UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

333-123664

(Commission File number)

UGS Corp.

(Exact name of Registrant as specified in its charter)


Delaware		75-2728894
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

5800 Granite Parkway, Suite 600
Plano, TX 75024
(Address of principal executive offices, including zip code)

(972) 987-3000
(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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filed þ

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

On October 31, 2006, 100 shares of the Registrant’s Common Stock, $.01 par value, were outstanding.

UGS CORP.
INDEX TO FORM 10-Q


		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations for the three months ended September 30, 2006 and 2005	1
	Condensed Consolidated Statements of Operations for the nine months ended September 30, 2006 and 2005	2
	Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	46
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 6.	Exhibits	47
	Signatures	48
First Amendment to Personal Services Agreement
Certification Pursuant Rules 13a-14(a) and 15d-14(a)
Certification Pursuant Rules 13a-14(a) and 15d-14(a)
Certification Pursuant to 18 U.S.C. Section 1350

UGS Corp.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)


	Three months
	ended
	September 30,			September 30,
	2006			2005
Revenue:
License	$	85,527		$	89,842
Maintenance		137,542			129,706
Services and other		72,476			70,701

Total revenue		295,545			290,249

Cost of revenue:
License		4,114			4,761
Maintenance		15,810			14,459
Services and other		57,195			58,451
Amortization of capitalized software and acquired intangible assets		39,097			32,059

Total cost of revenue		116,216			109,730

Gross profit		179,329			180,519

Operating expenses:
Selling, general and administrative		112,027			107,803
Research and development		43,416			44,350
Amortization of other intangible assets		7,991			9,018

Total operating expenses		163,434			161,171

Operating income		15,895			19,348
Interest expense and amortization of deferred financing fees		(27,576	)		(25,197	)
Other income (expense), net		1,087			(919	)

Loss before income taxes		(10,594	)		(6,768	)
Benefit for income taxes		(3,161	)		(2,002	)

Net loss	$	(7,433	)	$	(4,766	)

See accompanying notes to unaudited condensed consolidated financial statements.

UGS Corp.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)


	Nine months
	ended
	September 30,			September 30,
	2006			2005
Revenue:
License	$	251,054		$	244,738
Maintenance		398,373			369,614
Services and other		216,571			213,472

Total revenue		865,998			827,824

Cost of revenue:
License		10,213			15,161
Maintenance		46,610			42,317
Services and other		170,210			181,148
Amortization of capitalized software and acquired intangible assets		113,856			89,283

Total cost of revenue		340,889			327,909

Gross profit		525,109			499,915

Operating expenses:
Selling, general and administrative		337,688			313,382
Research and development		142,029			118,990
In-process research and development		—			4,100
Restructuring		(535	)		1,774
Amortization of other intangible assets		25,357			25,327

Total operating expenses		504,539			463,573

Operating income		20,570			36,342
Interest expense and amortization of deferred financing fees		(80,543	)		(71,576	)
Other income (expense), net		11,024			(14,326	)

Loss before income taxes		(48,949	)		(49,560	)
Benefit for income taxes		(15,943	)		(14,601	)

Net loss	$	(33,006	)	$	(34,959	)

See accompanying notes to unaudited condensed consolidated financial statements.

UGS Corp.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)


	September 30,			December 31,
	2006			2005
Assets:
Current assets
Cash and cash equivalents	$	59,257		$	61,532
Accounts receivable, net		241,352			251,763
Prepaids and other		35,629			22,389
Deferred income taxes		16,663			26,471

Total current assets		352,901			362,155


Property and equipment, net		30,633			36,645
Goodwill		1,423,338			1,393,472
Capitalized and acquired software, net		417,031			464,994
Customer accounts, net		183,607			203,064
Other intangible assets, net		119,093			135,265
Other assets		35,380			39,623

Total assets	$	2,561,983		$	2,635,218


Liabilities and Stockholder’s Equity:
Current liabilities
Accounts payable and accrued liabilities	$	171,605		$	159,976
Deferred revenue		152,301			133,027
Income taxes payable		7,844			11,895

Total current liabilities		331,750			304,898


Other long-term liabilities		61,035			48,511
Deferred income taxes		100,472			147,440
Long-term debt		1,155,296			1,212,046

Stockholder’s equity
Common stock, $ .01 par value, 3,000 shares authorized; 100 issued and outstanding at September 30, 2006 and December 31, 2005		—			—
Additional paid-in capital		1,014,823			1,005,991
Retained deficit		(96,208	)		(63,202	)
Accumulated other comprehensive loss, net of tax		(5,185	)		(20,466	)

Total stockholder’s equity		913,430			922,323

Total liabilities and stockholder’s equity	$	2,561,983		$	2,635,218

See accompanying notes to unaudited condensed consolidated financial statements.

UGS Corp.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine months
	ended
	September 30,			September 30,
	2006			2005
Cash flows from operating activities
Net loss	$	(33,006	)	$	(34,959	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Benefit for deferred income taxes		(21,241	)		(40,246	)
Depreciation and amortization		154,886			126,792
Amortization of deferred financing fees		4,148			4,231
In-process research and development		—			4,100
Stock-based compensation		438			467
Unrealized (gain) loss on revaluation of foreign denominated assets and liabilities		(24,062	)		22,782
Unrealized loss (gain) on foreign currency revaluation of derivative instruments		7,680			(17,044	)
Other		3,205			2,920
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		19,285			10,128
Prepaids and other		(12,325	)		3,674
Accounts payable and accrued liabilities		8,450			990
Deferred revenue		11,799			32,375
Income taxes payable		(10,936	)		2,676
Other long-term liabilities		3,295			(425	)

Total adjustments		144,622			153,420

Net cash provided by operating activities		111,616			118,461


Cash flows from investing activities
Acquisitions, net of cash acquired		—			(218,437	)
Acquired software		(4,000	)		—
Cash received from prior parent for acquisition related tax matters		—			11,354
Payments for purchases of property and equipment		(7,589	)		(8,542	)
Capitalized software costs		(51,755	)		(56,889	)
Proceeds from sale of marketable securities		—			23,194
Other		(1,100	)		(842	)

Net cash used in investing activities		(64,444	)		(250,162	)


Cash flows from financing activities
Proceeds from revolver credit line		121,800			118,551
Payments on revolver credit line		(121,800	)		(124,551	)
Proceeds from notes payable		6,850			10,297
Payments on notes payable		(345	)		(2,773	)
Proceeds from bank notes and bonds		—			225,271
Payments on bank notes and bonds		(62,300	)		(74,597	)
Capital contributed by parent (stock options exercised)		639			508
Capital contributed by parent (compensatory payment)		3,819			—

Net cash (used in) provided by financing activities		(51,337	)		152,706

Effect of exchange rates on cash and cash equivalents		1,890			(3,152	)

Net (decrease) increase in cash and cash equivalents		(2,275	)		17,853
Cash and cash equivalents at beginning of period		61,532			58,400

Cash and cash equivalents at end of period	$	59,257		$	76,253

See accompanying notes to unaudited condensed consolidated financial statements.

