		733			267
Proceeds from purchases of common stock under employee stock purchase plan		666			374

Net cash provided by (used in) financing activities		(113	)		641

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		1,862			1,824

NET DECREASE IN CASH AND CASH EQUIVALENTS		(9,958	)		(9,143	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		118,414			127,665

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	108,456		$	118,522

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	72		$	90

Issuance of common stock in business combination	$	12,371		$	—

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

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements of MatrixOne, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States. These accounting principles were applied on a basis consistent with those of the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2005 filed with the Securities and Exchange Commission (the “SEC”). The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2005, which the Company filed on November 9, 2005. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation. The operating results for the three and six month periods ended January 1, 2005 may not be indicative of the results expected for any succeeding quarter or the entire fiscal year ending July 2, 2005.

The Company operates on a 52 or 53 week fiscal year that ends on the Saturday closest to June 30^thand on thirteen or fourteen week fiscal quarters that end on the Saturday closest to September 30^th, December 31^st and March 31^st. The fiscal quarter ended January 3, 2004 consisted of fourteen weeks, and the fiscal year ended July 3, 2004 consisted of 53 weeks. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and judgments, which are evaluated on an on-going basis, that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, allowance for doubtful accounts, useful lives of property and equipment, valuation of deferred tax assets, business combinations, valuation of goodwill and acquired intangible assets, and professional services warranty.

Revenue Recognition

The Company generates revenues from licensing its software and providing professional services, training and maintenance and customer support services. The Company executes separate contracts that govern the terms and conditions of each software license and maintenance arrangement and each professional services arrangement. These contracts may be considered together as a single multiple-element arrangement. Revenues under multiple-element arrangements, which may include several different software products or services sold together, are allocated to each element using the residual method.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

The Company uses the residual method when fair value does not exist for one of the delivered elements in an arrangement. Under the residual method, the fair value of the undelivered elements is deferred and subsequently recognized. The Company has established sufficient vendor specific objective evidence of fair value for professional services, training and maintenance and customer support services, except for maintenance and customer support service in Japan, based on the price charged when these elements are sold separately, Accordingly, when vendor specific objective evidence exists, software license revenue is recognized under the residual method in arrangements in which software is licensed with professional services, training or maintenance and customer support services.

The Company has not established sufficient vendor specific objective evidence of fair value for maintenance and customer support services in Japan. Accordingly, the software license fees in Japan are recognized ratably over the term of the related maintenance and customer support services contract, generally one year, on a straight-line basis.

The Company primarily provides the following four types of software license arrangements:

•

Perpetual software license - we recognize software license revenues from perpetual licenses under the residual method upon execution of a signed software license agreement, delivery of the software to a customer and determination that collection of a fixed or determinable license fee is probable;

•

Two year or more time-based license - we recognize software license revenues from two year or more time-based licenses under the residual method upon execution of a signed software license agreement, delivery of the software to a customer and determination that collection of a fixed or determinable license fee is probable;

•

Less than two year time-based license - we recognize software license revenues from less than two year time-based licenses ratably over the period of the license arrangement. Since we do not have vendor specific objective evidence of fair value for maintenance and customer support for such arrangements, both the software license and maintenance and customer support fees are included in software license revenues; and

•

Revenue sharing, royalty and subscriber arrangements with and through third-parties - we recognize revenue sharing, royalty and subscriber arrangements with and through third-parties as software license revenue when they are fixed or determinable, generally upon receipt of a statement from the third-party and determination that collection of the fixed or determinable license fee is probable.

If a customer is provided extended payment terms, revenue is recognized when the fees become due. A software license is considered delivered when the customer receives the physical media in accordance with the applicable shipping terms or is provided electronic access to the software files.

In accordance with the Company’s agreements with its value-added resellers and distributors (“Alliance Partners”), an Alliance Partner has the right to license the Company’s software to its customers (“end users”). Therefore, the Company has no obligation to the Alliance Partner’s end users. Accordingly, the Company recognizes software license revenues from an Alliance Partner upon receipt of a written confirmation from the Alliance Partner of a noncancellable, binding written arrangement with the ultimate end user, delivery of the software to the Alliance Partner and when all other revenue recognition criteria, including fulfillment of all obligations and commitments, have been met.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Service revenues include professional services, reimbursements received for out-of-pocket expenses incurred, training and maintenance and customer support fees. Professional services are generally not essential to the functionality of the other elements in an arrangement and are accounted for separately. Professional services revenues are primarily derived from time and material contracts and are recognized as the services are performed. Professional services revenues for fixed-price contracts are recognized using a concept of proportional performance based upon the ratio of direct labor costs incurred to total expected labor costs. If conditions for acceptance are required or the arrangement includes future product deliverables, professional services revenues and related software license revenue are recognized upon customer acceptance or upon delivery of the future deliverables. Customers generally reimburse the Company for the majority of its out-of-pocket expenses incurred during the course of an engagement. The Company does not mark-up or add additional fees to the actual out-of-pocket expenses incurred. Training revenues are recognized as the services are provided.

For arrangements that include the licensing of software and the performance of professional services under a fixed-price contract, both the software license revenues and professional services revenues are recognized using a concept of proportional performance based upon the ratio of direct labor costs incurred to total expected labor costs.

Maintenance and customer support fees include the right to unspecified upgrades on a when-and-if-available basis and ongoing technical support. Maintenance and customer support fees are recognized ratably over the term of the contract, generally one year, on a straight-line basis. When a maintenance and customer support fee is included in a software license fee, a portion of the software license fee is allocated to maintenance and customer support fees based on the renewal rate of maintenance and customer support fees.

Goodwill and Other Intangible Assets

Intangible assets consist of acquired technology, customer contracts and related customer relationships, trademarks and trade names acquired through business combinations and the values allocated to these intangible assets are amortized using the straight-line method over the estimated useful life of the related asset. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable and an impairment loss is recognized when it is probable that the estimated cash flows are less than the carrying amount of the asset.

Goodwill is not subject to amortization and is tested annually for impairment, or more frequently if events and circumstances indicate that the asset might be impaired. Goodwill is required to be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. The Company evaluates the impairment of goodwill annually in its fourth fiscal quarter with the assistance of an independent valuation firm. Application of the goodwill impairment test requires making judgments about the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of the reporting units. The Company has determined that it has one reporting segment. Significant judgment is required to estimate the fair value of a reporting unit including estimating future cash flows and determining appropriate discount rates. Changes in these judgments, estimates and assumptions could materially affect the determination of fair value for the reporting unit and therefore the determination as to the existence or size of any impairment. Any impairment losses recorded in the future could have a material adverse impact on the Company’s financial condition and results of operations.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Concentrations of Credit Risk and Significant Customers

No customer represented more than 10% of the Company’s total revenues for either the three or six month periods ended January 1, 2005 and January 3, 2004. No customer represented more than 10% of the Company’s accounts receivable at January 1, 2005. One customer represented 13.9% of the Company’s accounts receivable at January 3, 2004.

Stock-Based Compensation

Pursuant to the Company’s Third Amended and Restated 1996 Stock Plan (the “1996 Plan”) and the Company’s Amended and Restated 1999 Stock Plan (the “1999 Plan”), the Company may grant incentive and nonqualified stock options, stock issuances and opportunities to make direct purchases of stock to employees, directors, officers or consultants of the Company. The Company records stock-based compensation issued to employees and directors (collectively “employees”) using the intrinsic value method and stock-based compensation issued to non-employees using the fair value method. Stock-based compensation is recognized on stock options issued to employees if the option exercise price is less than the market price of the underlying stock on the date of grant, and stock-based compensation is recognized on all stock options granted to non-employees. During the periods presented, no stock options were issued to employees at an exercise price less than the marketprice of the underlying stock on the date of grant, and no stock options were issued to non-employees. Accordingly, no deferred stock-based compensation expense was recorded pursuant to stock options granted during the periods presented.

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. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.

The fair value of stock options granted during the periods indicated has been determined using the Black-Scholes option pricing model and the following assumptions:


	Three Months Ended		Six Months Ended
	January 1, 2005	January 3, 2004	January 1, 2005	January 3, 2004
Risk-free interest rate	3.10 – 3.41%	2.73 – 2.87%	3.10 – 3.41%	2.40 – 2.91%
Expected dividend yield	None	None	None	None
Expected life	3-4 Years	4 Years	3-4 Years	4 Years
Expected volatility	65%	120%	65% - 90%	120%

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Had compensation expense for all stock options been determined based on fair value as prescribed by Statement of Financial Accounting Standards No. 123, the Company’s pro forma net loss and pro forma basic and diluted net loss per share would have been as follows:


	Three Months Ended						Six Months Ended
	January 1, 2005			January 3, 2004			January 1, 2005			January 3, 2004
	(As Restated)			(As Restated)			(As Restated)			(As Restated)
NET INCOME(LOSS):
Net income(loss), as reported	$	446		$	(5,539	)	$	(2,045	)	$	(10,894	)
Exclude:
Stock-based compensation expense related to stock options included in net loss		—			188			—			567
Include:
Stock-based compensation expense related to stock options using the fair value method		(3,444	)		(4,452	)		(7,517	)		(8,239	)

Pro forma net loss	$	(2,998	)	$	(9,803	)	$	(9,562	)	$	(18,566	)

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
As reported:
Basic net income(loss) per share	$	0.01		$	(0.11	)	$	(0.04	)	$	(0.23	)
Diluted net income(loss) per share	$	0.01		$	(0.11	)	$	(0.04	)	$	(0.23	)
Pro forma:
Basic and diluted net loss per share	$	(0.06	)	$	(0.20	)	$	(0.19	)	$	(0.39	)

In the first quarter fiscal of 2006 the Company adopted Statement of Financial Accounting Standards No. 123(R) “Share-Based Payments” (“SFAS 123(R)”), which requires all share-based payments to employees, including stock options and stock issued under certain employee stock purchase plans, to be recognized in the Company’s financial statements at their fair value. SFAS 123(R) requires the Company to estimate future forfeitures of stock-based compensation, while the pro forma disclosure for the three and six months ended January 1, 2005 and January 3, 2004 includes only those options that had been forfeited during that period. The Company has continued to use the Black-Scholes option pricing model to determine fair value of options under SFAS 123(R) and has elected to use the modified-prospective transition method, in which prior period financial statements will not be restated but disclosure of the pro forma net loss calculation will be included in the footnotes to the financial statements for periods prior to fiscal 2006 and the adoption of SFAS 123(R).

In connection with certain stock option grants to employees in fiscal 2000 and 1999, the Company recorded deferred stock-based compensation totaling $17,654. Deferred stock-based compensation represents the difference between the option exercise price and the deemed fair value of the Company’s common stock on the date of grant. Deferred stock-based compensation, a component of stockholders’ equity, is amortized through charges to operations over the vesting period of the options, which is generally four years. Stock-based compensation was $188 and $567 for the three and six months ended January 3, 2004, respectively. The amortization of deferred stock-based compensation terminated during the three months ended January 3, 2004.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Note 2: Restatement of Consolidated Financial Statements

The Company has restated its consolidated financial statements for fiscal 1999 through fiscal 2004 as well as the first two interim periods of fiscal 2005 due to the discovery of errors in revenue recognition related to certain transactions reported by the Company and to address other matters as described below. The following provides a more detailed discussion of the restatement along with a comparison of the amounts previously reported in the condensed consolidated balance sheets as of January 1, 2005 and July 3, 2004 and condensed consolidated statements of operations for the three and six month periods ended January 1, 2005 and January 3, 2004.

The financial statements for the Company’s first quarter of fiscal 2005 were restated as part of its Quarterly Report on Form 10-Q for our first quarter of fiscal 2006 filed on November 15, 2005. The Company does not anticipate filing amended Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for any periods prior to the second quarter of fiscal 2005. Previously filed financial statements for all annual and quarterly periods prior to 2005 should no longer be relied upon. Instead the financial statements for fiscal 2004 and fiscal 2003 included in our Annual Report on Form 10-K for the fiscal period ended July 2, 2005 should be relied upon.

In the third quarter of fiscal 2005, a new manager at the Company’s Japanese subsidiary discovered a side letter, a violation of the Company’s policy, which granted a distributor an unauthorized right of return related to certain of the Company’s software products. The manager informed the Company’s U.S. management about the side letter, who, in turn, notified the Company’s independent auditors and the Audit Committee of the Board of Directors. The Audit Committee of the Company’s Board of Directors launched a review of the Company’s revenue recognition practices (“the review”). As a result of the review, the Company identified a pattern of unauthorized arrangements and concessions granted to certain distributors, principally in Japan, in the form of rights of return; exchanges for product which had not been delivered; and timing of commencement of maintenance, among other conditions; as well as a pattern of failure by managers and employees and certain of the Company’s distributors to provide accurate information to the Company concerning arrangements included as revenue in the Company’s consolidated financial statements. As a result of these findings, the Company determined that the timing of revenue recognition should be deferred until all such concessions and unauthorized arrangements lapse or have been fulfilled. Based on the review, management and the Audit Committee concluded that the failure to detect these unauthorized arrangements and concessions resulted in errors in revenue recognition, which primarily result in the deferral of revenue into later periods than originally recognized, required the Company to restate previously reported financial results. The Company also identified several customer arrangements in prior fiscal periods that included certain commitments to provide future software functionality resulting in the deferral of revenue into later periods when the commitment was or will be fulfilled. The restatement affected previously reported results from fiscal 1999 through the second quarter of fiscal 2005.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Revenue and Expense Adjustments

Set forth below are the adjustments to the Company’s previously issued statement of operations for the three and six month periods ended January 1, 2005 and January 3, 2004.


	Three Months Ended						Six Months Ended
	January 1, 2005			January 3, 2004			January 1, 2005			January 3, 2004
Net loss, as previously reported	$	(399	)	$	(7,151	)	$	(2,337	)	$	(13,839	)
Restatement adjustments, net:
Software license revenues		1,332			758			1,105			2,045
Service revenues		(597	)		(25	)		(1,304	)		95
Cost of software license revenue		312			898			457			1,417
Cost of service revenues		329			281			536			(27	)
Operating expenses		(524	)		(292	)		(494	)		(726	)
Other Income		(7	)		(8	)		(8	)		(9	)
Income Taxes		—			—			—			150

Total restatement adjustments		845			1,612			292			2,945

Net income(loss), as restated	$	446		$	(5,539	)	$	(2,045	)	$	(10,894	)

Software License Revenue

The Company’s policy for recognizing software license revenue from Alliance Partners results in the recognition of software license revenue upon receipt of a written confirmation from the Alliance Partner of an arrangement with the ultimate end user, delivery of the software to the Alliance Partner and when all other revenue recognition criteria are met (refer to Note 1 “Summary of Significant Accounting Policies”). As a result of the investigation, the Company identified a pattern of unauthorized arrangements and concessions granted to certain distributors, principally in Japan, in the form of rights of return; exchanges for product which had not been delivered; and timing of commencement of maintenance, among other conditions; as well as a pattern of failure by managers and employees and certain of the Company’s distributors to provide accurate information to the Company concerning arrangements included as revenue in the Company’s consolidated financial statements. As a result of these findings, the Company determined that the timing of revenue recognition should be deferred until all such concessions and unauthorized arrangements have lapsed or have been fulfilled.

Further, as a result of the investigation, the Company determined that, because of unauthorized maintenance terms being granted to certain distributors in Japan, the Company is unable to assert that it has vendor specific objective evidence (“VSOE”) for the software license revenue transactions reported by its Japanese subsidiary. Consequently, all license transactions reported by the Company’s Japanese subsidiary during the restatement period were restated to recognize software license revenue on a straight-line basis over the related maintenance term (primarily one year), beginning generally when maintenance commenced or, if later, when concessions or unauthorized arrangements were fulfilled or subsequently lapsed.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

In addition, the Company identified several customer arrangements in prior fiscal periods that included certain commitments to provide future software functionality resulting in the deferral of software license revenue into later periods when the commitment was or will be fulfilled.

Service Revenue

Service revenues include consulting services, maintenance and customer support services, and training. A number of the Company’s revenue transactions involve multiple elements, including software licenses and maintenance and customer support services. Statement of Position (“SOP”) 97-2, Software Revenue Recognition, requires maintenance and customer support service revenues to be recognized over the period such services are provided. Based on the Company’s investigation, the Company identified certain circumstances in which it offered maintenance and customer support services at discounted rates to certain customers but did not properly allocate the fair value for the maintenance and customer support service from software license revenue. This resulted in revenue associated with the value of the maintenance and customer support services not being recognized in the proper amount over the service period. In the restated financial statements, the Company has recognized maintenance and customer support service revenue ratably over the period in which the maintenance and customer support service was provided based on the deferral of the applicable VSOE of maintenance and customer support service. In such cases, the Company has reclassified maintenance and customer support service from software license revenues to service revenues for the applicable periods presented. The Company also identified several customer arrangements in prior fiscal periods that included certain commitments to provide future software functionality resulting in the deferral of professional service and maintenance and customer support revenues into later periods when the commitment was or will be fulfilled.