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

On May 27, 2004, UGS Corp. (“the Company”), a newly formed Delaware corporation, acquired all of the stock of UGS PLM Solutions Inc. from Electronic Data Systems Corporation (“EDS”). Immediately following the acquisition from EDS, UGS Corp. merged with and into UGS PLM Solutions Inc., with UGS PLM Solutions Inc. continuing as the surviving corporation. In connection with that merger, UGS PLM Solutions Inc. changed its name to UGS Corp.

The Company is a wholly owned subsidiary of UGS Holdings, Inc., which is a wholly owned subsidiary of UGS Capital Corp. II, which is a wholly owned subsidiary of UGS Capital Corp. UGS Capital Corp., UGS Capital Corp. II and UGS Holdings, Inc., which are collectively referred to as the Parent Companies, were formed in March 2004 for the purpose of acquiring and holding the stock of the Company.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the Company’s consolidated financial position, results of operations, and cash flows as of and for the dates and periods presented. The results for such periods are not necessarily indicative of the results to be expected for the entire fiscal year or for any future period. The condensed consolidated balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements are meant to be, and should be, read in conjunction with the December 31, 2005 consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K (File No. 333-123664) as filed with the Securities and Exchange Commission on March 9, 2006.

The unaudited condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America which require management to make assumptions and estimates that affect the amounts reported in these statements. Those items requiring assumptions and estimates include capitalized software development costs, revenue recognition, business combinations, income taxes and recoverability of goodwill, acquired intangible assets and long-lived assets. Actual results may differ from these estimates.

Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current period presentation.

Note 2: Stock-Based Compensation

Effective January 1, 2006 the Company adopted the provisions of “Statement of Financial Accounting Standards (“SFAS”) No. 123 (R), “Share-Based Payment” and its related interpretations. Previously, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company accounted for its stock option and retention incentive plans in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and recorded no charges (except to the extent required by APB Opinion No. 25) against earnings with respect to options granted. The Company is considered a non-public entity as defined by both SFAS No. 123 and SFAS No. 123(R), and used the minimum value method of measuring equity share options for pro forma disclosure purposes under SFAS No. 123. Accordingly, the Company is required to apply the provisions of SFAS No. 123(R) prospectively to new awards and to awards modified, repurchased, or cancelled after the date of adoption. The Company has continued to account for any portion of awards outstanding at December 31, 2005 using the provisions of APB Opinion No. 25 as previously permitted under SFAS No. 123. In addition, the Company has discontinued pro forma disclosures previously required by SFAS No. 123 for equity share options accounted for using the intrinsic value method of APB Opinion No. 25.

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Share-based payments accounted for under SFAS No. 123(R) resulted in $0.1 million of compensation expense and $29,000 of income tax benefit for the three months ended September 30, 2006. For the nine months ended September 30, 2006, the Company recognized $0.2 million of compensation expense and $65,000 of income tax benefit. The amount included in capitalized software was not material. Total unrecognized expense for share-based payments was $2.4 million at September 30, 2006, which will be recognized over a weighted average period of five years.

2004 Management Incentive Plan

The Board of Directors of UGS Capital Corp. II (the “Administrator”) administers the 2004 Management Incentive Plan (the “2004 Incentive Plan”), which provides for the granting of awards of stock options, other stock and performance awards, and the deferral of grants of cash in connection with other awards to eligible employees, officers, directors, and consultants of the Company. A maximum of 12,600,000 shares of Class A common stock and 20,000 shares of Class L common stock of UGS Capital Corp., and 7,500 shares of preferred stock of UGS Capital Corp. II may be granted as awards. Terms of stock options and other awards granted under the 2004 Incentive Plan, including vesting requirements, are determined by the Administrator.

Stock Options

For stock options granted or modified after January 1, 2006, the Company recognizes compensation cost associated with its stock-based awards to employees in accordance with SFAS No. 123(R). The Company records stock-based compensation over the requisite service period, or vesting period, at the grant date fair value determined using the Black-Scholes option pricing model. This model requires subjective assumptions, including expected stock price volatility, and expected term, which affects the calculated fair value on the grant date. Expected volatility is based upon equal weighting of both historical volatilities of stock prices and implied volatilities of traded options of comparable companies. Expected term is the average of the contractual term and vesting period of the options. Expected forfeiture rate is based upon the Company’s historical data.

The following table summarizes the weighted average assumptions used in the estimated grant date fair value calculations for stock option and stock purchase awards:


	Three months			Nine months
	ended			ended
	September 30,			September 30,
	2006			2006
Expected term (in years)		7.5			7.5
Dividend yields		0	%		0	%
Expected volatility		43.28	%		43.25	%
Risk-free interest rate		4.89	%		4.65	%
Expected forfeiture rate		6.00	%		6.00	%

For the three months ended September 30, 2006, the aggregate grant-date fair value of options granted was $0.1 million. For the nine months ended September 30, 2006, the aggregate grant-date fair value of options granted was $1.7 million.

During the three months ended March 31, 2005, the Company granted stock options with exercise prices below the estimated fair value of the common stock. The difference between the fair market value of these awards and their exercise price was a total of $1.5 million, which is being recognized as compensation expense over the five-year vesting period. For the nine months ended September 30, 2006 and 2005, compensation expense recorded by the Company for these awards was $0.2 million.

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of the stock option activity for UGS Capital Corp. Class A Common Shares under the 2004 Management Incentive Plan for the nine months ended September 30, 2006 is reflected below:


						Weighted-
				Weighted-		Average
	UGS Capital Corp.			Average		Remaining
	Class A Common			Exercise		Contractual		Aggregate
Fixed Options	Shares			Price		Term		Intrinsic Value
Outstanding at December 31, 2005		10,273,200		$	1.98
Granted		459,000			7.33
Exercised		(421,133	)		1.00
Forfeited		(336,333	)		1.91

Outstanding at September 30, 2006		9,974,733		$	2.27		8.11	$	31,420,412


Exercisable at September 30, 2006		3,426,825		$	1.38		7.93	$	13,844,373

Deferred Stock Award

Deferred stock awards are valued at the fair market value on the date of award in accordance with SFAS No. 123(R). The Company recognizes the compensation expense for deferred stock awards on a straight-line basis over the requisite service period of each award less the forfeiture rate disclosed above.

The Company granted 184,502 shares of deferred stock in August 2006 with a total grant date fair value of $1.0 million. Under the terms of the award, an equal amount of shares will be issued on each anniversary date of the award over the course of three years. There were no vested shares of deferred stock at September 30, 2006.

Retention Incentive Plan

In conjunction with the acquisition of UGS PLM Solutions Inc., the Retention Incentive Plan was created to allow certain employees to receive a cash award from the Company or to roll over between 25% and 100% their cash award into the equity of UGS Capital Corp. and UGS Capital Corp II. Employees that elected to forgo the cash award received: (1) restricted stock awards of UGS Capital Corp. Class A common stock, (2) options to purchase UGS Capital Corp. Class L common stock, and (3) options to purchase UGS Capital Corp. II preferred stock. In addition, the Company agreed to pay cash bonuses in amounts equal to the aggregate exercise price at the time and to the extent the stock options were exercised. The exercise price of the stock options issued under the Retention Incentive Plan was equal to the estimated fair value of the underlying common and preferred stock at the date of grant. Shares that were vested at the date of separation from EDS were accounted for as part of the purchase price allocation. In 2005, the Company amended the Retention Incentive Plan such that cash bonuses will be paid on fixed dates rather than at the time and to the extent the stock options are exercised. As a result, expenses related to cash bonuses are recognized as incurred with no charge reflected for stock-based compensation expense. In addition, the balance recorded in stockholder’s equity at the time of the plan amendment was reclassified from equity to a liability.

Stock Options

In June 2006, UGS Capital Corp. II offered to repurchase all the outstanding preferred shares with proceeds from the issuance of floating rate senior PIK notes. As of September 30, 2006 all the options on preferred shares had been exercised. A summary of the stock option activity for UGS Capital Corp. II preferred shares for the nine months ended September 30, 2006 is reflected below:

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Weighted-

Average

UGS Capital Corp. II

Average

Remaining

Preferred

Exercise

Contractual

Fixed Options

Shares

Price

Term

Outstanding at December 31, 2005

3,573

100.00

Exercised

(3,573

)

100.00

Outstanding at September 30, 2006

—

There was no activity of UGS Capital Corp. Class L common stock under the Retention Incentive Plan for the nine months ended September 30, 2006. A summary of the UGS Capital Corp. Class L common stock options outstanding under the Retention Incentive Plan at September 30, 2006 is reflected below:

Weighted-

UGS Capital

Weighted-

Average

Corp. Class L

Average

Remaining

Common

Exercise

Contractual

Fixed Options

Shares

Price

Term

Outstanding and exercisable at September 30, 2006

12,712

7.65

Restricted Stock Awards

Restricted stock awards of UGS Capital Corp. Class A common stock issued during 2004 were 178,624 shares. The weighted average grant date fair value of the restricted stock awards was $0.2 million. All restricted stock awards were vested at September 30, 2006.

Note 3: Property and Equipment

Property and equipment is stated net of accumulated depreciation of $31.1 million at September 30, 2006 and $19.2 million at December 31, 2005. The following is a summary of depreciation expense (in thousands):


	Three months
	ended
	September 30,		September 30,
	2006		2005
Depreciation expense	$	4,295	$	3,573


	Nine months
	ended
	September 30,		September 30,
	2006		2005
Depreciation expense	$	12,871	$	9,842

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 4: Goodwill

The following summarizes the changes in goodwill by reportable segment for the nine months ended September 30, 2006 (in thousands):


	Americas			Europe			Asia Pacific			Total
Balance as of December 31, 2005	$	536,734		$	474,559		$	382,179		$	1,393,472
Tecnomatix purchase price allocation adjustments		(4,458	)		(9,195	)		(513	)		(14,166	)
Imputed interest on note payable		—			—			(1,117	)		(1,117	)
Impact of foreign currency translation		—			45,149			—			45,149

Balance as of September 30, 2006	$	532,276		$	510,513		$	380,549		$	1,423,338

The purchase price allocation adjustments for the acquisition of Tecnomatix are primarily comprised of acquisition related income tax matters.

As described in more detail in Note 7, the Company has a note payable to EDS that occurred as a result of cash loans for excess taxes of certain Japanese subsidiaries of the Company. Interest on the note payable will only be payable for any amounts outstanding after December 31, 2009. The interest free period of the note payable is considered to be reverse contingent consideration in accordance with SFAS No. 141 that is resolved as the cash loan is received by the Company. Interest is imputed for the interest free period based on the Company’s incremental borrowing rate. The calculated amount of imputed interested is recorded as a discount to the note payable with a corresponding reduction to goodwill. The adjustment to goodwill for the nine months ended September 30, 2006 is shown in the table above.

Note 5: Other Intangible Assets

Other intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. As of September 30, 2006, the Company had no intangible assets with indefinite useful lives. The following is a summary of other intangible assets (dollars in thousands, life in years):


					September 30, 2006
	Weighted		Gross
	Average Useful		Carrying		Accumulated
	Life		Amount		Amortization		Total
Definite Useful Lives
Capitalized software		3.0	$	156,910	$	35,982	$	120,928
Acquired software		5.0		536,620		240,517		296,103
Customer accounts		10.0		242,273		58,666		183,607
Maintenance agreements		10.0		110,039		22,997		87,042
Noncompete agreements		2.0		11,460		10,287		1,173
Trademarks/tradenames		7.0		45,931		15,053		30,878

Total other intangible assets			$	1,103,233	$	383,502	$	719,731


					December 31, 2005
	Weighted		Gross
	Average Useful		Carrying		Accumulated
	Life		Amount		Amortization		Total
Definite Useful Lives
Capitalized software		3.0	$	105,035	$	10,743	$	94,292
Acquired software		5.0		529,789		159,087		370,702
Customer accounts		10.0		242,273		39,209		203,064
Maintenance agreements		10.0		110,039		14,744		95,295
Noncompete agreements		2.0		11,460		7,136		4,324
Trademarks/tradenames		7.0		45,787		10,141		35,646

Total other intangible assets			$	1,044,383	$	241,060	$	803,323

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Amortization of software and maintenance agreements is included in cost of revenue. Amortization of customer accounts, noncompete agreements and trademarks/tradenames is included in operating expenses. The following is a summary of amortization expense (in thousands):


	Three months
	ended
	September 30,		September 30,
	2006		2005
Capitalized software	$	9,410	$	2,641
Acquired software		26,202		26,001
Acquired and other intangible assets		12,253		13,174

Total amortization expense	$	47,865	$	41,816


Amortization of certain acquired software allocated to operating expense	$	777	$	739


	Nine months
	ended
	September 30,		September 30,
	2006		2005
Capitalized software	$	25,228	$	5,353
Acquired software		78,262		74,480
Acquired and other intangible assets		38,525		37,118

Total amortization expense	$	142,015	$	116,951


Amortization of certain acquired software allocated to operating expense	$	2,802	$	2,341

Estimated amortization expense related to intangible assets at September 30, 2006, for the remainder of 2006 and for each of the years in the five year period ending December 31, 2011 and thereafter is: remainder of 2006—$48.1 million; 2007—$199.7 million; 2008—$191.0 million; 2009—$109.2 million; 2010—$45.9 million, 2011—$36.9 million and all remaining years—$88.9 million.

Note 6: Restructuring Activities

The following table summarizes activity in the restructuring accruals for the nine months ended September 30, 2006 (in thousands):


	Employee			Exit
	Separations			Costs			Total
Balance at December 31, 2005	$	3,778		$	13,324		$	17,102
Cash payments		(1,366	)		(3,684	)		(5,050	)
Reduction of accrual		(1,231	)		(2,758	)		(3,989	)

Balance at September 30, 2006	$	1,181		$	6,882		$	8,063

In April 2005, the Company acquired Tecnomatix and initiated restructuring activities designed to reduce the overall cost structure of the continuing organization. These activities provided for workforce reductions of approximately 140 people across all geographic segments totaling $8.1 million. The workforce reductions affected individuals employed throughout the Company in selling, general and administrative, and research and development positions. In addition, the Company’s initiatives included exit costs, such as certain contract termination costs and the cost of redundant facilities, which totaled $6.3 million. The affected facilities have lease commitments that expire as late as April 2009. Restructuring activities associated with Tecnomatix were included in the fair value of the assets and liabilities as of the purchase date and totaled $6.3 million for workforce reductions and $6.3 million for exit costs. As such,

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

these charges were not recognized in the statement of operations. The remaining restructuring activities of $1.8 million for workforce reductions were reflected as a restructuring expense in the statement of operations for 2005. At September 30, 2006, the balance of restructuring accruals related to Tecnomatix was $2.5 million.