Other service revenue adjustments relate to certain service revenue allowances which were previously identified and determined to be immaterial to the Company’s consolidated financial statements. Adjustments related to these allowances were reversed during fiscal 2004 and fiscal 2003, decreasing service revenue in those years. These adjustments related to service revenue allowances established prior to fiscal 2002 for potential service revenue recognition matters with respect to certain professional service arrangements.

Cost of Software License Revenues

Cost of software license revenues primarily consists of royalties paid to third-parties for certain products licensed to the Company’s customers. As a result of the restatement, certain software license revenues were adjusted as described in above. Accordingly, certain direct costs related to software license revenues were deferred to reflect the associated deferred recognition of these revenues. These costs are being recognized in the period in which the related software license revenue is recognized.

As part of the restatement, the Company re-evaluated payments pursuant to certain third-party development and licensing arrangements and concluded they should be accounted for as research and development expenses when paid rather than capitalized and amortized to cost of software license revenues based on the greater of the actual royalties incurred to date or the straight-line method of amortization over the estimated useful life.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Cost of Service Revenues

As a result of the restatement, certain professional service and maintenance and customer support revenues were adjusted as previously described. Accordingly, the direct costs related to professional service revenues were deferred to reflect the deferred recognition of these revenues. These costs are being recognized in the period in which the related revenues are recognized.

The Company records an estimate of professional services warranty based on historical activity. Estimated professional services warranty costs are included in cost of service revenues. The Company primarily satisfies its warranty obligations by providing in-kind services. Over the past several years, the Company has had favorable professional services warranty experience. As part of the restatement, the Company has adjusted its professional services warranty to reflect its actual historical experience.

Operating Expenses

Operating expenses include selling and marketing, research and development and general and administrative. As part of the restatement, the Company deferred certain direct selling expenses related to deferred software license revenue. These expenses will be recognized in the period in which the related software license revenue is recognized. The Company also reclassed certain prepaid software royalty fees related third-party development arrangements from prepaid expenses and other current assets to research and development expense. In addition, the Company adjusted its allowance for doubtful accounts, which is included in general and administrative expenses, to reflect its actual historical experience. Finally, the Company also recorded certain adjustments for previously unrecorded immaterial errors related to certain operating expense estimates and accruals.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Impact of the Financial Statement Adjustments on the Condensed Consolidated Statements of Operations

The following table presents the impact of the financial statement adjustments on the Company’s previously reported condensed consolidated statements of operations for the three and six month periods ended January 1, 2005.


	Three Months Ended					Six Months Ended
	January 1, 2005			January 1, 2005		January 1, 2005			January 1, 2005
	(As Reported)			(As Restated)		(As Reported)			(As Restated)
Condensed Consolidated Statements of Operations Data:
Revenues:
Software license	$	15,352		$	16,684	$	26,753		$	27,858
Service		19,754			19,157		37,969			36,665

Total revenues		35,106			35,841		64,722			64,523

Cost of revenues:
Software license		1,761			1,449		2,871			2,414
Amortization of purchased technology		199			199		332			332
Service		12,462			12,133		24,109			23,573

Total cost of revenues		14,422			13,781		27,312			26,319

Gross profit		20,684			22,060		37,410			38,204

Operating expenses:
Selling and marketing		11,666			11,816		21,470			21,703
Research and development		7,143			7,397		13,424			13,735
General and administrative		2,541			2,661		5,332			5,282
Amortization of intangible assets		106			106		176			176

Total operating expenses		21,456			21,980		40,402			40,896

Income(loss) from operations		(772	)		80		(2,992	)		(2,692	)
Other income, net		430			423		763			755
Provision for income taxes		57			57		108			108

Net income(loss)	$	(399	)	$	446	$	(2,337	)	$	(2,045	)

Basic net income(loss) per share:
Net income(loss)	$	(0.01	)	$	0.01	$	(0.05	)	$	(0.04	)

Shares used in computation		51,378			51,378		50,836			50,836

Diluted net income(loss) per share:
Net income(loss)	$	(0.01	)	$	0.01	$	(0.05	)	$	(0.04	)

Shares used in computation		51,378			53,980		50,836			50,836

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)


	Three Months Ended						Six Months Ended
	January 3, 2004			January 3, 2004			January 3, 2004			January 3, 2004
	(As Reported)			(As Restated)			(As Reported)			(As Restated)
Condensed Consolidated Statements of Operations Data:
Revenues:
Software license	$	9,384		$	10,142		$	15,498		$	17,543
Service		17,485			17,460			34,612			34,707

Total revenues		26,869			27,602			50,110			52,250

Cost of revenues:
Software license		1,621			723			3,157			1,740
Service		12,103			11,822			23,137			23,164

Total cost of revenues		13,724			12,545			26,294			24,904

Gross profit		13,145			15,057			23,816			27,346

Operating expenses:
Selling and marketing		9,031			9,049			17,960			18,159
Research and development		5,432			5,507			11,436			11,631
General and administrative		2,374			2,573			4,683			5,015
Stock-based compensation		188			188			567			567
Restructuring charges		1,884			1,884			1,884			1,884
Asset impairment and disposal charges		1,680			1,680			1,680			1,680

Total operating expenses		20,589			20,881			38,210			38,936

Loss from operations		(7,444	)		(5,824	)		(14,394	)		(11,590	)
Other income, net		343			335			658			649
Provision for income taxes		50			50			103			(47	)

Net loss	$	(7,151	)	$	(5,539	)	$	(13,839	)	$	(10,894	)

Basic and Diluted net loss per share:
Net loss	$	(0.15	)	$	(0.11	)	$	(0.29	)	$	(0.23	)

Shares used in computation		48,210			48,210			48,086			48,086

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Impact of the Adjustment on the Condensed Consolidated Balance Sheet

The following is a summary of the impact of the adjustments on the Company’s previously reported condensed consolidated balance sheet as of January 1, 2005.


	As of January 1, 2005
	As Reported			As Restated
*ASSETS*
Current Assets:
Cash and cash equivalents	$	108,456		$	108,456
Accounts receivable, net		31,842			32,497
Prepaid expenses and other current assets		4,088			6,652

Total current assets		144,386			147,605
Property and Equipment, Net		6,600			6,600
Goodwill		12,043			12,043
Other Intangible Assets, Net		8,072			8,072
Other Assets		2,178			2,178

	$	173,279		$	176,498

*LIABILITIES AND STOCKHOLDERS’ EQUITY*
Current Liabilities:
Accounts payable	$	5,268		$	4,743
Accrued expenses		18,812			18,021
Deferred revenue		18,867			29,022

Total current liabilities		42,947			51,786

Long Term Deferred Revenue		—			3,394
Stockholders’ Equity:
Common stock		515			515
Additional paid-in capital		226,830			226,830
Accumulated deficit		(101,711	)		(109,812	)
Accumulated other comprehensive income		4,698			3,785

Total stockholders’ equity		130,332			121,318

	$	173,279		$	176,498

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Note 3. Business Combinations

On August 4, 2004, the Company acquired Synchronicity Software, Inc. (“Synchronicity”), a provider of electronic design management, team collaboration and intellectual property reuse solutions for the global electronics industry for cash consideration of approximately $4,529 and the issuance of approximately 2,304 shares of MatrixOne common stock. The acquisition of Synchronicity added new solutions for semiconductor and electronics design management to the solutions portfolio of the Company, expanded the Company’s customer base and deepened the Company’s domain expertise in the electronics industry. The transaction was accounted for under the purchase method of accounting. Accordingly, the results of operations of the acquired entity are included in the Company’s unaudited condensed consolidated statements of operations for all periods subsequent to the acquisition date.

The total purchase price for Synchronicity was as follows:


Value of 2,304 shares of MatrixOne common stock issued, net of issuance costs of $65	$	12,306
Cash paid to and on behalf of former Synchronicity security holders		4,529
Direct transaction costs		862

Total purchase price	$	17,697

The purchase price was fixed and there was no contingent consideration. The value of MatrixOne shares issued was $5.37 per share, based on an average of the closing prices of MatrixOne’s common stock on the Nasdaq National Market for the two days up to, after and including the measurement date of July 15, 2004. The direct transaction costs represent the expenses incurred by MatrixOne directly related to the Synchronicity acquisition. The final amount of these costs may change within the purchase price allocation period, in which case, the initial purchase price allocation would change, resulting in a change to goodwill.

The total purchase price, as shown in the preceding table, is allocated to the tangible and identifiable intangible assets and liabilities of Synchronicity assumed, based on their fair values as of the date of the acquisition. The following table presents the fair value of the assets acquired and liabilities assumed:


Current assets	$	4,206
Property and equipment, net		198
Other long term assets		75
Current liabilities		(2,492	)
Deferred revenues		(2,193	)

Net liabilities assumed		(206	)
Fair value of acquired lease		75
Intangible assets acquired:
Developed technology		4,730
Customer contracts and related customer relationships		3,600
Trademarks and trade names		250
Goodwill		10,108
Accrued acquisition liabilities		(777	)
Accrued registration costs		(83	)

Total purchase price	$	17,697

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

The Company performed a review to determine whether all tangible assets and liabilities were recorded in Synchronicity’s general ledger in accordance with U.S. GAAP. Management of the Company believes that the historical value of the acquired tangible assets and liabilities approximates their respective fair values.

The estimation of the fair value of intangible assets determined by the Company with the assistance of an independent appraisal firm, from which the Company has received a valuation report, involved the following steps:

•

Preparation of discounted cash flow analysis;

•

Estimation of the fair value of tangible assets;

•

Determination of the fair value and estimated useful lives of identified material intangible assets;

•

Determination of the fair value and estimated useful lives of developed technology and in-process research and development using a cash flow allocation model;

•

Allocation of the residual purchase price to other intangible assets generally in the nature of goodwill; and

•

Reconciliation of the individual asset returns with the weighted average cost of capital.

An after-tax discount rate of 18%, based on Synchronicity’s weighted average cost of capital, was utilized to discount the net cash flows of developed technology, customer contracts and related customer relationships and trademarks and trade names to their present value. The weighted average cost of capital reflected the anticipated market acceptance and penetration of Synchronicity’s products, market growth rates and risks related to potential changes in future target markets.

Developed technology represents products that have reached technological feasibility and thus are capitalizable and consist of the existing Synchronicity product lines. Developed technology includes processes and trade secrets developed through years of experience in design and development of Synchronicity’s products. The value assigned to developed technology was determined by discounting the estimated future cash flows to be generated from Synchronicity’s existing products to their present value. The estimates of revenue used to value the developed technology were based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by Synchronicity, the combined Company and its competitors.

Customer contracts and related customer relationships represent the value assigned to Synchronicity’s installed base of customers based on various assumptions such as probability of additional revenue transactions with these existing customers and the percentage retention of these customers. The installed base of customers represents a significant part of Synchronicity’s business as Synchronicity had contract renewal rates of approximately 90% for existing customers. In addition, Synchronicity has consulting and training engagements with numerous customers.

The value of the trademarks and trade names was determined based on estimates of the expected royalties to be earned over the estimated life of the trademarks and trade names.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Goodwill represents the excess of the purchase price for Synchronicity over the fair value of the underlying net tangible and identifiable intangible assets. Of the total purchase price, $10,108 was allocated to goodwill. Goodwill resulting from business combinations completed subsequent to June 30, 2001 is not amortized but instead is reviewed annually for impairment or more frequently if impairment indicators arise. In the event that management determines that goodwill has become impaired, the combined Company will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made.

On the date of the acquisition, the combined Company committed to a plan to exit certain activities of Synchronicity at a cost of approximately $806 in the aggregate, which was included in the purchase price allocation as acquisition liabilities. These acquisition liabilities relate to certain severance and other employee benefits related to the planned termination of ten Synchronicity employees at a cost of approximately $641, and the cost of vacating a Synchronicity facility of approximately $165. The Company expects to pay severance and other related benefits and the lease termination costs through September 2005. Should the estimates of these acquisition liabilities change within the purchase price allocation period, there will be a resulting change to the balance of goodwill.

The significant components of the exit plan, cash payments and remaining accrual as of January 1, 2005 were as follows:


	Employee Severance and Fringe Benefits			Facilities and Other Associated Costs			Total
Exit plan costs	$	641		$	165		$	806
Non-cash adjustment		(29	)		—			(29	)
Cash payments		(235	)		(4	)		(239	)

Accrual balance as of January 1, 2005	$	377		$	161		$	538

The non-cash adjustment of $29 represents the reversal of certain severance and other employee benefits related to the retention of two employees previously planned to be terminated.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

The following unaudited pro forma financial information presents the combined results of the Company and Synchronicity as if the Synchronicity acquisition had taken place on June 29, 2003. The pro forma amounts give effect to certain adjustments, including the amortization of intangible assets, increased commission expense, decreased interest income, incremental rent expense and certain one-time adjustments which had been recorded by Synchronicity in its historical financial statements. This pro forma information does not necessarily reflect the results of operations as they would have been if the business had been managed by the Company during these periods and is not indicative of results that may be obtained in the future.


	Three Months Ended			Six Months Ended
	January 3, 2004			January 1, 2005			January 3, 2004
	(As Restated)			(As Restated)			(As Restated)
Pro forma total revenues	$	30,361		$	65,685		$	57,818
Pro forma net loss	$	(7,077	)	$	(2,789	)	$	(14,190	)
Pro forma basic and diluted net loss per share	$	(0.14	)	$	(0.05	)	$	(0.28	)

On November 12, 2004, the Company acquired certain intangible assets of Centor Software Corporation (“Centor”). Centor is a provider of software for documenting and validating regulatory compliance with the European Union directives that target banned substances and recycling for the automotive and electronics industries, for cash consideration of $1,750 (the “Centor acquisition”). The acquired intangible assets include certain existing technology, customer contracts and related customer relationships and technology agreements, and all trademarks and trade names. The Centor acquisition added new solutions for regulatory compliance to the solutions portfolio of the Company and expanded the Company’s customer base. The transaction was accounted for as a business combination using the purchase method of accounting and, accordingly, the results of operations of Centor are included in the Company’s unaudited condensed consolidated statements of operations for all periods subsequent to the acquisition date.

The total purchase price for the Centor acquisition was as follows:


Cash paid to Centor	$	1,750
Direct transaction costs		112

Total purchase price	$	1,862

The purchase price was fixed and there was no contingent consideration. The direct transaction costs represent the estimated expenses incurred by MatrixOne directly related to the Centor acquisition. The final amount of these costs may change within the purchase price allocation period, in which case, the initial purchase price allocation would change, resulting in a change to goodwill.

The following table presents the preliminary fair value of the assets acquired and liabilities assumed:


Deferred revenues	$	(73)
Goodwill		1,935

Total estimated purchase price	$	1,862

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

The Company retained an independent appraisal firm to assist in determining the fair value of intangible assets acquired in connection with the Centor acquisition. Based on the preliminary valuation report, approximately 6% of the total purchase price is estimated to pertain to customer relationships, which have an estimated useful life of 5 years. Since the valuation report was not finalized as of January 1, 2005 and any related amortization would have been immaterial, the Company reported the entire purchase price as goodwill as of January 1, 2005, and therefore, the Company did not record amortization expense during the three and six month periods ended January 1, 2005. The results of Centor’s operations do not have a material impact on the Company’s historical operating results.

Note 4. Goodwill and Other Intangible Assets, Net

Other intangible assets, net were comprised of the following as of January 1, 2005:


Identified Intangible Asset	Useful Life in Years	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technology
Core technology	7	$	3,780	$	(225	)	$	3,555
Application technology – DesignSync	4		710		(74	)		636
Application technology – ProjectSync	3		240		(33	)		207

Total developed technology			4,730		(332	)		4,398

Customer contracts and related customer relationships—Synchronicity	10		3,600		(150	)		3,450
Trademarks and trade names	4		250		(26	)		224

			3,850		(176	)		3,674

Total		$	8,580	$	(508	)	$	8,072

For the three and six months ended January 1, 2005, amortization expense related to identified intangible assets was $305 and $508, respectively, of which $199 and $332, respectively, was related to developed technology and included in cost of revenues and $106 and $176, respectively, was related to customer contracts and related customer relationships and trademarks and trade names and included in operating expenses.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

The following is the estimated future amortization expense related to other intangible assets as of January 1, 2005:


Fiscal Year
Remainder of fiscal 2005	$	610
2006		1,220
2007		1,220
2008		1,147
2009		920
2010		900
Thereafter		2,055

Total	$	8,072

The following sets forth changes to goodwill for the six months ended January 1, 2005:


Goodwill balance as of July 3, 2004	$	—
Goodwill resulting from Synchronicity acquisition		10,108
Goodwill resulting from Centor acquisition		1,935

Goodwill balance as of January 1, 2005	$	12,043

Note 5. Professional Services Warranty

The Company’s professional services are generally warranted to be performed in a workmanlike manner. In the event the customer requests the work be corrected, the Company generally will provide these additional professional services at no charge to comply with its warranty obligations and to ensure customer satisfaction. The Company estimates its professional services warranty liability based on historical activity. Warranty expense is included in cost of services. If the Company’s actual warranty activities differ from these estimates, revisions to the estimated warranty liability would be required and result in additional charges to cost of services. The Company primarily satisfies its warranty obligations by providing in-kind services.