The remaining balance of the accrual at September 30, 2006 was $5.6 million and represents restructuring activities done in conjunction with the acquisition of Engineering Animation Incorporated (“EAI”) in 2000 and the acquisition of Structural Dynamics Research Corporation (“SDRC”) in 2001. The Company added to the restructuring accrual in 2002 for activities associated with SDRC.

The reduction of accrual during the nine months ended September 30, 2006 for employee separations was for activities associated with Tecnomatix. This included fewer workforce reductions and lower separation payments to employees than originally estimated. Of the $1.2 million reduction, $0.7 million was recorded to goodwill for the reductions associated with the acquired entity. The remaining $0.5 million related to workforce reductions of the Company and was recorded to restructuring in the statement of operations for the three months ended March 31, 2006. Adjustments recognized correspond to the same financial statement line item in which the original accrual was recorded.

The reduction of accrual during the nine months ended September 30, 2006 for exit costs was due to the settlement in May 2006 with the Department of Commerce concerning the liability established for export compliance issues at the acquisition of SDRC. The adjustment is reflected in the statement of operations as a reduction to cost of license revenue.

Note 7: Debt

Debt as of September 30, 2006 consists of the following (in thousands):


Note payable, due December 31, 2014 (1,566.6 million yen)	$	13,296
Senior unsecured subordinated notes, due June 1, 2012, 10.0%		550,000
Secured term loan, due March 31, 2012, LIBOR plus 1.75%		592,000

Total long-term debt	$	1,155,296

Debt as of December 31, 2005 consists of the following (in thousands):


Note payable, due December 31, 2014 (913.6 million yen)	$	7,746
Senior unsecured subordinated notes, due June 1, 2012, 10.0%		550,000
Secured term loan, due March 31, 2012, LIBOR plus 2.0%		654,300

Total long-term debt	$	1,212,046

Note Payable

As part of the UGS PLM Solutions Inc. acquisition, EDS agreed to provide one of the Company’s Japanese subsidiaries with cash loans for any cash taxes incurred by that subsidiary in excess of what income taxes would have normally been incurred had certain Japanese subsidiaries constituted a single corporation. The final loans with respect to such Japanese tax payments were made in August 2006. Interest on the note payable will only be payable for any amounts outstanding after December 31, 2009. Interest is imputed for the interest free period based on the Company’s incremental borrowing rate. The calculated amount of imputed interested is recorded as a discount to the note payable with a corresponding reduction to goodwill. The discount is amortized to interest expense through December 31, 2009.

Debt Covenants

The subordinated notes and the credit facility (secured term loan and revolving line of credit) contain various covenants including limitations on additional indebtedness, capital expenditures, restricted

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

payments, the incurrence of liens, transactions with affiliates and sales of assets. In addition, the credit facility requires the Company to comply with certain financial covenants, including leverage and interest coverage ratios and capital expenditure limitations.

Parent Company Debt

In June 2006, UGS Capital Corp. II issued floating rate senior PIK notes (“senior PIK notes”) in the aggregate principal amount of $300.0 million. Interest on the senior PIK notes accrues and is payable semiannually in arrears on June 1 and December 1 of each year, commencing on December 1, 2006 at a rate per annum equal to LIBOR plus 5.00%. The interest is payable in the form of additional notes, or in cash if so elected. The senior PIK notes mature on June 1, 2011. Neither the Company nor any of its subsidiaries guarantee the senior PIK notes. The senior PIK notes do not limit the Company’s ability to incur additional indebtedness, pay dividends, or make other distributions. Because UGS Capital Corp. II is a holding company with no operations and has only the senior PIK notes and its investment in UGS Holdings, Inc., which wholly owns the Company, future cash flows or assets of the Company through 2011 may be required to service the senior PIK notes upon their maturity.

Note 8: Income Taxes

The expense (benefit) for income taxes is summarized as follows (in thousands):


	Three months
	ended
	September 30,			September 30,
	2006			2005
Current	$	798		$	12,504
Deferred		(3,959	)		(14,506	)

Total	$	(3,161	)	$	(2,002	)


	Nine months
	ended
	September 30,			September 30,
	2006			2005
Current	$	5,298		$	25,645
Deferred		(21,241	)		(40,246	)

Total	$	(15,943	)	$	(14,601	)

Loss before income taxes includes the following components (in thousands):


	Three months
	ended
	September 30,			September 30,
	2006			2005
U.S. loss	$	(959	)	$	(8,035	)
Non-U.S. loss		(9,635	)		1,267

Total	$	(10,594	)	$	(6,768	)


	Nine months
	ended
	September 30,			September 30,
	2006			2005
U.S. loss	$	(24,393	)	$	(37,641	)
Non-U.S. loss		(24,556	)		(11,919	)

Total	$	(48,949	)	$	(49,560	)

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company is not contractually obligated to pay EDS for its share of any consolidated income tax liabilities while it was a member of the EDS consolidated tax return group. Any consolidated income tax liabilities calculated on a separate return basis as due and payable by the Company were treated as non-cash capital contributions from EDS to the Company. Furthermore, pursuant to the stock purchase agreement between EDS and the Company, all income tax liabilities for all tax periods up to, and including, the period ending May 26, 2004 are the financial responsibility of EDS.

As of May 27, 2004, the Company became a member of and participates in the filing of UGS Capital Corp.’s consolidated U.S. Federal income tax return. The Company accounts for current and deferred income taxes on the “separate return” method. Tax attributes of the Parent Companies of the UGS consolidated tax group utilized by the Company are treated as capital contributions by the Parent Companies to the Company because the Company is not contractually obligated to pay the Parent Companies for its utilization of their tax attributes.

The effective tax rate of UGS Capital Corp. and Subsidiaries is substantially similar to the Company’s effective tax rate.

Note 9: Pension Benefits of Certain Foreign Subsidiaries

Several of the Company’s foreign subsidiaries have defined benefit pension or termination indemnity plans covering substantially all of their eligible employees that are in place as a result of the applicable local statutes. Benefits under these plans are generally based on years of service and final average compensation levels. These plans are managed in accordance with applicable local statutes and practices. The Company deposits funds for these plans with insurance companies, pension trustees, government-managed accounts, and/or accrues the expense for the unfunded portion of the benefit obligation on its consolidated financial statements. The Company’s practice is to fund the various pension or termination indemnity plans in amounts sufficient to meet the minimum requirements as established by applicable local governmental oversight and taxing authorities. Depending on the design of the plan, local custom and market circumstances, the liabilities of a plan may exceed qualified plan assets.

The following table provides the components of net periodic benefit cost recognized in the statement of operations for the nine months ended September 30, 2006 and 2005 (in thousands):


	Nine months
	ended
	September 30,			September 30,
	2006			2005
Service cost	$	3,026		$	2,019
Interest cost		927			629
Expected return on plan assets		(183	)		(164	)
Amortization of prior service cost		102			—
Amortization of net actuarial loss		40			44

Net periodic benefit cost	$	3,912		$	2,528

Note 10: Segment Information

The Company aggregates its operations by geographic location for management reporting purposes. Reportable segments consist of the Americas, Europe and Asia Pacific. The Company’s business involves operations in principally one industry segment: providing product lifecycle management software and services to various industries.

Management uses several metrics to measure the performance of each segment, including revenue and operating income. These results are used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses, which are separately managed at the corporate level, are not allocated to the reportable segments. Unallocated costs include research and development costs,

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

amortization of capitalized software and intangible assets, and corporate general and administrative costs. Accounts receivable is the only significant asset managed at a segment level. All other assets are managed on a consolidated basis. Financial information for each reportable segment is as follows (in thousands):


Revenue	Americas		Europe		Asia Pacific		Total
Three months ended September 30, 2006
License	$	29,970	$	29,835	$	25,722	$	85,527
Maintenance		56,003		51,927		29,612		137,542
Services and other		36,957		28,888		6,631		72,476

Total revenue	$	122,930	$	110,650	$	61,965	$	295,545


Three months ended September 30, 2005
License	$	32,535	$	34,682	$	22,625	$	89,842
Maintenance		54,575		48,420		26,711		129,706
Services and other		36,737		27,718		6,246		70,701

Total revenue	$	123,847	$	110,820	$	55,582	$	290,249


Revenue	Americas		Europe		Asia Pacific		Total
Nine months ended September 30, 2006
License	$	92,098	$	89,440	$	69,516	$	251,054
Maintenance		167,898		148,137		82,338		398,373
Services and other		110,750		85,789		20,032		216,571

Total revenue	$	370,746	$	323,366	$	171,886	$	865,998


Nine months ended September 30, 2005
License	$	88,704	$	92,247	$	63,787	$	244,738
Maintenance		156,465		139,718		73,431		369,614
Services and other		113,199		81,416		18,857		213,472

Total revenue	$	358,368	$	313,381	$	156,075	$	827,824


Operating Income	Americas		Europe		Asia Pacific		Total
Three months ended September 30, 2006	$	56,204	$	47,881	$	36,729	$	140,814

Three months ended September 30, 2005	$	56,123	$	51,322	$	30,382	$	137,827


Operating Income	Americas		Europe		Asia Pacific		Total
Nine months ended September 30, 2006	$	170,764	$	137,286	$	99,510	$	407,560

Nine months ended September 30, 2005	$	157,293	$	133,194	$	82,887	$	373,374


Accounts Receivable	Americas		Europe		Asia Pacific		Total
As of September 30, 2006	$	86,799	$	104,904	$	49,649	$	241,352

As of December 31, 2005	$	86,726	$	114,228	$	50,809	$	251,763

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A reconciliation of operating income for reportable segments to operating income is as follows (in thousands):


	Three months
	ended
	September 30,			September 30,
	2006			2005
Total operating income for reportable segments	$	140,814		$	137,827
Research and development		(43,416	)		(44,350	)
Amortization of capitalized and acquired software and other intangible assets		(47,088	)		(41,077	)
Corporate and unallocated costs		(34,415	)		(33,052	)

Operating income	$	15,895		$	19,348


	Nine months
	ended
	September 30,			September 30,
	2006			2005
Total operating income for reportable segments	$	407,560		$	373,374
Research and development		(142,029	)		(118,990	)
In-process research and development		—			(4,100	)
Restructuring		535			(1,774	)
Amortization of capitalized and acquired software and other intangible assets		(139,213	)		(114,610	)
Corporate and unallocated costs		(106,283	)		(97,558	)

Operating income	$	20,570		$	36,342

The following presents information about the Company’s operations in selected geographical regions that represent more than 10% of total revenue (in thousands):


	Three months
	ended
	September 30,		September 30,
Total Revenue:	2006		2005
United States	$	114,063	$	116,575
Germany		41,731		40,353
Japan		30,758		30,514
All Other		108,993		102,807

Total	$	295,545	$	290,249


	Nine months
	ended
	September 30,		September 30,
Total Revenue:	2006		2005
United States	$	344,318	$	337,572
Germany		115,212		104,966
Japan		87,646		85,304
All Other		318,822		299,982

Total	$	865,998	$	827,824

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 11: Commitments and Contingencies

Legal Proceedings

The Company is not a party to any litigation other than ordinary, routine litigation incidental to its business. In the opinion of management, the ultimate liability, if any, will not have a material adverse effect on the Company’s consolidated results of operations or financial position.

Guarantees

The Company adopted the initial recognition and measurement provisions of FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” on January 1, 2003, which provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has adopted the disclosure provisions of FIN No. 45 in the preparation of these financial statements. In the ordinary course of business, the Company is not subject to potential obligations under guarantees that fall within the scope of FIN No. 45 except for standard indemnification and warranty provisions that are contained within many of its software license agreements, and these give rise only to the disclosure requirements prescribed by FIN No. 45. In addition, under previously existing accounting principles, the Company continues to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and will recognize any such losses under the guarantees and indemnifications when those losses are estimable. The Company incurred no significant losses related to such indemnifications or guarantees during the periods presented in the accompanying unaudited condensed consolidated Statements of Operations.

Other

In October 2005, one of the Company’s customers filed a voluntary petition for business reorganization under Chapter 11 of the U.S. Bankruptcy Code. As of the date of the petition, accounts receivable from this customer approximated $1.2 million, with virtually all relating to services and maintenance contracts. For the nine months ended September 30, 2006, the Company recorded $0.4 million of bad debt expense upon an assessment of the collectibility of the receivable. In April 2006, the Company sold the receivable and received the remaining $0.8 million outstanding.

During the 90 days prior to the bankruptcy filing, the Company received payments from this customer aggregating approximately $2.7 million, with a total of $2.6 million relating to services and maintenance contracts. Since the payments were made within 90 days of the bankruptcy filing, it is possible that the trustee or debtor in possession in the bankruptcy may seek to avoid the payment as a preference. In the event such a claim was brought, the Company would contest such claim vigorously, and the Company believes it is probable that it would prevail. However, given the uncertainties inherent in bankruptcy proceedings, there can be no assurance that the ultimate outcome would be in the Company’s favor. The Company currently does not believe that it will suffer losses associated with these payments as a result of the filing of this bankruptcy petition. The Company will assess its position on an ongoing basis as the bankruptcy proceeding progresses.

Note 12: Comprehensive Loss

The following table presents the calculation of comprehensive loss (in thousands):


	Three months
	ended
	September 30,			September 30,
	2006			2005
Net loss	$	(7,433	)	$	(4,766	)
Currency translation adjustments, net of taxes		2,409			490
Change in fair value of derivative instruments, net of taxes		2,681			(773	)

Comprehensive loss	$	(2,343	)	$	(5,049	)

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)


	Nine months
	ended
	September 30,			September 30,
	2006			2005
Net loss	$	(33,006	)	$	(34,959	)
Currency translation adjustments, net of taxes		16,288			(21,041	)
Change in fair value of derivative instruments, net of taxes		(1,007	)		(151	)

Comprehensive loss	$	(17,725	)	$	(56,151	)

Note 13: Related Party Transactions

During the nine months ended September 30, 2006, UGS Capital Corp. II issued $300.0 million senior PIK notes. Approximately $3.8 million of the proceeds from the issuance of the notes was used to make a capital contribution to UGS Holdings, Inc. UGS Holdings, Inc. used the capital contribution to make compensatory payments to certain managers of UGS Corp., which were recorded as compensation expense in the statement of operations. The contribution from UGS Holdings, Inc. is reflected as a financing inflow in the statement of cash flows.