	(As Restated)
Balances as of July 3, 2004	$	300
Net provisions for warranty charged to cost of services during the six months ended January 1, 2005		486
Payments made (in kind or in cash) during the six months ended January 1, 2005		(536	)

Balance as of January 1, 2005	$	250

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Note 6. Commitments and Contingencies

Contingencies

On April 19, 2002, a consolidated amended class action complaint was filed in the United States District Court for the Southern District of New York. The complaint, which superseded five virtually identical complaints that had been filed from July 24, 2001 to September 5, 2001, names as defendants the Company, two of our officers, and certain underwriters involved in our initial public offering of common stock (“IPO”). The complaint is allegedly brought on behalf of purchasers of our common stock during the period from February 29, 2000 to December 6, 2000 and asserts, among other things, that our IPO prospectus and registration statement violated federal securities laws because they contained material misrepresentations and/or omissions regarding the conduct of our IPO underwriters in allocating shares in our IPO to the underwriters’ customers, and that the Company and the two named officers engaged in fraudulent practices with respect to the underwriters’ conduct. The action seeks damages, fees and costs associated with the litigation, and interest. We and our officers and directors believe that the allegations in the complaint are without merit and have defended the litigation vigorously. The litigation process is inherently uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of this pending lawsuit. Pursuant to a stipulation between the parties, the Company’s two named officers were dismissed from the lawsuit, without prejudice, on October 9, 2002. On February 19, 2003, the Court ruled on a motion to dismiss the complaint that had been filed by the Company, along with the three hundred plus other publicly-traded companies that have been named by various plaintiffs in substantially similar lawsuits. The Court granted the Company’s motion to dismiss the claim filed against it under Section 10(b) of the Securities Exchange Act of 1934, but denied the Company’s motion to dismiss the claim filed against it under Section 11 of the Securities Act of 1933, as it denied the motions under this statute for virtually every other company sued in the substantially similar lawsuits.

In June 2003, the Company, implementing the determination made by a special independent committee of the Board of Directors, elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If ultimately approved by the Court, this proposed settlement would result in a dismissal, with prejudice, of all claims in the litigation against us and against any of the other issuer defendants who elect to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. The proposed settlement does not provide for the resolution of any claims against the underwriter defendants, and the litigation as against those defendants is continuing. The proposed settlement provides that the class members in the class action cases brought against the participating issuer defendants will be guaranteed a recovery of $1.0 billion by insurers of the participating issuer defendants. If recoveries totaling $1.0 billion or more are obtained by the class members from the underwriter defendants, however, the monetary obligations to the class members under the proposed settlement will be satisfied. In addition, the Company and any other participating issuer defendants will be required to assign to the class members certain claims that they may have against the underwriters of their IPOs.

The proposed settlement contemplates that any amounts necessary to fund the settlement or settlement-related expenses would come from participating issuers’ directors and officers liability insurance policy proceeds, as opposed to funds of the participating issuer defendants themselves. A participating issuer defendant could be required to contribute to the costs of the settlement if that issuer’s insurance coverage were insufficient to pay that issuer’s allocable share of the settlement costs. The Company expects that its insurance proceeds will be sufficient for these purposes and that it will not otherwise be required to contribute to the proposed settlement.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Consummation of the proposed settlement is conditioned upon obtaining final approval by the Court. On September 1, 2005, the Court preliminarily approved the proposed settlement, directed that notice of the terms of the proposed settlement be provided to class members, and scheduled a fairness hearing, at which objections to the proposed settlement will be heard. Thereafter, the Court will determine whether to grant final approval to the proposed settlement.

If the proposed settlement described above is not consummated, the Company intends to continue to defend the litigation vigorously. Moreover, if the proposed settlement is not consummated, the Company believes that the underwriters may have an obligation to indemnify the Company for the legal fees and other costs of defending this suit. While the Company cannot guarantee the outcome of these proceedings, the Company believes that the final result of these actions will have no material effect on its consolidated financial condition, results of operations or cash flows.

On December 2, 2005, plaintiffs holding shares of the Company’s common stock filed a lawsuit in the Delaware Court of Chancery against the Company’s board of directors: Oliver Press Partners, LLC, et al. v. W. Patrick Decker, et al., C.A. No. 1817-N (Del. Ch.). Plaintiffs challenge the application of the Company’s advance notice bylaw, adopted in March 2000, that requires that nominations to the Company’s board of directors be submitted within a specified period prior to the Company’s annual meeting of stockholders (the “Advance Notice Bylaw”). On December 2, 2005, plaintiffs purported to nominate a slate of two directors for election at the Company’s annual meeting, which is scheduled to occur December 22, 2005. Because the Advance Notice Bylaw would operate to prevent a vote on plaintiffs’ alternative slate of directors at the annual meeting, plaintiffs alleged that the Advance Notice Bylaw is unreasonable and that the directors breached their fiduciary duties of loyalty and care to plaintiffs by adopting and applying the Advance Notice Bylaw. Plaintiffs sought a declaration that the Advance Notice Bylaw is invalid and inequitable as applied to them, a declaration that their slate of directors is valid and must be voted on at the 2005 annual meeting, and an order compelling the rescheduling of the annual meeting to January 2006. At the same time that plaintiffs filed their complaint, they also filed a motion to expedite proceedings, seeking expedited discovery and trial proceedings in advance of the December 22, 2005 annual meeting. On December 6, 2005, the court denied plaintiffs’ motion and ordered the parties to confer upon and submit a scheduling order. The Company intends to defend the litigation vigorously, and while the Company cannot predict with certainty the outcome of these proceedings, the Company believes the final outcome will result in no material effect on our consolidated financial condition, results of operations or cash flows.

Indemnification

The Company licenses software and sells services to its customers pursuant to contracts, which the Company refers to as a Software License Agreement (“SLA”) and Master Services Agreement (“MSA”), respectively. Each SLA and MSA contains the relevant terms of the contractual arrangement with the customer and generally includes certain provisions for indemnifying the customer against losses, expenses, and liabilities from damages that are finally awarded against the customer by a court of competent jurisdiction or that are agreed to by the Company in a written settlement agreement in the event the Company’s software or services performed by the Company are found to infringe upon a patent, copyright, trademark, or other proprietary right of a third-party. The SLA and MSA generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to, certain time and geography based scope limitations and a right to replace an infringing product.

The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the SLA and MSA. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights of its employees’ development work to the Company. Through January 1, 2005, the Company has not had to reimburse any of its

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

customers for any losses related to these indemnification provisions and no material claims are outstanding as of January 1, 2005. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the SLA and MSA, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. However, the Company does not believe any amounts would be material to the Company’s consolidated financial condition, results of operations or cash flows.

Note 7. Basic and Diluted Net Income(Loss) Per Share

Basic net income(loss) per share is computed by dividing net income(loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income(loss) per share is computed by dividing net income(loss) by the shares used in the calculation of basic net income(loss) per share plus the dilutive effect of common stock equivalents, such as stock options, using the treasury stock method. Common stock equivalents are excluded from the computation of diluted net loss per share if their effect is antidilutive.

Potentially dilutive common stock options aggregating 3,370 and 10,065 shares for the three months ended January 1, 2005 and January 3, 2004, respectively, and 12,022 and 10,261 shares for the six months ended January 1, 2005 and January 3, 2004, respectively, have been excluded from the computation of diluted net loss per share because their inclusion would be antidilutive.

Note 8. Comprehensive Income(Loss)

Comprehensive income(loss) includes net income(loss) and other changes in stockholders’ equity, except for stockholders’ investments and distributions, repurchases of common stock and deferred stock-based compensation. The components of comprehensive income(loss) were as follows:


	Three Months Ended					Six Months Ended
	January 1, 2005		January 3, 2004			January 1, 2005			January 3, 2004
	(As Restated)		(As Restated)			(As Restated)			(As Restated)
Net income(loss)	$	446	$	(5,539	)	$	(2,045	)	$	(10,894	)
Foreign currency translation adjustments		1,297		923			1,711			840

Comprehensive income(loss)	$	1,743	$	(4,616	)	$	(334	)	$	(10,054	)

Note 9: Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available to the chief operating decision maker, or decision-making group, in assessing performance and allocating resources. The Company’s decision-making group, its executive management team, views the Company’s operations and manages its business principally as one segment with two offerings: PLM software and related services. The executive management team evaluates these offerings based on their respective gross margins. Therefore, the financial information presented in these financial statements represents all the material financial information related to the Company’s principal operating segment.

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to a number of risks and uncertainties. These forward-looking statements are typically denoted in this Quarterly Report on Form 10-Q/A by the phrases “anticipates,” “believes,” “expects,” “plans” and similar phrases (as well as other words or expressions referencing future events, conditions or circumstances). Our actual results could differ materially from those projected in the forward-looking statements as a result of various factors, including the factors set forth in “Risk Factors” beginning on page 48 of this Quarterly Report on Form 10-Q/A. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes for the periods specified. Further reference should be made to the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2005, filed on November 9, 2005.

In this Quarterly Report on Form 10-Q/A, we are restating our condensed consolidated balance sheets as of January 1, 2005 and July 3, 2004 and our condensed consolidated statements of operations, statements of cash flows and related disclosures for the three and six month periods ended January 1, 2005 and January 3, 2004. Our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q for fiscal 1999 through 2004 have not been amended to reflect the restatement, and the financial statements contained in those reports should not be relied upon. Instead the financial statements for fiscal 2004 and fiscal 2003 included in our Annual Report on Form 10-K for the fiscal period ended July 2, 2005 should be relied upon. For additional information regarding the restatement, refer to Note 2 “Restatement of Consolidated Financial Statements” in the Notes to Condensed Consolidated Financial Statements to this Quarterly Report on Form 10-Q/A.

Business Overview

MatrixOne, Inc. is a provider of collaborative product lifecycle management (“PLM”) solutions. Our solutions enable companies from a broad range of industries to accelerate innovation and time to market and drive efficiencies into the product development processes by allowing for the collaborative development, building and management of their products. Our interoperable solutions bring together people, processes, content and systems throughout global value chains of employees, customers, suppliers and partners to achieve a competitive advantage by bringing the right products and services to market cost-effectively. By unifying and streamlining processes across the product lifecycle, companies can easily work on projects with parties inside and outside of their enterprises to achieve greater efficiency and profitability. In addition, our technology enables companies to adapt, react and scale quickly to address their ever-changing business requirements.

On August 4, 2004, we acquired Synchronicity Software, Inc. (“Synchronicity”), a provider of electronic design management, team collaboration and intellectual property reuse solutions for the global electronics industry. Synchronicity offers the Synchronicity Developer Suite, a solution for managing large-scale semiconductor designs that supports the Electronic Design Automation (“EDA”) industry’s leading databases – OpenAccess and Milkyway™. Synchronicity also offers the Synchronicity Publisher and Consumer Suites, a solution for IP management, distribution and reuse. Synchronicity has approximately 120 electronics industry customers, including 13 of the largest 15 semiconductor companies. The combination of Synchronicity and MatrixOne provides solutions for companies that have high-value electronic content in their products. The acquisition of Synchronicity has added new solutions for semiconductor and electronics design management to the solutions portfolio of MatrixOne, expanded our customer base and deepened our domain expertise in the electronics industry. Our customers, who come from many industries including automotive, aerospace, consumer, machinery, medical device and high technology, are being confronted with new design, manufacturing and quality challenges as the electronics content in their products increase and new product development cycle times compress. To deal with these challenges, our customers look to us to provide an integrated development environment that will enable them to effectively manage not only the mechanical design aspect of their products but also the electronics and software components. The combined solution of MatrixOne and Synchronicity allows

MatrixOne to address a new and rapidly emerging market for PLM by directly connecting the electronic design environment to the extended enterprise. Together, MatrixOne and Synchronicity solutions are designed to enable global design teams to work together with their development partners, customers and suppliers to reduce design and development costs, leverage design expertise, improve quality and accelerate time to market.

On November 12, 2004, we acquired certain intangible assets of Centor Software Corporation (“Centor”), a provider of software for documenting and validating regulatory compliance with the European Union directives that target banned substances and recycling for the automotive and electronics industries (the “Centor acquisition”). The Centor acquisition added new solutions for regulatory compliance to the solutions portfolio of MatrixOne and expanded our customer base by the addition of approximately 20 new customers. Many of our customers are facing new design and manufacturing challenges as the content in their products increasingly becomes subject to regulations aimed at reducing the amount of hazardous materials in new products and ensuring that materials are recyclable at the end of their product lifecycle. Our customers need an integrated development environment that will enable them to effectively manage the compliance process at the earliest stages of design. The combined solution of MatrixOne and Centor is expected to allow MatrixOne to address this new and rapidly emerging market for PLM by providing a complete out of the box solution for reporting, analyzing, and iterating on product data, along with aggregation of supplier data. Together, MatrixOne and Centor solutions will be designed to allow material and substance data and specifications to be incorporated in product development decisions throughout the product lifecycle.

Our collaborative PLM solutions are based on our suite of software products, collectively referred to as Matrix10^TM. Our Matrix10 offering is a comprehensive and flexible PLM environment that consists of three components: the Matrix PLM Platform ^TM, our Business Process Applications ^TM, which include the Synchronicity and Centor suites of products, and our Enterprise Integration offerings. We also offer a variety of services that complement our PLM solutions. Our professional services personnel provide rapid and cost-effective implementation, integration and other consulting services. These personnel capture and model the specific business processes that reflect our customers’ planning, design, manufacturing, sales and service practices. We also provide training and maintenance and customer support services to continuously enhance the value of our products to our customers. In addition, we have a global network of systems integrators who are experienced in providing implementation and integration services to our customers. Many of our customers use their preferred systems integrators or perform their own implementation.

Our strategy is focused on achieving a leadership position within the PLM market by effectively enabling our customers to achieve measurable improvements in their business by unifying and streamlining processes across the product lifecycle. We license our PLM solutions primarily in seven industrial markets including aerospace and defense, automotive, consumer products, machinery, high technology, medical devices, and the process industries. To gain market leadership in each of these industrial markets, a core part of our strategy is to develop and market focused variations of our product offerings to meet the needs of industry-specific business processes and develop the deep domain expertise of our workforce in the industrial markets in which we compete.

Financial Overview

On August 4, 2004, we acquired Synchronicity for cash consideration of approximately $4.5 million and the issuance of approximately 2.3 million shares, and on November 12, 2004, we acquired certain intangible assets of Centor for cash consideration of approximately $1.8 million. These acquisitions were accounted for as business combinations using the purchase method of accounting. Accordingly, the results of operations of Synchronicity and Centor are included in our statements of operations for all periods subsequent to the respective acquisition dates.

We generate revenues from licensing our software and providing professional services, training and maintenance and customer support services through our offices in the United States, Canada, England, France, Germany, Italy, Japan, Korea, Singapore and the Netherlands and indirectly through our Alliance Partner network throughout Europe and Asia/Pacific. Revenues by geographic region fluctuate each period based on the timing,

size and number of software license and professional services transactions and the fluctuation in the value of foreign currencies relative to the U.S. Dollar. Our total revenues by major geographic region, including exports into such regions, for the three and six months ended January 1, 2005 and January 3, 2004 were as follows:


	Three Months Ended				Six Months Ended
(In thousands)	January 1, 2005		January 3, 2004		January 1, 2005		January 3, 2004
	(As Restated)		(As Restated)		(As Restated)		(As Restated)
North America	$	18,885	$	15,689	$	35,353	$	28,785
Europe		13,114		9,138		21,649		17,522
Asia/Pacific		3,842		2,775		7,521		5,943

Total revenues	$	35,841	$	27,602	$	64,523	$	52,250

Our international subsidiaries generally invoice their customers and pay their employees and suppliers in local currency. Therefore, our revenues and expenses from these international subsidiaries, when translated to U.S. Dollars, are subject to foreign currency risk. We currently do not enter into contracts or agreements to minimize our exposure to the effects of changes in foreign currency when the results of our international subsidiaries are translated to U.S. Dollars. Accordingly, if the dollar weakens relative to foreign currencies, our revenues and expenses would increase when stated in U.S. Dollars. Conversely, if the dollar strengthens, our revenues and expenses would decrease. If the revenues from our international subsidiaries for the three and six month periods ended January 1, 2005 had been translated at exchange rates for the comparable period a year ago, our total revenues would have been approximately $1.1 and $1.9 million lower, respectively.

We have incurred significant costs to develop our technology and products, market, license, sell, implement and support our products and services, and maintain an infrastructure to support our global operations. These costs have historically exceeded our total revenues. As of January 1, 2005, we had an accumulated deficit of approximately $109.8 million. If our operating expenses are higher than we anticipate or our revenues are lower than anticipated, we may incur significant net losses in fiscal 2005 and beyond.

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments, which we evaluate on an on-going basis, that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and judgments under different assumptions or conditions.

We believe the following sets forth the most important accounting policies we used in the preparation of our condensed consolidated financial statements and those that affect our more significant estimates and judgments, which have been reviewed by our Disclosure Committee, consisting primarily of our senior management team, and the Audit Committee of our Board of Directors.

Revenue Recognition

We generate revenues from licensing our software and providing professional services, training and maintenance and customer support services. We execute separate contracts that govern the terms and conditions of each software license and maintenance arrangement and each professional services arrangement. These contracts may be considered together as a single multiple-element arrangement. Revenues under multiple-element arrangements, which may include several different software products or services sold together, are allocated to each element using the residual method.

We use the residual method when fair value does not exist for one of the delivered elements in an arrangement. Under the residual method, the fair value of the undelivered elements is deferred and subsequently recognized. We have established sufficient vendor specific objective evidence of fair value for professional services, training and maintenance and customer support services, except for maintenance and customer support services in Japan, based on the price charged when these elements are sold separately. Accordingly, when vendor specific objective evidence exists, software license revenue is recognized under the residual method in arrangements in which software is licensed with professional services, training or maintenance and customer support services.

We have not established sufficient vendor specific objective evidence of fair value for maintenance and customer support services in Japan. Accordingly, the software license fees in Japan are recognized ratably over the term of the related maintenance and customer support services contract, generally one year, on a straight-line basis.

We primarily provide the following four types of software license arrangements:

•

In accordance with our agreements with our value-added resellers and distributors (“Alliance Partners”), an Alliance Partner has the right to license our software to its customers (“end users”). Therefore, we have no obligation to the Alliance Partner’s end users. Accordingly, we recognize software license revenues from an Alliance Partner upon receipt of a written confirmation from the Alliance Partner of an arrangement with the ultimate end user, delivery of the software to the Alliance Partner and when all other revenue recognition criteria, including fulfillment of all obligations and commitments, have been met.

Service revenues include professional services, reimbursements received for out-of-pocket expenses incurred, training and maintenance and customer support fees. Professional services generally are not essential to the functionality of the other elements in an arrangement and are accounted for separately. Professional services revenues are primarily derived from time and material contracts and are recognized as the services are performed. Professional services revenues for fixed-price contracts are recognized using a concept of proportional performance based upon the ratio of direct labor costs incurred to total expected labor costs. If conditions for acceptance are required or the arrangement includes future product deliverables, professional services revenues and related software license revenue are recognized upon customer acceptance or upon delivery of the future deliverable. Our customers generally reimburse us for the majority of our out-of-pocket expenses incurred during the course of an engagement. We do not mark-up or add additional fees to the actual out-of-pocket expenses we incur. Training revenues are recognized as the services are provided.

Maintenance and customer support fees include the right to unspecified upgrades on a when-and-if-available basis and ongoing technical support. Maintenance and customer support fees are recognized ratably over the term of the contract, generally one year, on a straight-line basis. When a maintenance and customer support fee is included in a software license fee, we allocate a portion of the software license fee to maintenance and customer support fees based on the renewal rate of maintenance and customer support fees.

Allowance for Doubtful Accounts

We periodically assess the collectibility of customer accounts receivable. We maintain an allowance for estimated losses resulting from uncollectible customer accounts receivable. In estimating this allowance, we consider customer specific factors such as historical collection experience, current credit worthiness, the aggregate amount due, age of the receivable and general economic conditions that may affect a customer’s ability to pay. We also consider factors such as the overall balance and aging of our accounts receivable, as well as customer and geographic concentrations. Actual customer collections could differ materially from our estimates. The use of different estimates or assumptions could produce a materially different allowance. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Our allowance for doubtful accounts was approximately $0.8 million and $0.9 million at January 1, 2005 and July 3, 2004, respectively.

Property and Equipment

We estimate the useful lives of our property and equipment, and we record depreciation on a straight-line basis over the estimated useful lives of our property and equipment. We regularly review our estimate of the useful lives and net book value of our property and equipment in order to determine if events and circumstances, such as changes in technology, product obsolescence and changes in our business, may require a change in the estimated useful lives of our property and equipment or recognition of an impairment loss, both of which would increase our operating expenses.

Deferred Tax Assets

Under applicable accounting criteria, we record a valuation allowance to reduce our deferred tax assets to the estimated amount that is more likely than not to be realized. During our assessment of the valuation allowance, we consider future taxable income and ongoing tax planning strategies on a consolidated basis and in the tax jurisdictions in which we operate. We have recorded a valuation allowance against our deferred tax assets due to the fact it is more likely than not that the deferred tax assets will not be realized. We regularly evaluate the realizability of our deferred tax assets and may adjust the valuation allowance based on such analysis.

Accounting for Business Combinations

We are required to allocate the purchase price of business combinations to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Such a valuation, which is determined with the assistance of an independent valuation firm, requires us to make significant estimates and assumptions, especially with respect to intangible assets.

Critical estimates in valuing certain of the intangible assets include but are not limited to:

•

future expected cash flows from software license sales, maintenance and customer support agreements, consulting contracts, customer contracts and related customer relationships, and acquired developed technologies and trademarks and trade names;

•

expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed;

•

the acquired company’s brand awareness and market position, as well as assumptions about the period of time the acquired brand will continue to be used by the combined company; and

•

discount rates.

Our estimates of fair value are based upon assumptions believed to be reasonable at that time, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. In addition, we estimate the useful lives of our intangible assets based upon the expected period over which we anticipate generating economic benefits from the related intangible asset.

Goodwill Impairment

Goodwill is required to be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. We evaluate the impairment of goodwill annually in our fourth fiscal quarter with the assistance of an independent valuation firm. Application of the goodwill impairment test requires making judgments about the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of the reporting units. We have determined that we have one reporting segment (see Note 9 “Segment Information” to our Condensed Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q/A). Significant judgments required to estimate the fair value of a reporting unit include estimating future cash flows and determining appropriate discount rates. Changes in these judgments, estimates and assumptions could materially affect the determination of fair value for the reporting unit and therefore the determination as to the existence or size of any impairment. Any impairment losses recorded in the future could have a material adverse impact on our financial condition and results of operations.

Impairment of Long-Lived Assets

We are required to record an impairment charge on long-lived tangible and finite-lived intangible assets when we determine that the carrying value of these assets may not be recoverable. As a result of the existence of one or more indicators of impairment, we measure any impairment of intangible assets based on a projected discounted cash flow method using a discount rate determined by us to be commensurate with the risk inherent in our business model. Our estimates of cash flows require significant judgment based on our historical results and anticipated results and are subject to many factors. Significant management judgment is required in: identifying a triggering event that arises from a change in circumstances; forecasting future operating results; and estimating the proceeds from the disposition of long-lived or intangible assets. Changes or inaccuracies in our judgments, estimates and assumptions could materially impact our determination of the existence or size of any impairment. We may be required to record material impairment charges should different conditions prevail or different judgments be made.

Professional Services Warranty

Our professional services are generally warranted to be performed in a workmanlike manner. In the event the customer requests the work be corrected, we generally will provide these additional professional services at no charge to comply with our warranty obligations and to ensure customer satisfaction.

We estimate our professional services warranty liability based on historical activity. Warranty expense is included in cost of services. If our actual warranty activities differ from these estimates, revisions to the estimated warranty liability would be required and result in additional charges to cost of services. We primarily satisfy our warranty obligations by providing in-kind services. Our warranty accrual was $0.3 million at both January 1, 2005 and July 3, 2004. For additional information regarding the activity related to our warranty accrual, refer to Note 5 “Professional Services Warranty” to our Condensed Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q/A.

Results of Operations

The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. As discussed in Note 2 “Restatement of Consolidated Financial Statements” in the Notes to Condensed Consolidated Financial Statements to this Quarterly Report on Form 10-Q/A, the unaudited condensed consolidated financial statements for the three and six month periods ended January 1, 2005 and January 3, 2004 are restated. The data has been derived from the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q/A. The operating results for any period should not be considered indicative of the results expected for any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended July 2, 2005 which was filed on November 9, 2005.


	Three Months Ended				Six Months Ended
	January 1, 2005		January 3, 2004		January 1, 2005		January 3, 2004
	(As Restated)		(As Restated)		(As Restated)		(As Restated)
Revenues:
Software license	46.6	%	36.7	%	43.2	%	33.6	%
Service	53.4		63.3		56.8		66.4

Total revenues	100.0		100.0		100.0		100.0

Cost of Revenues:
Software license	4.0		2.6		3.8		3.3
Amortization of purchased technology	0.6		—		0.5		—
Service	33.9		42.8		36.5		44.4

Total cost of revenues	38.5		45.4		40.8		47.7

Gross profit	61.5		54.6		59.2		52.3

Operating Expenses:
Selling and marketing	33.0		32.8		33.6		34.7
Research and development	20.6		20.0		21.3		22.3
General and administrative	7.4		9.3		8.2		9.6
Amortization of intangible assets	0.3		—		0.3		—
Stock-based compensation	—		0.7		—		1.1
Restructuring charges	—		6.8		—		3.6
Asset impairment and disposal charges	—		6.1		—		3.2

Total operating expenses	61.3		75.7		63.4		74.5

Income(Loss) from Operations	0.2		(21.1	)	(4.2	)	(22.2	)
Other Income (Expense), Net	1.2		1.2		1.2		1.3

Income(Loss) Before Income Taxes	1.4		(19.9	)	(3.0	)	(20.9	)
Provision for income taxes	0.2		0.2		0.2		(0.1	)

Net Income(Loss)	1.2	%	(20.1	)%	(3.2	)%	(20.8	)%

Comparison of the Three Months Ended January 1, 2005 and January 3, 2004

Software license revenues. We derive our software license revenues principally from licensing our suite of software products including our Matrix PLM Platform, Business Process Applications and Enterprise Integration products.

Software license revenues from our suite of software products, the number of software license transactions and the number of software license transactions in excess of $1.0 million for the three months ended January 1, 2005 and January 3, 2004 were as follows:


	Three Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands, except transaction volumes)	January 1, 2005		January 3, 2004		Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)		(As Restated)
Matrix PLM Platform	$	5,860	$	5,359	$	501	9.3	%
Business Process Applications		7,931		4,300		3,631	84.4	%
Enterprise Integrations		2,893		483		2,410	499.0	%

Total software license revenues	$	16,684	$	10,142	$	6,542	64.5	%

Number of software license transactions recognized⁽¹⁾		113		62		51	82.3	%
Number of software license transactions in excess of $1.0 million recognized⁽¹⁾		2		—		2	200.0	%

⁽¹⁾	Excludes transactions recognized on a ratable basis.

Software license revenues by geographic region fluctuate each period based on the timing, size and number of software license transactions. We report software license revenues in the geographic region of the customer placing the software license order. However, the customer may deploy software licenses in other geographic regions. Software license revenues by geographic region for the three months ended January 1, 2005 and January 3, 2004 were as follows:


	Three Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	January 1, 2005		January 3, 2004		Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)		(As Restated)
North America	$	8,076	$	5,895	$	2,181	37.0	%
Europe		6,589		3,014		3,575	118.6	%
Asia/Pacific		2,019		1,233		786	63.7	%

Total software license revenues	$	16,684	$	10,142	$	6,542	64.5	%

Software license revenues increased during the three months ended January 1, 2005 primarily due to the continued improvement in information technology spending for PLM software and improved company-wide sales execution, resulting in an increase in the number of software license transactions, the number of software license transactions in excess of $1.0 million and an increase in software license revenue from new customers. Software license revenues also increased due to the addition of the Synchronicity suite of products. Software license revenues from new customers were $2.4 million for the three months ended January 1, 2005 compared to $0.6 million for the three months ended January 3, 2004.

During the three months ended January 1, 2005, software license revenues in Asia/Pacific increased due to an increase in software license transactions from both new and existing customers. During the three months ended January 1, 2005, software license revenues in both Europe and North America increased primarily due to a software license transaction in excess of $1.0 million with an existing customer in each region and an increase in software license revenues from both new and existing customers.

Software license revenues from our Business Process Applications increased during the three months ended January 1, 2005 due to incremental software license revenue related to the addition of the Synchronicity suite of products, in addition to continued adoption of our Business Process Applications by both new and existing customers. Software license revenues from our Enterprise Integration products increased primarily due to implementation expansion by existing customers. Software license revenues from our Enterprise Integration Products also increased due to the introduction of several new products and software license revenues from new customers.

Service revenues. We provide services to our customers and systems integrators consisting of professional services, training and maintenance and customer support services. Our service revenues also include reimbursements received for out-of-pocket expenses incurred. Our professional services, which include implementation and consulting services, are primarily provided on a time and materials basis. Typically, our customers reimburse us for the majority of our out-of-pocket expenses incurred during the course of an engagement. We do not mark-up or add additional fees to the actual out-of-pocket expenses we incur. We also offer training services to our customers, distributors and systems integrators either in our offices throughout the world or at customer locations. Customers that license our products generally purchase annually renewable maintenance contracts, which provide customers with the right to receive unspecified software upgrades and technical support over the term of the contract. The components of our services revenues for the three months ended January 1, 2005 and January 3, 2004 were as follows:


	Three Months Ended						Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004			Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)			(As Restated)
Maintenance revenues	$	10,020		$	8,709		$	1,311	15.1	%
Professional services revenues		8,560			8,219			341	4.1	%
Training revenues		577			532			45	8.5	%

Total service revenues	$	19,157		$	17,460		$	1,697	9.7	%

Maintenance as a percentage of service revenues		52.3	%		49.9	%

Service revenues increased during the three months ended January 1, 2005 as a result of an increase in maintenance revenues related to incremental maintenance revenues related to Synchronicity, maintenance revenues from new customers and back maintenance from existing customers. In addition, services revenues increased due to the incremental consulting revenue related to Synchronicity, new consulting projects and expansion of existing consulting projects. Training revenues can fluctuate from period to period based on the timing of new and existing customers attending training classes and customer purchases of web-based training products.

Cost of software licenses. Cost of software licenses primarily consists of royalties paid to third-parties for certain Business Process Applications and Enterprise Integration offerings licensed to our customers. Cost of software licenses also includes the cost of manuals and product documentation, production media used to deliver our products and shipping costs. Our cost of software licenses fluctuates from period to period due to changes in the mix of software licensed and the extent to which we pay royalties to third-parties on our Business Process Applications and our Enterprise Integration products.


	Three Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	January 1, 2005		January 3, 2004		Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)		(As Restated)
Cost of software licenses	$	1,449	$	723	$	726	100.4	%
Amortization of purchased technology		199		—		199	100.0	%

Total cost of software licenses	$	1,648	$	723	$	925	128.0	%

Cost of software licenses increased during the three months ended January 1, 2005 primarily due to increased royalties of $0.8 million related to an increase in software license revenues from our Enterprise Integration Products. This increase was partially offset by a decrease of $0.1 million in royalties for our Business Applications Products due to a change in the mix of Business Applications revenues. Amortization of purchased technology relates to the identified intangible assets purchased in the Synchronicity acquisition.

Cost of services. Cost of services includes salaries and related expenses for internal services personnel and costs of contracting with independent systems integrators to provide consulting services. Cost of services fluctuates based on the mix of internal professional services personnel and more expensive independent systems integrators used for professional services engagements. Our gross margins may fluctuate based on the actual costs incurred to provide professional services.


	Three Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	January 1, 2005		January 3, 2004		Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)		(As Restated)
Cost of services	$	12,133	$	11,822	$	311	2.6	%

Cost of services increased during the three months ended January 1, 2005 primarily due to the increased personnel costs as a result of our acquisition of Synchronicity and expansion of our professional services organization.

Gross profit. The following sets forth certain information regarding the gross profit and gross margin on our software license and service revenues:


	Three Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004			Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)			(As Restated)
Gross profit on software license revenues	$	15,036		$	9,419		$	5,617		59.6	%
Gross profit on service revenues		7,024			5,638			1,386		24.6	%

Total gross profit	$	22,060		$	15,057		$	7,003		46.5	%

Gross margin on software license revenues		90.1	%		92.9	%		(2.8	)%
Gross margin on service revenues		36.7	%		32.3	%		4.4	%
Total gross margin		61.5	%		54.6	%		6.9	%
Percentage of total revenues derived from software license revenues		46.6	%		36.7	%		9.9	%
Percentage of total revenues derived from service revenues		53.4	%		63.3	%		(9.9	)%

Total gross profit increased during the three months ended January 1, 2005 primarily due to an increase in software license revenue and the proportion of our total revenues derived from software license revenues, and an increase in service revenues and continuing improvement in our gross margin on service revenues due to an increase in maintenance revenues and improved utilization of our professional services personnel.

Selling and marketing. Selling and marketing expenses include marketing costs, such as public relations and advertising, trade shows, marketing materials and customer user group meetings, and selling costs such as sales training events and commissions. Selling and marketing costs may fluctuate based on the timing of trade shows and user group events and the amount of sales commissions, which vary based upon revenues.


	Three Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004			Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)			(As Restated)
Selling and marketing expenses	$	11,816		$	9,049		$	2,767		30.6	%
Selling and marketing expenses as a percentage of total revenues		33.0	%		32.8	%		0.2	%

Selling and marketing expenses increased during the three months ended January 1, 2005 primarily due to additional personnel costs of $1.2 million related to our acquisition of Synchronicity and focused investments in key sales leadership positions, higher commission expense of $0.8 million due to an increase in software license revenues, increased employee expenses of $0.5 million and an increase in expenditures on external contractors and consultants of $0.3 million.

Research and development. Research and development expenses include costs incurred to develop our intellectual property and are charged to expense as incurred. To date, software development costs have been charged to expense as incurred because the costs incurred from the attainment of technological feasibility to general product release have not been significant. Research and development costs may fluctuate based on the use of third-parties to assist in the development of our software products.