Included in accounts payable of the Company is a payable due to its parent, UGS Holdings Inc. of approximately $0.8 million at September 30, 2006. The amount relates to cash received by the Company from UGS Holdings Inc., which received cash from UGS Capital Corp. II for debt costs from the issuance of the floating rate senior PIK notes. The Company expects to pay these costs by the end of 2006.

Note 14: Recent Accounting Pronouncements

In June 2006, the FASB issued FIN No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on accounting for derecognition, interest, penalties, accounting in interim periods, disclosure and classification of matters related to uncertainty in income taxes, and transitional requirements upon adoption of FIN No. 48. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the effect that adoption of this interpretation will have on the Company’s consolidated financial position and results of operations.

In June 2006, the Emerging Issues Task Force (“EITF”) ratified EITF Issue No. 06-3, “How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” A consensus was reached that entities may adopt a policy of presenting taxes in the statement of operations on either a gross or net basis. An entity should disclose its policy of presenting taxes and the amount of any taxes presented on a gross basis should be disclosed, if significant. The guidance is effective for periods beginning after December 15, 2006. The impact of EITF Issue No. 06-3 on the Company’s consolidated financial position or statement of operations will be immaterial.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is applicable whenever another accounting pronouncement requires or permits assets or liabilities to be measured at fair value, but does not expand the use of fair value to any new circumstances. The requirements of SFAS No. 157 are effective for the Company’s fiscal year beginning January 1, 2008. The Company is evaluating the effect that adoption of SFAS No. 157 will have on the Company’s consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

132(R).” This statement requires the Company to fully recognize the over-funded or under-funded status of its defined benefit pension plans as an asset or liability in its financial statements. In addition, the statement eliminates the use of a measurement date that is different than the date of the Company’s year-end financial statements. The standard is effective for the Company’s fiscal year ending December 31, 2007. The Company is evaluating the effect that adoption of this statement will have on the Company’s consolidated financial position and results of operations.

Note 15: Financial Statements of Guarantors

The Company’s senior unsecured subordinated notes and the obligations under the Company’s senior secured credit facility are guaranteed by certain wholly owned subsidiaries. The guarantees are full, unconditional and joint and several. The following unaudited condensed consolidating schedules of operations, balance sheets and cash flows are presented for the parent company (UGS Corp.), the guarantor subsidiaries, the non-guarantor subsidiaries and the total consolidated UGS Corp.

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands)


	Three months ended September 30, 2006
							Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations					Consolidated
Revenue:
License	$	25,179		$	987		$	59,361		$	—				$	85,527
Maintenance		49,255			142			88,145			—					137,542
Services and other		33,861			60,172			38,594			(60,151	)	(a	)		72,476

Total revenue		108,295			61,301			186,100			(60,151	)				295,545


Cost of revenue:
License		1,588			(62	)		2,588			—					4,114
Maintenance		5,468			61			10,281			—					15,810
Services and other		24,966			—			92,380			(60,151	)	(a	)		57,195
Amortization of capitalized software and acquired intangible assets		19,163			14,010			5,924			—					39,097

Total cost of revenue		51,185			14,009			111,173			(60,151	)				116,216

Gross profit		57,110			47,292			74,927			—					179,329

Operating expenses:
Selling, general and adminstrative		52,646			1,208			58,173			—					112,027
Research and development		43,416			—			—			—					43,416
Amortization of other intangibles assets		2,288			—			5,703			—					7,991

Total operating expenses		98,350			1,208			63,876			—					163,434

Operating (loss) income		(41,240	)		46,084			11,051			—					15,895
Interest expense and amortization of deferred financing fees		(29,301	)		12,867			(11,142	)		—					(27,576	)
Other (expense) income, net		2,256			(1,172	)		3			—					1,087

(Loss) income before income taxes		(68,285	)		57,779			(88	)		—					(10,594	)
(Benefit) provision for income taxes		(23,353	)		20,223			(31	)		—					(3,161	)

Net (loss) income	$	(44,932	)	$	37,556		$	(57	)	$	—				$	(7,433	)


(a)		— Elimination represents statutory royalty revenue to guarantor subsidiaries and statutory royalty expense to non-guarantor subsidiaries.

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands)


	Three months ended September 30, 2005
	Parent			Guarantor		Non-Guarantor
	Company			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Revenue:
License	$	27,042		$	993	$	61,807		$	—		$	89,842
Maintenance		48,735			54		80,917			—			129,706
Services and other		33,974			44,939		36,604			(44,816	)(a)		70,701

Total revenue		109,751			45,986		179,328			(44,816	)		290,249


Cost of revenue:
License		1,890			368		2,503			—			4,761
Maintenance		4,973			49		9,437			—			14,459
Services and other		27,234			—		76,033			(44,816	)(a)		58,451
Amortization of capitalized software and acquired intangible assets		12,355			14,010		5,694			—			32,059

Total cost of revenue		46,452			14,427		93,667			(44,816	)		109,730

Gross profit		63,299			31,559		85,661			—			180,519

Operating expenses:
Selling, general and adminstrative		49,061			1,368		57,374			—			107,803
Research and development		44,350			—		—			—			44,350
Amortization of other intangibles assets		2,623			—		6,395			—			9,018

Total operating expenses		96,034			1,368		63,769			—			161,171

Operating (loss) income		(32,735	)		30,191		21,892			—			19,348
Interest expense and amortization of deferred financing fees		(25,064	)		13,686		(13,819	)		—			(25,197	)
Other (expense) income, net		(2,367	)		236		1,212			—			(919	)

(Loss) income before income taxes		(60,166	)		44,113		9,285			—			(6,768	)
(Benefit) provision for income taxes		(20,692	)		15,440		3,250			—			(2,002	)

Net (loss) income	$	(39,474	)	$	28,673	$	6,035		$	—		$	(4,766	)

(a) — Elimination represents statutory royalty revenue to guarantor subsidiaries and statutory royalty expense to non-guarantor subsidiaries.

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands)


	Nine months ended September 30, 2006
	Parent			Guarantor		Non-Guarantor
	Company			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Revenue:
License	$	73,254		$	1,809	$	175,991		$	—		$	251,054
Maintenance		148,336			446		249,591			—			398,373
Services and other		102,296			168,281		114,000			(168,006	)(a)		216,571

Total revenue		323,886			170,536		539,582			(168,006	)		865,998


Cost of revenue:
License		2,298			117		7,798			—			10,213
Maintenance		15,863			116		30,631			—			46,610
Services and other		75,366			—		262,850			(168,006	)(a)		170,210
Amortization of capitalized software and acquired intangible assets		54,308			42,030		17,518			—			113,856

Total cost of revenue		147,835			42,263		318,797			(168,006	)		340,889

Gross profit		176,051			128,273		220,785			—			525,109

Operating expenses:
Selling, general and adminstrative		158,982			3,211		175,495			—			337,688
Research and development		142,029			—		—			—			142,029
Restructuring		—			—		(535	)		—			(535	)
Amortization of other intangibles assets		7,423			—		17,934			—			25,357

Total operating expenses		308,434			3,211		192,894			—			504,539

Operating (loss) income		(132,383	)		125,062		27,891			—			20,570
Interest expense and amortization of deferred financing fees		(82,251	)		35,852		(34,144	)		—			(80,543	)
Other (expense) income, net		(344	)		12,385		(1,017	)		—			11,024

(Loss) income before income taxes		(214,978	)		173,299		(7,270	)		—			(48,949	)
(Benefit) provision for income taxes		(74,054	)		60,655		(2,544	)		—			(15,943	)

Net (loss) income	$	(140,924	)	$	112,644	$	(4,726	)	$	—		$	(33,006	)

(a) — Elimination represents statutory royalty revenue to guarantor subsidiaries and statutory royalty expense to non-guarantor subsidiaries.