	Three Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004			Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)			(As Restated)
Research and development expenses	$	7,397		$	5,507		$	1,890		34.3	%
Research and development expenses as a percentage of total revenues		20.6	%		20.0	%		0.6	%

Research and development expenses increased during the three months ended January 1, 2005 primarily due to an increase of $1.0 million in personnel and associated costs related to the personnel acquired from Synchronicity and hired related to Centor and a $0.9 million increase in external contractor expenses primarily related to the Synchronicity and Centor software products.

General and administrative. General and administrative expenses consist primarily of compensation of executive, finance, investor relations, human resource and administrative personnel, legal and accounting services and provisions for doubtful accounts.


	Three Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004			Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)			(As Restated)
General and administrative expenses	$	2,661		$	2,573		$	88		3.4	%
General and administrative expenses as a percentage of total revenues		7.4	%		9.3	%		(1.9	)%

General and administrative expenses increased during the three months ended January 1, 2005 primarily due to an increase in bad debt expense of $0.2 million, offset by a $0.1 million decrease in personnel expenses.

Amortization of intangible assets. Amortization of intangible assets consists of the amortization of the identified intangible assets related to customer contracts and related customer relationships and trademarks and trade names acquired in the Synchronicity and Centor acquisitions, which are amortized on a straight-line basis over the estimated useful lives of the assets of four to ten years.


	Three Months Ended				Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004	Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)			(As Restated)
Amortization of intangible assets	$	106		—	$	106		100.0	%
Amortization of intangible assets as a percentage of total revenues		0.3	%	—		0.3	%

Stock-based compensation. Stock-based compensation relates to the issuance of stock options to employees with exercise prices below the deemed fair value of our common stock on the date of grant. In connection with certain stock option grants during fiscal 2000 and 1999, we recorded deferred stock-based compensation totaling approximately $17.7 million. Deferred stock-based compensation represents the difference between the option exercise price and the deemed fair value of our common stock on the date of the option grant. Deferred stock-based compensation, a component of stockholders’ equity, is amortized through charges to operations over the vesting period of the options, which is generally four years.


	Three Months Ended				Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005	January 3, 2004			Increase (Decrease)			Percentage Increase (Decrease)
Stock-based compensation expenses	—	$	188		$	(188	)	(100	)%
Stock-based compensation expenses as a percentage of total revenues	—		0.7	%		(0.7	)%	—

The amortization of deferred stock-based compensation ended during the three months ended January 3, 2004. Therefore, there was no deferred stock-based compensation recorded during the three months ended January 1, 2005.

Other income (expense). Other income (expense) fluctuates based on interest income earned on our investments and the amount of cash available for investment, realized and unrealized gains and losses on foreign currency transactions and gains and losses on sales and disposals of fixed assets.


	Three Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	January 1, 2005		January 3, 2004		Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)		(As Restated)
Other income (expense), net	$	423	$	335	$	88	26.3	%

Other income increased during the three months ended January 1, 2005 primarily due to increased interest income from higher yields on our investments.

Provision for income taxes. During the three months ended January 1, 2005 and January 3, 2004, we recorded a provision for income taxes of $0.1 million in each period, primarily related to minimum taxes due in certain domestic and foreign tax jurisdictions.

Comparison of the Six Months Ended January 1, 2005 and January 3, 2004

Software license revenues. Software license revenues from our suite of software products, the number of software license transactions and the number of software license transactions in excess of $1.0 million for the six months ended January 1, 2005 and January 3, 2004 were as follows:


	Six Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands, except transaction volumes)	January 1, 2005		January 3, 2004		Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)		(As Restated)
Matrix PLM Platform	$	9,129	$	8,336	$	793	9.5	%
Business Process Applications		13,566		6,998		6,568	93.9	%
Enterprise Integrations		5,163		2,209		2,954	133.7	%

Total software license revenues	$	27,858	$	17,543	$	10,315	58.8	%

Number of software license transactions recognized⁽¹⁾		183		97		86	88.7	%
Number of software license transactions in excess of $1.0 million recognized⁽¹⁾		5		1		4	400.0	%

⁽¹⁾	Excludes transactions recognized on a ratable basis

Software license revenues by geographic region for the six months ended January 1, 2005 and January 3, 2004 were as follows:


	Six Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	January 1, 2005		January 3, 2004		Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)		(As Restated)
North America	$	13,928	$	9,114	$	4,814	52.8	%
Europe		9,836		5,592		4,244	75.9	%
Asia/Pacific		4,094		2,837		1,257	44.3	%

Total software license revenues	$	27,858	$	17,543	$	10,315	58.8	%

Software license revenues increased during the six months ended January 1, 2005 primarily due to the continued improvement in information technology spending for PLM software around the world, improvement in sales execution and incremental software license revenue related to the acquisition of Synchronicity. As a result of these factors, we recorded more software license transactions in excess of $1.0 million, more software license transactions, and more software license transactions with and higher software license revenues from, new customers. Software license revenues from new customers were $5.4 million for the six months ended January 1, 2005 compared to $2.2 million for the six months ended January 3, 2004. The increases in software license revenue in the six months ended January 1, 2005, was partially offset by a decrease in revenues related to the timing of revenue recognized using the ratable method in Japan.

During the six months ended January 1, 2005, software license revenues in Asia/Pacific increased due to an increase in the number of transactions with both new and existing customers. During the six months ended January 1, 2005, software license revenues in Europe increased primarily as a result of two license transactions in excess of $1.0 million and also an increase in the number of transactions with both new and existing customers. Software license revenues in North America increased primarily as a result of three license transactions greater

than $1.0 million, incremental software license revenue related to the acquisition of Synchronicity and an increase in the number of transactions with both new and existing customers.

Software license revenues from our Business Process Applications increased during the six months ended January 1, 2005 due to incremental software license revenue related to the addition of the Synchronicity suite of products in addition to an increase in both the number of software license transactions and the number of software license transactions in excess of $1.0 million. Software license revenues from our Matrix PLM Platform and our Enterprise Integration Products increased as a result of an increase in the number of software license transactions and the number of software license transactions in excess of $1.0 million.

Service revenues. The components of our service revenues for the six months ended January 1, 2005 and January 3, 2004 were as follows:


	Six Months Ended						Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004			Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)			(As Restated)
Maintenance revenues	$	18,882		$	17,158		$	1,724	10.0	%
Professional services revenues		16,449			16,417			32	0.2	%
Training revenues		1,334			1,132			202	17.8	%

Total service revenues	$	36,665		$	34,707		$	1,958	5.6	%

Maintenance as a percentage of service revenues		51.5	%		49.4	%

Service revenues increased during the six months ended January 1, 2005 as a result of an increase in maintenance revenues due to incremental maintenance revenues related to Synchronicity, maintenance revenues from new customers and back maintenance from existing customers. In addition, service revenues increased due to the incremental consulting revenue related to Synchronicity, new consulting projects and expansion of existing consulting projects. Training revenues can fluctuate from period to period based on the timing of new and existing customers attending training classes and customer purchases of web-based training products.

Cost of software licenses.


	Six Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	January 1, 2005		January 3, 2004		Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)		(As Restated)
Cost of software licenses	$	2,414	$	1,740	$	674	38.7	%
Amortization of purchased technology		332		—		332	100.0	%

Total cost of software licenses	$	2,746	$	1,740	$	1,006	57.8	%

Cost of software licenses increased during the six months ended January 1, 2005 due to an increase in royalties of $0.8 million for our Enterprise Integration Products related to an increase in software license revenues from these products. This increase was partially offset by a decrease of $0.1 million in royalties for our Business Applications Products due to a change in the mix of Business Applications revenues. Amortization of purchased technology relates to the identified intangible assets purchased in the Synchronicity acquisition.

Cost of services.


	Six Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	January 1, 2005		January 3, 2004		Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)		(As Restated)
Cost of services	$	23,573	$	23,164	$	409	1.8	%

Cost of services increased during the six months ended January 1, 2005 primarily due to a $0.9 million increase in personnel costs as a result of our acquisition of Synchronicity and expansion of our professional services organization, offset by a $0.5 million decrease in depreciation and other expenses.

Gross profit. The following sets forth certain information regarding the gross profit and gross margin on our software license and service revenues:


	Six Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004			Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)			(As Restated)
Gross profit on software license revenues	$	25,112		$	15,803		$	9,309		58.9	%
Gross profit on service revenues		13,092			11,543			1,549		13.4	%

Total gross profit	$	38,204		$	27,346		$	10,858		39.7	%

Gross margin on software license revenues		90.1	%		90.1	%		0.0	%
Gross margin on service revenues		35.7	%		33.3	%		2.4	%
Total gross margin		59.2	%		52.3	%		6.9	%
Percentage of total revenues derived from software license revenues		43.2	%		33.6	%		9.6	%
Percentage of total revenues derived from service revenues		56.8	%		66.4	%		(9.6	)%

Total gross profit and gross margin increased during the six months ended January 1, 2005 primarily due to an increase in software license revenue and the proportion of our total revenues derived from software license revenues, and continuing improvement in our gross margin on service revenues due to an increase in maintenance revenues and improved utilization of our professional services personnel.

Selling and marketing.


	Six Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004			Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)			(As Restated)
Selling and marketing expenses	$	21,703		$	18,159		$	3,544		19.5	%
Selling and marketing expenses as a percentage of total revenues		33.6	%		34.7	%		(1.1	%)

Selling and marketing expenses increased during the six months ended January 1, 2005 primarily due to additional personnel and related costs of $2.1 million related to our acquisition of Synchronicity and focused investments in key sales leadership positions, higher commission expense of $1.3 million due to an increase in software license revenues, and an increase of $0.4 million in external contractor costs and outside services. This increase was partially offset by a decrease of $0.3 million in expenses related to our Global Customer Conference, due to the timing of the event.

Research and development.


	Six Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004			Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)			(As Restated)
Research and development expenses	$	13,735		$	11,631		$	2,104		18.1	%
Research and development expenses as a percentage of total revenues		21.3	%		22.3	%		(1.0	)%

Research and development expenses increased during the six months ended January 1, 2005 primarily due to increased personnel costs of $1.4 million related to the personnel acquired from Synchronicity and hired related to Centor and $0.8 million higher contractor expenses primarily related to the Synchronicity and Centor software products. This increase was partially offset by a decrease of $0.1 million in expenses related to documentation translation.

General and administrative.


	Six Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004			Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)			(As Restated)
General and administrative expenses	$	5,282		$	5,015		$	267		5.3	%
General and administrative expenses as a percentage of total revenues		8.2	%		9.6	%		(1.4	)%

General and administrative expenses increased during the six months ended January 1, 2005 due to a charge of approximately $0.4 million related to a separation arrangement with the Company’s former Chief Financial Officer. This increase was partially offset by a decrease of $0.1 million in legal and accounting expenses.

Amortization of Intangible Assets.

Amortization of intangible assets consists of the amortization of the identified intangible assets related to customer contracts and related customer relationships and trademarks and trade names acquired in the Synchronicity and Centor acquisitions, which are amortized on a straight-line basis over the estimated useful lives of the assets.


	Six Months Ended				Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004	Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)			(As Restated)
Amortization of intangible assets	$	176		—	$	176		100.0	%
Amortization of intangible assets as a percentage of total revenues		0.3	%	—		0.3	%

Stock-based compensation. Stock-based compensation relates to the issuance of stock options to employees with exercise prices below the deemed fair value of our common stock on the date of grant. In connection with certain stock option grants during fiscal 2000 and fiscal 1999, we recorded deferred stock-based compensation totaling approximately $17.7 million. Deferred stock-based compensation represents the difference between the option exercise price and the deemed fair value of our common stock on the date of the option grant. Deferred stock-based compensation, a component of stockholders’ equity, is amortized through charges to operations over the vesting period of the options, which is generally four years.


	Six Months Ended					Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005		January 3, 2004			Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)		(As Restated)
Stock-based compensation expenses	$	—	$	567		$	(567	)	(100	)%
Stock-based compensation expenses as a percentage of total revenues		—		1.1	%		(1.1	)%

The amortization of deferred stock-based compensation ended during the six months ended January 3, 2004. Therefore, there was no deferred stock-based compensation recorded during the six months ended January 1, 2005.

Other income (expense).


	Six Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	January 1, 2005		January 3, 2004		Increase (Decrease)		Percentage Increase (Decrease)
	(As Restated)		(As Restated)
Other income (expense), net	$	755	$	649	$	106	16.3	%

Other income increased during the six months ended January 1, 2005 primarily due to increased interest income from higher yields on our investments.

Provision for income taxes. During the six months ended January 1, 2005 and January 3, 2004, we recorded a provision for income taxes in each period of $0.1 million, related to minimum taxes due in certain domestic and foreign tax jurisdictions.

Liquidity and Capital Resources

Our principal source of liquidity is our current cash and cash equivalents. Our ability to generate cash from operations is dependent upon our ability to generate revenue from licensing our software and providing related services, as well as our ability to manage our operating costs and net assets. A decrease in the demand for our software and related services or unanticipated increases in our operating costs would likely have an adverse effect on our liquidity and cash generated from operations. The following sets forth information relating to our liquidity:


	As of				Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005		July 3, 2004		Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)		(As Restated)
Cash and cash equivalents	$	108,456	$	118,414	$	(9,958	)	(8.4	)%
Working capital	$	95,819	$	100,535	$	(4,716	)	(4.7	)%

During the six months ended January 1, 2005, our cash and cash equivalents and working capital decreased primarily due to our loss from operations and the cash paid for acquisitions.

The following sets forth information relating to the sources and uses of our cash:


	Six Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	January 1, 2005			January 3, 2004			Increase (Decrease)			Percentage Increase (Decrease)
	(As Restated)			(As Restated)
Net cash used in operating activities	$	(4,468	)	$	(9,997	)	$	5,529		55.3	%
Net cash used in investing activities	$	(7,239	)	$	(1,611	)	$	(5,628	)	(349.3	)%
Net cash provided by (used in) financing activities	$	(113	)	$	641		$	(754	)	(117.6	)%


	Three Months Ended
	January 1, 2005	January 3, 2004
	(As Restated)	(As Restated)
Days sales outstanding	83	78

Net cash used in operating activities during the six months ended January 1, 2005 resulted primarily from our net loss, a decrease in deferred revenue, and an increase in accounts receivable. These uses were partially offset by non-cash depreciation and amortization expenses as well as an increase in accrued expenses. Net cash used in operating activities for the six months ended January 3, 2004 primarily resulted from our net loss and a decrease in deferred revenue. These uses were partially offset by non-cash depreciation and asset impairment charges.

Net cash used in investing activities for the six months ended January 1, 2005 reflects net cash payments related to acquisitions aggregating approximately $6.5 million and our investments in computer hardware and software, leasehold improvements and office furniture and equipment of $0.9 million. The net cash used in investing activities for the six months ended January 3, 2004 reflects $0.6 million of investments in computer hardware and software and leasehold improvements related to the consolidation of certain offices in conjunction with our October 2003 restructuring program. Net cash used in investing activities for the six months ended January 3, 2004 also includes a $1.5 million increase in other assets related to a long-term accounts receivable from a customer due in September 2005, offset by collection of certain security deposits on leased facilities. We

expect that capital expenditures for the next 12 months will be approximately $2.5 million, primarily for the acquisition of computer hardware and software and leasehold improvements.

Net cash provided by (used in) financing activities for both the six months ended January 1, 2005 and January 3, 2004 include the proceeds from stock option exercises and purchases of common stock under employee stock purchase plan aggregating $1.4 million and $0.6 million, respectively. Additionally, net cash used in financing activities for the six months ended January 1, 2005 includes the $1.5 million repayment of a line of credit assumed in the Synchronicity acquisition.

We currently anticipate that our current cash and cash equivalents will be sufficient to fund our anticipated cash requirements for working capital and capital expenditures for at least the next 12 months. However, we may need to raise additional funds in order to fund an expansion of our business, develop new products, enhance existing products and services, or acquire complementary products, businesses or technologies. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders may be reduced, our stockholders may experience additional dilution, and such securities may have rights, preferences or privileges senior to those of our stockholders. Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund an expansion of our business, take advantage of unanticipated opportunities or develop or enhance our services or products would be significantly limited.

Recently Issued Accounting Pronouncements

In the first quarter fiscal of 2006 we adopted Statement of Financial Accounting Standards No. 123(R) “Share-Based Payments” (“SFAS 123(R)”), which requires all share-based payments to employees, including stock options and stock issued under certain employee stock purchase plans, to be recognized in our financial statements at their fair value. SFAS 123(R) requires us to estimate future forfeitures of stock-based compensation, while the pro forma disclosure for the three and six months ended January 1, 2005 and January 3, 2004 includes only those options that had been forfeited during that period. We have continued to use the Black-Scholes option pricing model to determine fair value of options under SFAS 123(R) and have elected to use the modified-prospective transition method, in which prior period financial statements will not be restated but disclosure of the pro forma net loss calculation will be included in the footnotes to the financial statements for periods prior to fiscal 2006 and the adoption of SFAS 123(R).

Commitments and Contractual Obligations

Our commitments and contractual obligations that we guarantee or for which we set a minimum amount of fees primarily consists of operating leases for facilities, automobiles and office equipment, product development agreements under which we pay fees to third-parties for development or assistance in development of certain Business Process Applications and Enterprise Integration software and other contractual arrangements to support certain programs or activities. Our commitments and contractual obligations that we guarantee or for which we have minimum fees due consisted of the following as of January 1, 2005:


(In thousands)	Remainder of 2005		2006		2007		2008		2009		Thereafter
Leases	$	2,714	$	4,621	$	3,199	$	2,680	$	1,974	$	2,687
Development agreements		1,125		30		—		—		—		—
Minimum royalty fees		81		225		—		—		—		—
Other contractual arrangements		689		67		153		—		—		—

	$	4,609	$	4,943	$	3,352	$	2,680	$	1,974	$	2,687

We do not have any other commitments or contractual obligations in addition to those set forth above and those included in our condensed consolidated financial statements as of January 1, 2005.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of January 1, 2005.

Risk Factors

This Quarterly Report on Form 10-Q/A contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Our actual results could differ materially from those anticipated or projected in these forward-looking statements as a result of certain factors, including those set forth in the following cautionary statements and elsewhere in this Quarterly Report on Form 10-Q/A. If any of the following risks were to occur, our business, financial condition or results of operations would likely suffer. In that event, the trading price of our common stock would decline. Any forward-looking statement should be considered in light of the factors discussed below.

We have Identified Material Weaknesses in Our Disclosure Controls and Procedures and Our Internal Control Over Financial Reporting as of July 2, 2005 that, if Not Remedied Effectively, Could Result in Material Misstatements in our Financial Statements in Future Periods

As a result of our assessment of the effectiveness of our internal control over financial reporting as of July 2, 2005 as required under Section 404 of the Sarbanes-Oxley Act of 2002 and Item 308 of Regulation S-K, we identified material weaknesses in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). For a description of these material weaknesses including the nature of each material weakness, the remedial measures implemented by us to date beginning in our fourth quarter of fiscal 2005 and the actual or potential effects on our financial statements, please see “Management’s Report on Internal Control over Financial Reporting” and “Item 9A. Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended July 2, 2005. Our management also evaluated the effectiveness of our disclosure controls and procedures and, due to these material weaknesses, our disclosure controls and procedures were not effective as of January 1, 2005 to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms.

If we are not successful in implementing remedial initiatives to address the identified material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered in the future, we may fail to meet our future reporting obligations on a timely basis, our financial statements may contain material misstatements, our operating results may be harmed, we may fail to meet our future reporting obligations on a timely basis, we may be subject to litigation, and our common stock may be delisted from the Nasdaq National Market. Any failure to address the identified material weaknesses or any additional material weaknesses or significant deficiencies in our internal control could also adversely affect the results of future management evaluations and auditor attestation reports regarding the effectiveness of our “internal control over financial reporting” that are required under Section 404 of the Sarbanes-Oxley Act of 2002. Internal control deficiencies could also cause investors to lose confidence in our reported financial information. We can give no assurance that any measures we may take will remediate the material weaknesses identified or that any additional material weaknesses will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or facilitate the fair presentation of our financial statements or our periodic reports filed with the SEC.

Failure or Circumvention of Our Internal Controls and Procedures Could Seriously Harm Our Business

Our internal controls and procedures have been circumvented in the past and may be circumvented in the future. We are making significant changes in our internal control over financial reporting and our disclosure controls and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, and not absolute, assurances that the objectives of the system are met. The failure or circumvention of our controls, policies and procedures could have a material adverse effect on our business, results of operations and financial condition.

Our Financial Statements Have been Impacted, and Could Be Impacted Again, by Unauthorized and Improper Actions of Our Personnel

We have recently restated our consolidated financial statements for fiscal 1999 through fiscal 2004 and the first two interim periods of fiscal 2005. The restatements were, in part, due to activities known to personnel employed at our Japanese subsidiary and concealed from U.S. management. Our financial statements could be adversely impacted by our employees’ improper activities and unauthorized actions and their concealment of those activities. For instance, revenue recognition depends on, among other criteria, the terms negotiated in our contracts with our customers. Our personnel may act outside of their authority, such as by negotiating additional terms or modifying terms, without our knowledge that could impact our ability to recognize revenue in a timely manner, and they could commit us to obligations or arrangements that may have a serious financial impact to our results of operations or financial condition. We have implemented policies we hope will prevent and discourage such conduct, but there can be no assurance that such policies will be followed. In addition, depending on when we learn of improper activities or unauthorized actions, we may have to restate our financial statements for a previously reported period, which would seriously harm our business, operating results and financial condition.

If We Are Not Current in Our Filings with the SEC, We Will Face Several Adverse Consequences

If we are unable to remain current in our financial filings, we will not be able to have a registration statement under the Securities Act of 1933, covering a public offering of securities, declared effective by the SEC, and we will not be able to make offerings pursuant to existing registration statements or pursuant to certain “private placement” rules of the SEC under Regulation D, to any purchasers not qualifying as “accredited investors.” Finally, we will not be eligible to use a “short form” registration statement on Form S-3 for a period of 12 months after the time we become current in our filings. These restrictions may impair our ability to raise funds in the public markets, should we desire to do so, and to attract and retain key employees.

If We Fail to Keep Current in Our Filings with the SEC, Our Common Stock May Be Delisted from the Nasdaq National Market and Transferred to the National Quotation Service Bureau (“Pink Sheets”), which May, Among Other Things, Reduce the Price of Our Common Stock and the Levels of Liquidity Available to Our Stockholders

If we fail to keep current in our filings with the SEC, our common stock may be delisted from the NASDAQ National Market and subsequently would trade on the Pink Sheets. The trading of our common stock on the Pink Sheets may reduce the price of our common stock and the levels of liquidity available to our stockholders. In addition, the trading of our common stock on the Pink Sheets will materially adversely affect our access to the capital markets, and the limited liquidity and reduced price of our common stock could materially adversely affect our ability to raise capital through alternative financing sources on terms acceptable to us or at all. Stocks that trade on the Pink Sheets are no longer eligible for margin loans, and a company trading on the Pink Sheets cannot avail itself of federal preemption of state securities or “blue sky” laws, which adds substantial compliance costs to securities issuances, including pursuant to employee option plans, stock purchase plans and private or public offerings of securities. Our delisting from the NASDAQ National Market and transfer to the Pink Sheets may also result in other negative implications, including the potential loss of confidence by suppliers, customers and employees, the loss of institutional investor interest and fewer business development opportunities.

We Have a History of Losses, and We May Incur Losses in the Future and May Not Achieve or Maintain Profitability

We have incurred substantial net losses in the past, and we may incur net losses in future periods. We incurred net losses of approximately $2.0 million, $12.4 million and $28.2 million in the six months ended January 1, 2005, fiscal 2004 and fiscal 2003, respectively. As of January 1, 2005, we had an accumulated deficit of approximately $109.8 million. We will need to generate increases in revenues to achieve and maintain profitability, and we may not be able to do so. If our revenues grow more slowly than we anticipate or decline or if our operating expenses increase more than we expect or cannot be reduced in the event of lower revenues, our

business will be significantly and adversely affected. Although we have implemented restructuring programs to better align our operations and cost structure with market conditions, these programs may not be sufficient for us to achieve profitability in any future period. Even if we achieve profitability in the future on a quarterly or annual basis, we may not be able to sustain or increase profitability. Failure to achieve profitability or achieve and sustain the level of profitability expected by investors and securities analysts may adversely affect the market price of our common stock.

Our Quarterly Revenues and Operating Results Are Likely to Fluctuate and if We Fail to Meet the Expectations of Management, Securities Analysts or Investors, Our Stock Price Could Decline

Our quarterly revenues and operating results are difficult to predict, have varied significantly in the past and are likely to fluctuate significantly in the future. We typically realize a significant percentage of our revenues for a fiscal quarter in the second half of the third month of the quarter. Accordingly, our quarterly results may be difficult or impossible to predict prior to the end of the quarter. Any inability to obtain sufficient orders or to fulfill shipments in the period immediately preceding the end of any particular quarter may cause the results for that quarter to fall short of our revenues expectations. Any disruption in our ability to conduct our business which occurs will likely have a material adverse effect on our operating results for that quarter. In addition, we base our current and future expense levels in part on our estimates of future revenues. Our expenses are largely fixed in the short term. We may not be able to adjust our spending quickly if our revenues fall short of our expectations. Accordingly, a shortfall in revenues in a particular quarter would have an adverse effect on our operating results for that quarter.

In addition, our quarterly operating results may fluctuate for many reasons, including, without limitation:

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changes in demand for our products and services, including seasonal differences;

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changes in the mix of our software license and service revenues;

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changes in the mix of the licensing of our Matrix PLM Platform, Business Process Applications and Enterprise Integration software products;

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the amount of royalty payments due to third-parties on our Business Process Applications and Enterprise Integration software products;

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changes in the mix of domestic and international revenues;

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variability in the mix of professional services performed by us and systems integrators;

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the amount of training we provide to systems integrators and Alliance Partners related to our products and their implementation; and

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The application of complex revenue recognition rules for customer arrangements.

For these reasons, you should not rely on period-to-period comparisons of our financial results to forecast our future performance. It is likely that in some future quarter or quarters our operating results will be below the expectations of securities analysts or investors. If a shortfall in revenues occurs, the market price of our common stock may decline significantly.

Our Lengthy and Variable Sales Cycle Makes it Difficult for Us to Predict When or if Sales Will Occur and Therefore We May Experience an Unplanned Shortfall in Revenues

Our software products have a lengthy and unpredictable sales cycle that contributes to the uncertainty of our operating results. Customers view the purchase of our software as a significant and strategic decision. As a result, customers generally evaluate our software products and determine their impact on existing infrastructure over a lengthy period of time. Our sales cycle has historically ranged from approximately one to nine months based on the customer’s need to rapidly implement a solution and whether the customer is new or is extending an existing implementation. The license of our software products may be subject to delays if the customer has lengthy internal budgeting, approval and evaluation processes. We may incur significant selling and marketing expenses during a customer’s evaluation period, including the costs of developing a full proposal and completing a rapid proof of concept or custom demonstration, before the customer places an order with us. Customers may also initially purchase a limited number of licenses before expanding their implementations. Larger customers may purchase our software products as part of multiple simultaneous purchasing decisions, which may result in additional unplanned administrative processing and other delays in the recognition of our license revenues. If revenues forecasted from a specific customer for a particular quarter are not realized or are delayed to another quarter, we may experience an unplanned shortfall in revenues, which could significantly and adversely affect our operating results.

We May Not Achieve Our Anticipated Revenues if Large Software and Service Orders Expected in a Quarter Are Not Placed or Are Delayed

Although we license our software to numerous customers in any quarter, a single customer may represent more than 10% of our quarterly revenues. We expect that revenues from large orders will continue to represent an increasing percentage of our total revenues in future quarters. A customer may determine to increase its number of licenses and expand its implementation of our software throughout its organization and to its customers, suppliers and other business partners only after a successful initial implementation. Therefore, the timing of these large orders is often unpredictable. If any large order anticipated for a particular quarter is not realized, delayed to another quarter or significantly reduced, we may experience an unplanned shortfall in revenues, which could significantly and adversely affect our operating results.

If Our Existing Customers Do Not License Additional Software Products From Us, We May Not Achieve Growth in Our Revenues

Our customers’ initial implementations of our software often include a limited number of licenses. Customers may subsequently add licenses as they expand the implementations of our products throughout their enterprises or add software applications designed for specific functions. Therefore, it is important that our customers are satisfied with their initial software implementations. If we do not increase software licenses to existing customers, we may not be able to achieve growth in our revenues, which could significantly and adversely affect our operating results.

We Must Overcome Significant Challenges in Integrating Business Operations and Software Product Offerings to Realize the Benefits of Our Recent Acquisitions

We will not achieve the anticipated benefits of our acquisitions unless we successfully combine and integrate the business operations and products of the three companies in a timely and effective manner. Integration will be a complex, time-consuming and expensive process and may result in revenue disruption and operational difficulties. We must operate as a combined organization utilizing common information communication systems, operating procedures, financial controls and human resource practices. We may experience substantial difficulties, costs and delays involved in the integration of our acquisitions. These difficulties, costs and delays may include:

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the difficulty of incorporating acquired technology into our products and services;

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the disruption of our ongoing business and diversion of management resources;

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an incompatibility of the business cultures;

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unanticipated expenses related to integration of operations;

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the impairment of relationships with employees and customers due to integration of new personnel;

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the difficulties of integrating international and domestic operations;

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unknown liabilities associated with the acquired business and technology;

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costs and delays in implementing common systems and procedures, including financial accounting systems and customer information systems, and disclosure controls and internal controls over financial reporting; and

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inability to retain, integrate and motivate key management, marketing, technical sales and customer support and development personnel.

We may not succeed in addressing these risks or any other problems encountered in connection with the integration of these acquisitions. If we are not successful in integrating our acquisitions, we may not realize the anticipated benefits of the acquisitions and the market price of our common stock may decline.

We operate in a highly competitive environment, characterized by rapid technological change and evolution of standards and frequent new product introductions. To obtain the full potential benefits of our acquisitions, we must promptly integrate our business operations, technology and software product offerings. We cannot assure you that we will be able to integrate their technology offerings and operations quickly and smoothly. We may be required to spend additional time or money on integration that would otherwise be spent on developing our business or on other matters. If we do not integrate our operations and technology smoothly or if management spends too much time on integration issues, it could harm our business, financial condition and results of operations and diminish the benefits of the acquisition as well as harm our existing business.

There May Be Sales of Substantial Amounts of Our Common Stock Issued in Connection with Our Acquisition of Synchronicity Which Could Cause Our Stock Price to Fall

As part of the aggregate purchase price to acquire Synchronicity, we issued approximately 2.3 million shares of our common stock, which may be resold under Rule 144 under the Securities Act. A substantial number of shares of our common stock may be sold into the public market, which could therefore result in a sharp decline in the market price of our common stock. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional common stock.

Future Acquisitions May Negatively Affect Our Ongoing Business Operations and Our Operating Results

We may further expand our operations or market presence by acquiring or investing in additional businesses, products or technologies that complement our business, increase our market coverage, enhance our technical capabilities or otherwise offer opportunities for growth. These transactions create risks such as:

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difficulty assimilating the operations, technology, products and personnel we acquire;

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disruption of our ongoing business;

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diversion of management’s attention from other business concerns;

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one-time charges and expenses associated with amortization of purchased intangible assets; and

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potential dilution to our stockholders.

Our inability to address these risks could negatively impact our operating results. Moreover, any future acquisitions, even if successfully completed, may not generate any additional revenues or provide any benefit to our business.

The Market for Our PLM Software Is Rapidly Changing and Demand for PLM Software Could Decline

The market for PLM software is rapidly changing. We cannot be certain that this market will continue to develop and grow or that companies will choose to use our products rather than attempting to develop alternative platforms and applications internally or through other sources. If we fail to establish a significant base of customer references, our ability to market and license our products successfully may be reduced. Companies that have already invested substantial resources in other methods of sharing information during the design, manufacturing and supply process may be reluctant to adopt new technology or infrastructures 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 selling efforts to educate prospective customers about the uses and benefits of our products. Therefore, demand for and market acceptance of our software products is subject to a high level of uncertainty.

If We Are Not Successful in Developing New Products and Services that Keep Pace with Technology, Our Operating Results Will Suffer

The market for our software is characterized by rapid technological advances, changing customer needs and evolving industry standards. Accordingly, to realize our expectations regarding our operating results, we depend on our ability to:

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develop, in a timely manner, new software products and services that keep pace with developments in technology;

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meet evolving customer requirements; and

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enhance our current software product and service offerings and deliver those software products and services through appropriate distribution channels.

We may not be successful in developing and marketing, on a timely and cost-effective basis, either enhancements to our products or new products that respond to technological advances and satisfy increasingly sophisticated customer needs. If we fail to introduce new software products, our operating results will suffer. In addition, if new industry standards emerge that we do not anticipate or adapt to, our software products could be rendered obsolete and our business could be materially harmed.

We May Not Achieve Anticipated Revenues if Market Acceptance of Our Software Does Not Continue

We believe that revenues from licenses of our software, together with revenues from related professional services, training and maintenance and customer support services, will account for substantially all of our revenues for the foreseeable future. Our future financial performance will depend on market acceptance of our software, including our Matrix PLM Platform, Business Process Applications and Enterprise Integration software products, and any upgrades or enhancements that we may make to our software products in the future. As a result, if our software does not achieve and maintain widespread market acceptance, we may not achieve anticipated revenues. In addition, if our competitors release new products that are superior to our software, demand for our products may not accelerate and could decline. If we are unable to increase the number and scope of our Business

Process Applications and Enterprise Integration software products or ship or implement any upgrades or enhancements to our products when planned, or if the introduction of upgrades or enhancements causes customers to defer orders for our existing products, we also may not achieve anticipated revenues.