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING
SCHEDULE OF OPERATIONS
(in thousands)


	Nine months ended September 30, 2005
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenue:
Software	$	76,763		$	1,403		$	166,572		$	—		$	244,738
Maintenance		141,129			300			228,185			—			369,614
Services and other		106,995			134,242			106,276			(134,041	)(a)		213,472

Total revenue		324,887			135,945			501,033			(134,041	)		827,824


Cost of revenue:
Software		5,940			520			8,701			—			15,161
Maintenance		15,345			91			26,881			—			42,317
Services and other		82,837			26			232,326			(134,041	)(a)		181,148
Amortization of capitalized software and acquired intangible assets		34,525			42,030			12,728			—			89,283

Total cost of revenue		138,647			42,667			280,636			(134,041	)		327,909

Gross profit		186,240			93,278			220,397			—			499,915

Operating expenses:
Selling, general and adminstrative		145,638			2,655			165,089			—			313,382
Research and development		118,990			—			—			—			118,990
In-process research and development		—			—			4,100			—			4,100
Restructuring		—			—			1,774			—			1,774
Amortization of other intangibles assets		7,868			—			17,459			—			25,327

Total operating expenses		272,496			2,655			188,422			—			463,573

Operating (loss) income		(86,256	)		90,623			31,975			—			36,342
Interest expense and amortization of deferred financing fees		(71,279	)		42,683			(42,980	)		—			(71,576	)
Other (expense) income, net		(2,902	)		(12,475	)		1,051			—			(14,326	)

(Loss) income before income taxes		(160,437	)		120,831			(9,954	)		—			(49,560	)
(Benefit) provision for income taxes		(53,408	)		42,291			(3,484	)		—			(14,601	)

Net (loss) income	$	(107,029	)	$	78,540		$	(6,470	)	$	—		$	(34,959	)

(a) — Elimination represents statutory royalty revenue to guarantor subsidiaries and statutory royalty expense to non-guarantor subsidiaries.

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING BALANCE SHEET
(in thousands)


	September 30, 2006
	Parent			Guarantor		Non-Guarantor
	Company			Subsidiaries		Subsidiaries		Eliminations			Consolidated
Assets:
Current assets
Cash and cash equivalents	$	88		$	179	$	58,990	$	—		$	59,257
Accounts receivable, net		76,507			482		164,363		—			241,352
Prepaids and other		11,396			—		24,233		—			35,629
Deferred income taxes		16,663			—		—		—			16,663

Total current assets		104,654			661		247,586		—			352,901


Property and equipment, net		19,001			—		11,632		—			30,633
Goodwill		324,151			542,785		556,402		—			1,423,338
Capitalized and acquired software, net		212,508			148,661		55,862		—			417,031
Customer accounts, net		69,946			—		113,661		—			183,607
Other intangible assets, net		41,105			—		77,988		—			119,093
Intercompany balances		—			765,568		—		(765,568	)(b)		—
Other assets		808,709			—		14,924		(788,253	)(a)		35,380

Total assets	$	1,580,074		$	1,457,675	$	1,078,055	$	(1,553,821	)	$	2,561,983


Liabilities and Stockholder’s Equity:
Current liabilities
Accounts payable and accrued liabilities	$	74,341		$	3,759	$	93,505	$	—		$	171,605
Deferred revenue		64,633			139		87,529		—			152,301
Income taxes payable		—			—		7,844		—			7,844
Intercompany balances		395,366			—		370,202		(765,568	)(b)		—

Total current liabilities		534,340			3,898		559,080		(765,568	)		331,750


Other long-term liabilities		1,527			13,957		45,551		—			61,035
Deferred income taxes		14,345			52,032		34,095		—			100,472
Long-term debt		1,142,000			—		13,296		—			1,155,296

Total stockholder’s equity		(112,138	)		1,387,788		426,033		(788,253	)(a)		913,430

Total liabilities and stockholder’s equity	$	1,580,074		$	1,457,675	$	1,078,055	$	(1,553,821	)	$	2,561,983

(a) — Elimination of investment in guarantor subsidiary.
(b) — Elimination of intercompany balances.

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING BALANCE SHEET
(in thousands)


	December 31, 2005
	Parent			Guarantor		Non-Guarantor
	Company			Subsidiaries		Subsidiaries		Eliminations			Consolidated
Assets:
Current assets
Cash and cash equivalents	$	(4,266	)	$	962	$	64,836	$	—		$	61,532
Accounts receivable, net		73,305			1,654		176,804		—			251,763
Prepaids and other		10,111			—		12,278		—			22,389
Deferred income taxes		26,471			—		—		—			26,471

Total current assets		105,621			2,616		253,918		—			362,155


Property and equipment, net		22,721			—		13,924		—			36,645
Goodwill		324,151			542,785		526,536		—			1,393,472
Capitalized and acquired software, net		206,926			190,691		67,377		—			464,994
Customer accounts, net		76,801			—		126,263		—			203,064
Other intangible assets, net		46,327			—		88,938		—			135,265
Intercompany balances		—			614,587		—		(614,587	)(b)		—
Other assets		812,857			—		15,019		(788,253	)(a)		39,623

Total assets	$	1,595,404		$	1,350,679	$	1,091,975	$	(1,402,840	)	$	2,635,218


Liabilities and Stockholder’s Equity:
Current liabilities
Accounts payable and accrued liabilities	$	56,304		$	1,566	$	102,106	$	—		$	159,976
Deferred revenue		59,210			699		73,118		—			133,027
Income taxes payable		—			—		11,895		—			11,895
Intercompany balances		248,246			—		366,341		(614,587	)(b)		—

Total current liabilities		363,760			2,265		553,460		(614,587	)		304,898


Other long-term liabilities		—			6,270		42,241		—			48,511
Deferred income taxes		9,689			66,743		71,008		—			147,440
Long-term debt		1,204,300			—		7,746		—			1,212,046

Total stockholder’s equity		17,655			1,275,401		417,520		(788,253	)(a)		922,323

Total liabilities and stockholder’s equity	$	1,595,404		$	1,350,679	$	1,091,975	$	(1,402,840	)	$	2,635,218

(a) — Elimination of investment in guarantor subsidiary.
(b) — Elimination of intercompany balances.