We Will Not Succeed Unless We Can Compete in Our Markets

The markets in which we offer our software and services are intensely competitive and rapidly changing. Furthermore, we expect competition to intensify, given the newly emerging nature of the market for PLM software and consolidation in the software industry in general. We will not succeed if we cannot compete effectively in these markets. Competitors vary in size and in the scope and breadth of the software products and services they offer. Many of our actual or potential competitors have significant advantages over us, including, without limitation:

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larger and more established selling and marketing capabilities;

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significantly greater financial, engineering and other resources;

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greater name recognition and a larger installed base of customers; and

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well-established relationships with our existing and potential customers, systems integrators, complementary technology vendors and Alliance Partners.

As a result, our competitors may be in a stronger position to respond quickly to new or emerging technologies and changes in customer requirements. Our competitors may also be able to devote greater resources to the development, promotion and sale of their products and services than we can. Accordingly, we may not be able to maintain or expand our revenues if competition increases and we are unable to respond effectively.

As competition in the PLM software market intensifies, new solutions will come to market. Our competitors may package their software products in a manner that may discourage customers from licensing our software. Also, current and potential competitors may establish cooperative relationships among themselves or with third-parties or adopt aggressive pricing policies to gain market share. Consolidation in the industry also results in larger competitors that may have significant combined resources with which to compete against us. Increased competition could result in reductions in price and revenues, lower profit margins, loss of customers and loss of market share. Any one of these factors could materially and adversely affect our business and operating results.

We Depend on Licensed Third-Party Technology, and the Ability to Interoperate with Third Party Technology, the Loss of Which Could Adversely Impact the Licensing of Our Products, or Result in Increased Costs of or Delays in Licensing Our Products

We license technology from several companies on a non-exclusive basis that is integrated into many of our products. We also license certain Enterprise Integration software products from third-parties for the purposes of enabling our products to interoperate with third party application products. We anticipate that we will continue to license technology from third-parties in the future. This software may not continue to be available on commercially reasonable terms, or at all. Some of the software we license from third-parties would be difficult and time-consuming to replace. The loss of any of these technology licenses could result in delays in the licensing of our software products until equivalent technology, if available, is identified, licensed and integrated. The loss of the ability to integrate to any of the third party software products could also adversely impact the licensing of our software products. In addition, the effective implementation of our software products may depend upon the successful operation of third-party licensed software products in conjunction with our software products, and therefore any undetected errors in these licensed software products may prevent the implementation or impair the functionality of our software products, delay new software product introductions or injure our reputation.

We Could Incur Substantial Costs Defending Our Intellectual Property from Claims of Infringement

The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. We may be subject to future litigation based on claims that our products infringe the intellectual property rights of others or that our own intellectual property rights are invalid. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry grows and the functionality of software products overlaps. From time to time, we have received correspondence from competitors asserting potential infringement of intellectual property rights or other claims based upon the integration of our software with one or more of their software offerings; such integrations are typically performed at the request of mutual customers. Claims of infringement could require us to reengineer or rename our software products or seek to obtain licenses from third-parties in order to continue offering our software products. Licensing or royalty agreements, if required, may not be available on terms acceptable to us or at all. Even if successfully defended, claims of infringement could also result in significant expense to us and the diversion of our management and technical resources.

Our Revenues Could Decline if We Do Not Develop and Maintain Successful Relationships with Systems Integrators, Complementary Technology Vendors and Alliance Partners

We pursue business alliances with systems integrators, complementary technology vendors and Alliance Partners to endorse our software, implement our software, provide customer support services, promote and resell software products that integrate with our software products and develop industry-specific software products. These alliances provide an opportunity to license our products to our Alliance Partners’ installed customer bases. In many cases, these parties have established relationships with our existing and potential customers and can influence the decisions of these customers. We rely upon these companies for recommendations of our software products during the evaluation stage of the purchasing process, as well as for implementation and customer support services. A number of our competitors have strong relationships with these systems integrators, complementary technology vendors and Alliance Partners who, as a result, may be more likely to recommend our competitors’ software products and services. In addition, some of our competitors have relationships with a greater number of these systems integrators, complementary technology vendors and Alliance Partners and, therefore, have access to a broader base of enterprise customers. If we are unable to establish, maintain and strengthen these relationships, we will have to devote substantially more resources to the selling and marketing, implementation and support of our products. Our efforts may not be as effective as these systems integrators, complementary technology vendors and Alliance Partners, which could significantly harm our operating results.

We May Not Be Able to Increase Revenues if We Do Not Expand Our Sales and Distribution Channels and Improve Our Sales Productivity

We will need to expand our direct and indirect global sales operations and improve our sales productivity in order to increase market awareness and acceptance of our software products and generate increased revenues. We market and license software our products directly through our sales organization and indirectly through our global Alliance Partner and distributor network.

Our ability to increase our global direct sales organization will depend on our ability to recruit, train and retain sales personnel with advanced sales skills and technical knowledge. Competition for qualified sales personnel is intense in our industry. In addition, it may take up to nine months for a new sales person to become fully productive. If we are unable to hire or retain qualified sales personnel, or if newly hired or existing sales personnel fail to develop the necessary skills, reach productivity more slowly than anticipated or are not able to maintain an expected level of productivity, we may have difficulty licensing our products, and we may experience a shortfall in anticipated revenues.

In addition, we believe that our future success is dependent upon expansion of our indirect global distribution channel, which consists of our relationships with a variety of systems integrators, complementary technology vendors and distributors. We cannot be certain that we will be able to maintain our current relationships or establish relationships with additional distribution partners on a timely basis, or at all. Our distribution partners may not devote adequate resources to promoting or selling our software products and may not be successful. In addition, we may also face potential conflicts between our direct sales force and third-party reselling efforts. Any failure to expand our indirect global distribution channel or increase the productivity of this distribution channel could result in lower than anticipated revenues.

Our International Operations Expose Us to Business Risks Which Could Cause Our Operating Results to Suffer

Our international revenues and expenses are generally transacted by our foreign subsidiaries in their respective countries and are typically denominated in local currency. Approximately 35.1%, 40.9% and 35.4% of our total revenues for the six months ended January 1, 2005, fiscal 2004 and fiscal 2003, respectively, were from our foreign subsidiaries. In addition, approximately 24.4%, 29.0% and 27.2% of our expenses for the six months ended January 1, 2005, fiscal 2004 and fiscal 2003, respectively, were from our foreign subsidiaries. At January 1, 2005 and July 3, 2004, approximately 23.7% and 18.6%, respectively, of our total assets were located at our foreign subsidiaries. Many of our customers have operations in numerous locations around the globe. In order to attract, retain and service multi-national customers, we have to maintain strong direct and indirect sales and support organizations in Europe and Asia/Pacific. Our ability to penetrate international markets may be impaired by resource constraints and our ability to hire qualified personnel in foreign countries. We face a number of risks associated with conducting business internationally, which could negatively impact our operating results, including, without limitation:

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difficulties relating to the management, administration and staffing of a globally-dispersed business;

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difficulties managing the operations of a globally-dispersed business and developing, implementing and monitoring systems of internal controls, including disclosure controls and internal controls over financial reporting;

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longer sales cycles associated with educating foreign customers on the benefits of our software products and services;

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longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

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difficulties in providing customer support for our software products in multiple time zones;

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currency fluctuations and exchange rates;

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limitations on repatriation of earnings of our foreign operations;

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the burdens of complying with a wide variety of foreign laws;

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reductions in business activity during the summer months in Europe and certain other parts of the world;

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multiple and possibly overlapping tax structures;

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negative tax consequences such as withholding taxes and employer payroll taxes;

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language barriers;

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the need to consider numerous international product characteristics;

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different accounting practices;

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import/export duties and tariffs, quotas and controls;

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complex and inflexible employment laws;

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economic or political instability in some international markets; and

•

conflicting international business practices.

We believe that expansion into new international markets will be necessary for our future success. Therefore, a key aspect of our strategy is to continue to expand our presence in foreign markets. We may not succeed in our efforts to enter new international markets. If we fail to do so, we may not be able to maintain existing levels of revenues and promote growth in our revenues. This international expansion may be more difficult or time-consuming than we anticipate. It is also costly to establish and maintain international facilities and operations and promote our products internationally. Thus, if revenues from international activities do not offset the expenses of establishing and maintaining foreign operations, our operating results will suffer.

Our Services Revenues and Operating Results May Be Adversely Affected if We Are Not Able to Maintain the Billing and Utilization Rates for Our Professional Services Personnel

The billing rates we charge for our professional services and the utilization, or chargeability, of our professional services personnel are significant components of our services revenues, gross margin and operating results. Our billing rates are affected by a number of factors, including the introduction of new services or products by our competitors, the pricing policies of our competitors, demand for professional services and general economic conditions. Our utilization rates are also affected by a number of factors, including seasonal trends, the duration and complexity of an engagement, our ability to transition employees from completed professional services engagements to new engagements and our ability to forecast demand of our professional services and thereby maintain an appropriate headcount. Many of the above factors are beyond our control. Accordingly, if we are not able to maintain the rates we charge for our professional services or an appropriate utilization for our professional services personnel, our service revenues and gross profit are likely to decline, which would adversely affect our operating results.

We Occasionally Perform Professional Services Engagements on a Fixed-Price Basis, Which Could Cause a Decline in Our Gross Margins

We occasionally perform professional services engagements on a fixed-price basis. Prior to performing a fixed-price professional services engagement, we estimate the amount of work involved for the engagement. However, we may underestimate the amount of time or resources required to complete a professional services engagement, and we may not be able to charge the customer for the additional work performed. If we do not correctly estimate the amount of time or resources required for a professional services engagement and we are not able to charge the customer for the additional work performed, our gross profit would decline, which would adversely affect our operating results.

If Systems Integrators Are Not Available or Fail to Perform Adequately, Our Customers May Suffer Implementation Delays and a Lower Quality of Customer Service, and We May Incur Increased Expenses

Systems integrators often are retained by our customers to implement our software products. If experienced systems integrators are not available to implement our software products, we may be required to provide these services internally, and we may not have sufficient resources to meet our customers’ implementation needs on a

timely basis. Use of our professional services personnel to implement our products would also increase our expenses. In addition, we cannot control the level and quality of service provided by our current and future implementation partners. If these systems integrators do not perform to the satisfaction of our customers, our customers could become dissatisfied with our software products, which could adversely affect our business and operating results.

We Depend on Our Key Personnel to Manage Our Business Effectively, and if We Are Unable to Retain Key Personnel, Our Ability to Compete Could Be Harmed

Our ability to implement our business strategy and our future success depends largely on the continued services of our executive officers and other key engineering, sales, marketing and support personnel who have critical industry or customer experience and relationships. The loss of the technical knowledge and management and industry expertise of any of these key personnel could result in delays in product development, loss of customers and sales and diversion of management resources, which could materially and adversely affect our operating results. In addition, our future performance depends upon our ability to attract and retain highly qualified sales, engineering, marketing, services and managerial personnel, and there is intense competition for such personnel. If we do not succeed in retaining our personnel or in attracting new employees, our business could suffer significantly.

Our Software Products May Contain Defects that Could Harm Our Reputation, Be Costly to Correct, Delay Revenues and Expose Us to Litigation

Despite testing by us, our Alliance Partners and our customers, errors may be found in our software products after commencement of commercial shipments. We and our customers have from time to time discovered errors in our software products. In the future, there may be additional errors and defects in our software. If errors are discovered, we may not be able to successfully correct them in a timely manner or at all. Errors and failures in our software products could result in loss of or delay in market acceptance of our software products and damage to our reputation and our ability to convince commercial users of the benefits of our software products. In addition, we may need to make significant expenditures of capital resources in order to eliminate errors and failures. Since our software products are used by customers for mission-critical applications, errors, defects or other performance problems could also result in financial or other damages to our customers, who could assert warranty and other claims for substantial damages against us. Although our software license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims, it is possible that such provisions may not be effective or enforceable under the laws of certain jurisdictions. In addition, our insurance policies may not adequately limit our exposure with respect to such claims. A software product liability claim, even if unsuccessful, would be costly and time-consuming to defend and could harm our business.

If We Are Unable to Obtain Additional Capital as Needed in the Future, Our Business May Be Adversely Affected and the Market Price for Our Common Stock Could Significantly Decline

We have been unable to fund our operations using cash generated from our business operations and have financed our operations principally through the sale of securities. We may need to raise additional debt or equity capital to fund an expansion of our operations, to enhance our software products and services, or to acquire or invest in complementary software products, services, businesses or technologies. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If adequate funds are not available on terms favorable to us, our business may be adversely affected and the market price for our common stock could significantly decline.

Our Business May be Adversely Affected by Securities Litigation

In the past, securities class action litigation has often been brought against a company following periods of volatility in the price of its securities. Due to the volatility of our stock price, we may be the target of securities litigation in the future. In addition, securities class actions often have been brought in connection with restatements of financial statements. The expense of defending and the outcome of pending and future shareholder litigation, including the New York securities litigation described above, and the possible inadequacy of our insurance to cover its obligations with respect to the ultimate resolution of any pending or future litigation matters could have a material adverse effect on our operating results. Securities litigation could also divert management’s attention and resources from our business, which could have a material adverse effect on our business and operating results.

We have restated previously released financial statements for fiscal 1999 through the second quarter of fiscal 2005. Defending against potential litigation relating to the restatement of our consolidated financial statements could have a material adverse effect on our business, results of operations and financial condition and require significant attention and resources of management. Regardless of the outcome, such litigation could result in significant legal expenses and may also negatively affect our relationships with our customers and employees.

Failure to Protect Our Intellectual Property Could Harm Our Name Recognition Efforts and Ability to Compete Effectively

Currently, we rely on a combination of trademarks, patents, copyrights and common law safeguards, including trade secret protection to protect our intellectual property rights. To protect our intellectual property rights in the future, we intend to rely on a combination of patents, trademarks, copyrights and common law safeguards, including trade secret protection. We also rely on restrictions on use, confidentiality and nondisclosure agreements and other contractual arrangements with our employees, affiliates, customers, Alliance Partners and others. The protective steps we have taken may be inadequate to deter misappropriation of our intellectual property and proprietary information. A third-party could obtain our proprietary information or develop products or technology competitive with ours. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. We have registered some of our trademarks in the United States and abroad, have several patents issued and have other trademark and patent applications pending or in preparation. Effective patent, trademark, copyright and trade secret protection may not be available in every country in which we offer or intend to offer our products and services to the same extent as in the United States. Failure to adequately protect our intellectual property could harm or even destroy our brands and impair our ability to compete effectively. Further, enforcing our intellectual property rights could result in the expenditure of significant financial and managerial resources and may not prove successful.

Our Stock Price Has Been and May Continue to be Volatile Which May Lead to Losses by Stockholders

The trading price of our common stock has been highly volatile and has fluctuated significantly in the past. During the six months ended January 1, 2005, our stock price fluctuated between a low bid price of $4.45 per share and a high bid price of $7.08 per share, and during fiscal 2004, our stock price fluctuated between a low bid price of $4.08 per share and a high bid price of $8.73 per share. We believe that the price of our common stock may continue to fluctuate significantly in the future in response to a number of events and factors relating to our Company, our competitors, the market for our products and services and the global economy, many of which are beyond our control, such as:

•

variations in our quarterly operating results;

•

changes in financial estimates and recommendations by securities analysts;

•

changes in market valuations of software companies;

•

announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

•

loss of a major customer or failure to complete significant business transactions;

•

additions or departures of key personnel;

•

the threat of additional litigation by current or former employees, customers, and shareholders;

•

sales of a substantial number of shares of our common stock in the public market by existing shareholders;

•

sales of common stock or other securities by us in the future;

•

news relating to trends in our markets; and

•

identification and disclosure of ineffective disclosure controls and procedures including material weakness in internal controls over financial reporting.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme volatility. This volatility has often been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.

Anti-Takeover Provisions in Our Organizational Documents and Delaware Law Could Prevent or Delay a Change in Control of Our Company

Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable. These provisions may also prevent changes in our management. These provisions include, without limitation:

•

authorizing the issuance of undesignated preferred stock;

•

providing for a classified board of directors with staggered, three-year terms;

•

requiring super-majority voting to effect certain amendments to our certificate of incorporation and bylaws;

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limiting the persons who may call special meetings of stockholders;

•

prohibiting stockholder action by written consent; and

•

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

Certain provisions of Delaware law may also discourage, delay or prevent someone from acquiring or merging with us.

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have foreign subsidiaries in Austria, Canada, England, France, Germany, Italy, Japan, Korea, Singapore and the Netherlands. Our international revenues and expenses are generally transacted from our foreign subsidiaries in their respective countries and are typically denominated in local currency. Approximately 35.1%, 40.9% and 35.4% of our total revenues for the six months ended January 1, 2005, fiscal 2004 and fiscal 2003, respectively, were from our foreign subsidiaries. In addition, approximately 24.4%, 29.0% and 27.2% of our expenses for the six months ended January 1, 2005, fiscal 2004 and fiscal 2003, respectively, were from our foreign subsidiaries. At January 1, 2005 and July 3, 2004, approximately 23.7% and 18.6%, respectively, of our total assets were located at our foreign subsidiaries.

We are exposed to foreign currency exchange rate fluctuations as the financial results and balances of our foreign subsidiaries are translated into U.S. dollars. As exchange rates vary, these results, when translated, may vary from expectations and may adversely impact our results of operations and financial condition (“translation risk”). Therefore, we are exposed to foreign currency exchange risks and fluctuations in foreign currencies, along with economic and political instability in the foreign countries in which we operate, all of which could adversely impact our results of operations and financial condition. We currently do not enter into contracts or agreements to minimize our exposure to the effects of changes in foreign currency when the results of our international subsidiaries are translated to U.S. Dollars. Accordingly, if the dollar weakens relative to foreign currencies, our revenues and expenses would increase when stated in U.S. Dollars. Conversely, if the dollar strengthens, our revenues and expenses would decrease.

Our exposure to foreign currency exchange rate fluctuations also arises in part from intercompany transactions. Our intercompany transactions are typically denominated in the local currency of the foreign subsidiary in order to centralize foreign currency risk at the parent company in the United States. The parent company and our foreign subsidiaries may also transact business in a currency other than the local currency. Our foreign currency hedging program is principally designed to mitigate the future potential impact of changes in the value of transactions denominated in a currency other than the local currency as a result of changes in foreign currency exchange rates, which may impact our results of operations. Our foreign currency hedging program is not designed, nor do we enter into foreign currency contracts, to mitigate translation risk. We use forward contracts to reduce our exposure to foreign currency risk due to fluctuations in exchange rates underlying the value of accounts receivable and accounts payable and intercompany accounts receivable and intercompany accounts payable denominated in a currency other than the local currency. A forward contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates. These forward contracts are denominated in the same currency in which the underlying foreign currency receivables or payables are denominated and bear a contract value and maturity date that approximate the value and expected settlement date, respectively, of the underlying transactions. Unrealized gains and losses on open contracts at the end of each accounting period, resulting from changes in the fair value of these contracts, are recognized in earnings in the same period as gains and losses on the underlying foreign denominated receivables

or payables are recognized and generally offset. Gains and losses on forward contracts and foreign denominated receivables and payables are included in other income (expense), net. We do not enter into or hold derivatives for trading or speculative purposes, and we only enter into forward contracts with highly rated financial institutions. At January 1, 2005 and January 3, 2004, we had no forward contracts outstanding.

We plan to continue our use of forward contracts and other instruments in the future to reduce our exposure to exchange rate fluctuations from accounts receivable and accounts payable and intercompany accounts receivable and intercompany accounts payable denominated in foreign currencies, and we may not be able to do this successfully. Accordingly, we may experience economic loss and a negative impact on our results of operations as a result of foreign currency exchange rate fluctuations. Also, as we continue to expand our operations outside of the United States, our exposure to fluctuations in currency exchange rates could increase.

We deposit our cash in highly rated financial institutions in North America, Europe and Asia/Pacific. We invest in diversified United States and international money market mutual funds and United States Treasury and agency securities. At January 1, 2005, we had $80.1 million and $15.0 million invested in the United States and Continental Europe, respectively. At January 1, 2005, the weighted average interest rate on our investments was 2.05% per annum. Due to the short-term nature of our investments, we believe we have minimal market risk.

Our investments are subject to interest rate risk. All of our investments have remaining maturities of three months or less. If these short-term assets were reinvested in a declining interest rate environment, we would experience an immediate negative impact on other income. The opposite holds true in a rising interest rate environment.

ITEM 4:

CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed or submitted under the Securities and Exchange Commission’s rules and forms is recorded, processed, summarized and reported within the time periods specified under such rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of January 1, 2005, which included an evaluation of disclosure controls and procedures applicable to the period covered by the filing of this periodic report. Based on this evaluation, and due to the material weaknesses in our internal control over financial reporting referenced below in this quarterly report on Form 10-Q/A and as described in our Annual Report on Form 10-K for the fiscal year ended July 2, 2005, filed on November 9, 2005, our disclosure controls and procedures were not effective as of January 1, 2005 to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms.

In connection with our review of our revenue recognition practices as previously reported in our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2005, and as a result of our assessment of the effectiveness of our internal control over financial reporting as of July 2, 2005 as required under Section 404 of the Sarbanes-Oxley Act of 2002 and Item 308 of Regulation S-K, we identified material weaknesses in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). For a description of these material weaknesses including the nature of each material weakness, the remedial measures implemented by us to date beginning in our fourth fiscal quarter and the actual or potential effects on our financial statements, please see “Management’s Report on Internal Control over Financial Reporting” and “Item 9A. Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended July 2, 2005 filed on November 9, 2005.

During the quarter ended October 1, 2005, we made further changes, described below, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting and assist us in remediating these weaknesses:

•

We modified our revenue recognition policy and required all sales and professional services personnel to certify their understanding and awareness of the policy which, among other things, provides that no employee may engage in verbal or written side agreements.

•

We implemented a new policy of obtaining certification from sales personnel and management on a quarterly basis that they are not aware of any side agreements or concessions, in addition to our existing procedure of obtaining such certification from sales personnel on a transaction by transaction basis.

•

We modified our code of business conduct and provided specific training for all of our senior management and training for other members of management and personnel. We trained substantially all employees on a worldwide basis on the changes to our code of conduct and reiterated the pre-existing requirements regarding conduct and obligations to report violations.

•

We terminated the employment of certain employees who were found to have violated our policies and procedures.

•

We established a strategic partner committee and evaluated our relationships with each of our Japanese resellers, including reviewing arrangements with them to ensure that they are providing to us accurate documentation as required by our revenue recognition policy.

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We produced Japanese language versions of the revised code of business conduct and conducted in-person training for all Japanese employees.

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We instituted additional reporting mechanisms for the submission of information relating to a violation of our code of business conduct and began implementing electronic tracking software to monitor the execution of, and questions regarding, the code of business conduct and quarterly certifications.

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We adopted new internal guidelines relating to communications with the Audit Committee.

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We modified the procedures under which the appropriate persons within our global management team will have greater levels of involvement in, and oversight of, international operations.

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We engaged an experienced financial consulting firm to assist us in providing additional financial and accounting services to review financial activities and transactions at various international locations.

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We hired a finance professional to fill the newly created position of Revenue Controller to assist in the oversight, evaluation, and execution of our revenue related activities.

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We modified our software license transaction certification, which is provided for each software license transaction to assist in detecting issues that may impact revenue recognition.

•

We began to conform certain finance and administration functions in Japan to that currently used for our other subsidiaries using corporate shared services.

In the future, we plan to take the following steps to further improve our internal control over financial reporting and assist us in remediating these weaknesses:

•

We plan to implement organizational changes to clarify those persons responsible for finance, accounting and legal functions concerning our Japanese subsidiary report directly to and/or correspond with persons responsible for finance, accounting and legal functions at our corporate management team.

•

We plan to establish an internal audit process to review the financial activities of our domestic and international operations.

•

We plan to hire additional accounting, financial, and administrative personnel.

•

We plan to hire additional domestic and international resources to assist in the oversight, evaluation, and execution of our revenue related activities.

We continue to plan additional changes to our infrastructure and related processes that we believe are also reasonably likely to strengthen and materially affect our internal control over financial reporting.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our second fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We note, however, that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues including instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our control systems may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected and could be material and require a restatement of our financial statements.

The certifications of our principal executive officer and principal financial officer required in accordance with Rule 13a-14(a) under the Exchange Act are attached as exhibits to this Quarterly Report on Form 10-Q/A. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures, and changes in our internal control over financial reporting, referred to in paragraph 4 of those certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.

PART II – OTHER INFORMATION

ITEM 1:

LEGAL PROCEEDINGS

On April 19, 2002, a consolidated amended class action complaint was filed in the United States District Court for the Southern District of New York (“Court”). The complaint, which superseded five virtually identical complaints that had been filed from July 24, 2001 to September 5, 2001, names us as defendant along with two of our officers, and certain underwriters involved in our initial public offering of common stock (“IPO”). The complaint is allegedly brought on behalf of purchasers of our common stock during the period from February 29, 2000 to December 6, 2000 and asserts, among other things, that our IPO prospectus and registration statement violated federal securities laws because they contained material misrepresentations and/or omissions regarding the conduct of our IPO underwriters in allocating shares in our IPO to the underwriters’ customers, and that we and the two named officers engaged in fraudulent practices with respect to the underwriters’ conduct. The action seeks damages, fees and costs associated with the litigation, and interest. We and our officers and directors believe that the allegations in the complaint are without merit and have defended the litigation vigorously. The litigation process is inherently uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of this pending lawsuit. Pursuant to a stipulation between the parties, our two named officers were dismissed from the lawsuit, without prejudice, on October 9, 2002. On February 19, 2003, the Court ruled on a motion to dismiss the complaint that had been filed by us, along with the three hundred plus other publicly-traded companies that have been named by various plaintiffs in substantially similar lawsuits. The Court granted our motion to dismiss the claim filed against it under Section 10(b) of the Securities Exchange Act of 1934, but denied our motion to dismiss the claim filed against it under Section 11 of the Securities Act of 1933, as it denied the motions under this statute for virtually every other company sued in the substantially similar lawsuits.

In June 2003, we, implementing the determination made by a special independent committee of the Board of Directors, elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If ultimately approved by the Court, this proposed settlement would result in a dismissal, with prejudice, of all claims in the litigation against us and against any of the other issuer defendants who elect to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. The proposed settlement does not provide for the resolution of any claims against the underwriter defendants, and the litigation as against those defendants is continuing. The proposed settlement provides that the class members in the class action cases brought against the participating issuer defendants will be guaranteed a recovery of $1.0 billion by insurers of the participating issuer defendants. If recoveries totaling $1.0 billion or more are obtained by the class members from the underwriter defendants, however, the monetary obligations to the class members under the proposed settlement will be satisfied. In addition, we and any other participating issuer defendants will be required to assign to the class members certain claims that they may have against the underwriters of their IPOs.

The proposed settlement contemplates that any amounts necessary to fund the settlement or settlement-related expenses would come from participating issuers’ directors and officers liability insurance policy proceeds, as opposed to funds of the participating issuer defendants themselves. A participating issuer defendant could be required to contribute to the costs of the settlement if that issuer’s insurance coverage were insufficient to pay that issuer’s allocable share of the settlement costs. We expect that its insurance proceeds will be sufficient for these purposes and that it will not otherwise be required to contribute to the proposed settlement.

If the proposed settlement described above is not consummated, we intend to continue to defend the litigation vigorously. Moreover, if the proposed settlement is not consummated, we believe that the underwriters may have an obligation to indemnify us for the legal fees and other costs of defending this suit. While we cannot predict with certainty the outcome of these proceedings, we believe the final outcome will result in no material effect on our consolidated financial condition, results of operations or cash flows.

On December 2, 2005, plaintiffs holding shares of MatrixOne, Inc. common stock filed a lawsuit in the Delaware Court of Chancery against MatrixOne’s board of directors: Oliver Press Partners, LLC, et al. v. W. Patrick Decker, et al., C.A. No. 1817-N (Del. Ch.). Plaintiffs challenge the application of the Company’s advance notice bylaw, adopted in March 2000, that requires that nominations to MatrixOne’s board of directors be submitted within a specified period prior to MatrixOne’s annual meeting of stockholders (the “Advance Notice Bylaw”). On December 2, 2005, plaintiffs purported to nominate a slate of two directors for election at MatrixOne’s annual meeting, which is scheduled to occur December 22, 2005. Because the Advance Notice Bylaw would operate to prevent a vote on plaintiffs’ alternative slate of directors at the annual meeting, plaintiffs alleged that the Advance Notice Bylaw is unreasonable and that the directors breached their fiduciary duties of loyalty and care to plaintiffs by adopting and applying the Advance Notice Bylaw. Plaintiffs sought a declaration that the Advance Notice Bylaw is invalid and inequitable as applied to them, a declaration that their slate of directors is valid and must be voted on at the 2005 annual meeting, and an order compelling the rescheduling of the annual meeting to January 2006. At the same time that plaintiffs filed their complaint, they also filed a motion to expedite proceedings, seeking expedited discovery and trial proceedings in advance of the December 22, 2005 annual meeting. On December 6, 2005, the court denied plaintiffs’ motion and ordered the parties to confer upon and submit a scheduling order. We intend to defend the litigation vigorously, and while we cannot predict with certainty the outcome of these proceedings, we believe the final outcome will result in no material effect on our consolidated financial condition, results of operations or cash flows.

We may from time to time become a party to various other legal proceedings arising in the ordinary course of our business.

ITEM 2:

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 29, 2000, the Securities and Exchange Commission declared effective our registration statement on Form S-1 (File No. 333-92731), relating to the initial public offering of our common stock, and we did a concurrent private placement of common stock. We expect to continue to use the net proceeds from the initial public offering and the concurrent private placement for general corporate purposes, including to expand our selling and marketing and services organizations, develop new distribution channels, expand our research and development efforts, improve our operational and financial systems and for other working capital purposes, and to acquire or invest in complementary businesses, products or technologies. Currently, we have no specific understandings, commitments or agreements with respect to any such acquisition or investment. Except as set forth below, we have not allocated any portion of the net proceeds for any specific purpose. Our actual use of the net proceeds from the initial public offering and the concurrent private placement may differ from the uses we have identified. Pending these uses, the net proceeds of the offering and the concurrent private placement will be invested in short-term, interest-bearing, investment-grade securities. Through January 1, 2005, we have used the proceeds from the initial public offering and concurrent private placement to (a) pay for the offering expenses, (b) fund approximately $11.4 million in investments in leasehold improvements, computer hardware and software and office furniture, (c) acquire certain businesses and technology aggregating $6.6 million of cash consideration, (d) repurchase $1.0 million of our common stock, and (e) fund approximately $14.8 million of working capital to support our operations.

On August 4, 2004, we acquired Synchronicity Software, Inc. (“Synchronicity”) for approximately $4.5 million in cash and approximately 2.3 million shares of our common stock valued at $5.37 per share, based on the average of the closing prices of our common stock on the Nasdaq National Market for the fifteen trading days immediately preceding the last trading day immediately preceding the closing date. The shares of our common stock were issued to holders of Synchronicity convertible notes and shares of certain series of Synchronicity

preferred stock in reliance upon the registration exemption of Section 4(2) and Rule 506 of the Securities Act of 1933, as amended, based on information regarding those holders.

On December 9, 2004, the Securities and Exchange Commission declared effective our registration statement on Form S-3 (File No. 333-119374), relating to the registration of shares of the Company’s common stock issued in connection with the acquisition of Synchronicity.

ITEM 5:

OTHER INFORMATION

There have been no changes in the procedures by which stockholders may recommend nominees for the Board of Directors.

ITEM 6:

EXHIBITS

The exhibits filed as part of this quarterly report on Form 10-Q/A are listed in the exhibit index immediately preceding the exhibits and are incorporated herein.

SIGNATURES

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


	MATRIXONE, INC.

Dated: December 23, 2005	By:	/s/ GARY D. HALL
		Gary D. Hall
		Senior Vice President of Finance, Chief Financial Officer and Treasurer (principal financial and accounting officer)

EXHIBIT INDEX


Exhibit No.		Description
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-31.1 2 dex311.htm CERTIFICATION OF CEO PURSUANT TO SECTION 302 CERTIFICATION OF CEO PURSUANT TO SECTION 302

EXHIBIT 31.1

CERTIFICATION

I, Mark F. O’Connell, certify that:

1.	I have reviewed this Amendment No. 1 to the Quarterly Report on Form 10-Q/A of MatrixOne, Inc.;

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

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

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

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

[Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986 dated June 5, 2003]

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 23, 2005

/s/ MARK F. O’CONNELL

Mark F. O’Connell
President and Chief Executive Officer

EX-31.2 3 dex312.htm CERTIFICATION OF CFO PURSUANT TO SECTION 302 CERTIFICATION OF CFO PURSUANT TO SECTION 302

EXHIBIT 31.2

CERTIFICATION

I, Gary D. Hall, certify that:

1.	I have reviewed this Amendment No. 1 to Quarterly Report on Form 10-Q/A of MatrixOne, Inc.;

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

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

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

[Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986 dated June 5, 2003]

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

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 23, 2005

/s/ GARY D. HALL

Gary D. Hall
Senior Vice President of Finance,
Chief Financial Officer and Treasurer

EX-32.1 4 dex321.htm CERTIFICATION OF CEO PURSUANT TO SECTION 906 CERTIFICATION OF CEO PURSUANT TO SECTION 906

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report on Form 10-Q of MatrixOne, Inc. (the “Company”) for the quarterly period ended January 1, 2005, as amended by Amendment No. 1 to the Quarterly Report on Form 10-Q/A as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark F. O’Connell, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ MARK F. O’CONNELL

Mark F. O’Connell
President and Chief Executive Officer

December 23, 2005

EX-32.2 5 dex322.htm CERTIFICATION OF CFO PURSUANT TO SECTION 906 CERTIFICATION OF CFO PURSUANT TO SECTION 906

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report on Form 10-Q of MatrixOne, Inc. (the “Company”) for the quarterly period ended January 1, 2005, as amended by Amendment No. 1 to the Quarterly Report on Form 10-Q/A as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gary D. Hall, Senior Vice President of Finance, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ GARY D. HALL

Gary D. Hall
Senior Vice President of Finance,
Chief Financial Officer and Treasurer

December 23, 2005

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