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING SCHEDULE OF CASH FLOWS
(in thousands)


	Nine months ended September 30, 2006
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Consolidated
Cash flows from operating activities
Net (loss) income	$	(140,924	)	$	112,644		$	(4,726	)	$	(33,006	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Benefit for deferred income taxes		5,878			(14,711	)		(12,408	)		(21,241	)
Depreciation and amortization		71,404			42,030			41,452			154,886
Amortization of deferred financing fees		4,148			—			—			4,148
Stock-based compensation		407			—			31			438
Unrealized gain on revaluation of foreign denominated assets and liabilities		—			—			(24,062	)		(24,062	)
Unrealized loss on foreign currency revaluation of derivative instruments		—			7,680			—			7,680
Other		1,573			(51	)		1,683			3,205
Changes in operating assets and liabilities, net of effect of acqusitions:
Accounts receivable		(3,928	)		1,223			21,990			19,285
Prepaids and other		(1,285	)		—			(11,040	)		(12,325	)
Accounts payable and accrued liabilities		17,197			2,193			(10,940	)		8,450
Deferred revenue		5,268			(577	)		7,108			11,799
Income taxes payable		—			—			(10,936	)		(10,936	)
Other long-term liabilities		—			(15	)		3,310			3,295

Total adjustments		100,662			37,772			6,188			144,622

Net cash (used in) provided by operating activities		(40,262	)		150,416			1,462			111,616


Cash flows from investing activities
Acquired software		(4,000	)		—			—			(4,000	)
Payments for purchases of property and equipment		(4,852	)		—			(2,737	)		(7,589	)
Capitalized software costs		(51,288	)		—			(467	)		(51,755	)
Other		(1,056	)		—			(44	)		(1,100	)

Net cash used in investing activities		(61,196	)		—			(3,248	)		(64,444	)


Cash flows from financing activities
Intercompany borrowings (payments)		157,592			(151,199	)		(6,393	)		—
Proceeds from revolver credit line		121,800			—			—			121,800
Payments on revolver credit line		(121,800	)		—			—			(121,800	)
Proceeds from notes payable		—			—			6,850			6,850
Payments on notes payable		—			—			(345	)		(345	)
Payments on bank notes and bonds		(62,300	)		—			—			(62,300	)
Intercompany Dividends		6,062			—			(6,062	)		—
Capital contributed by parent (stock options exercised)		639			—			—			639
Capital contributed by parent (compensatory payment)		3,819			—			—			3,819

Net cash provided by (used in) financing activities		105,812			(151,199	)		(5,950	)		(51,337	)

Effect of exchange rates on cash and cash equivalents		—			—			1,890			1,890

Net increase (decrease) in cash and cash equivalents		4,354			(783	)		(5,846	)		(2,275	)
Cash and cash equivalents at beginning of period		(4,266	)		962			64,836			61,532

Cash and cash equivalents at end of period	$	88		$	179		$	58,990		$	59,257

UGS Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

SUPPLEMENTAL UNAUDITED CONDENSED
CONSOLIDATING SCHEDULE OF CASH FLOWS
(in thousands)


	Nine months ended September 30, 2005
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Consolidated
Cash flows from operating activities
Net (loss) income	$	(107,029	)	$	78,540		$	(6,470	)	$	(34,959	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Benefit for deferred income taxes		(14,970	)		(14,711	)		(10,565	)		(40,246	)
Depreciation and amortization		50,653			42,030			34,109			126,792
Amortization of deferred financing fees		4,231			—			—			4,231
In-process research and development		—			—			4,100			4,100
Stock-based compensation		467			—			—			467
Other		817			(157	)		2,260			2,920
Unrealized gain on foreign currency revaluation of derivative instruments		—			(17,044	)		—			(17,044	)
Unrealized loss on revaluation of foreign denominated assets and liabilities		—			—			22,782			22,782
Changes in operating assets and liabilities, net of effect of acqusitions:
Accounts receivable		182			1,500			8,446			10,128
Prepaids and other		4,611			220			(1,157	)		3,674
Accounts payable and accrued liabilities		6,062			142			(5,214	)		990
Deferred revenue		11,869			(536	)		21,042			32,375
Income taxes payable		—			—			2,676			2,676
Other long-term liabilities		—			—			(425	)		(425	)

Total adjustments		63,922			11,444			78,054			153,420

Net cash (used in) provided by operating activities		(43,107	)		89,984			71,584			118,461


Cash flows from investing activities
Acquisitions, net of cash acquired		—			—			(218,437	)		(218,437	)
Cash received from prior parent for acquisition related tax matters		11,354			—			—			11,354
Payments for purchases of property and equipment		(5,805	)		—			(2,737	)		(8,542	)
Capitalized software costs		(55,061	)		—			(1,828	)		(56,889	)
Proceeds from sale of marketable securities		—			—			23,194			23,194
Other		(2,278	)		280			1,156			(842	)

Net cash (used in) provided by investing activities		(51,790	)		280			(198,652	)		(250,162	)


Cash flows from financing activities
Intercompany borrowings (payments)		(74,961	)		(89,313	)		164,274			—
Proceeds from revolver credit line		118,551			—			—			118,551
Payments on revolver credit line		(124,551	)		—			—			(124,551	)
Proceeds from notes payable		—			—			10,297			10,297
Payments on notes payable		—			—			(2,773	)		(2,773	)
Proceeds from bank notes and bonds, net		225,201			—			70			225,271
Payments on bank notes and bonds		(51,000	)		—			(23,597	)		(74,597	)
Capital contributed by parent		508			—			—			508

Net cash provided by (used in) financing activities		93,748			(89,313	)		148,271			152,706

Effect of exchange rates on cash and cash equivalents		—			—			(3,152	)		(3,152	)

Net increase in cash and cash equivalents		(1,149	)		951			18,051			17,853
Cash and cash equivalents at beginning of period		(1,951	)		251			60,100			58,400

Cash and cash equivalents at end of period	$	(3,100	)	$	1,202		$	78,151		$	76,253

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

Statements contained in this Quarterly Report on Form 10-Q that relate to our future performance, including, without limitation, statements with respect to our anticipated results of operations or level of business for fiscal 2006 or any other future period, are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. The factors that could cause actual results to materially differ include a failure of the PLM market to develop, loss or downsizing of key customers, highly competitive industry, inability to deliver new and innovative PLM software products and services, substantial, prolonged economic downturn in the markets, potential bankruptcies in the automotive industry, disruptions in international markets, fluctuations in quarterly results, future terrorist attacks, ability to complete or integrate future acquisitions, changes in pricing models for PLM software products, difficulties in our partner relationships, impact of defects, major design errors or security flaws, loss of the use of facilities or systems, intellectual property rights protection and infringement claims, loss of senior executives or employees, high level of indebtedness, and complexity of assessing adequacy of our provision for income taxes. These risks are described in Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 (file No. 333-123664) under the heading “Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Key Business Metrics

Our business performance is directly impacted by our ability to generate software revenue through the sale of CAx and cPDM licenses to existing and new customers. CAx includes CAD, CAE and CAM applications. cPDM applications manage CAx and other product related data and share and control that data in real-time throughout the customer’s organization and with external suppliers, designers and engineers. In conjunction with our initial license sale, we enter into maintenance contracts to provide telephone support and upgrades and enhancements to the software license on a when and if available basis. We may also sign services contracts to provide technical services as needed by customers in order to successfully install the PLM software in their organization. Following the initial maintenance term, our objective is to subsequently renew maintenance contracts. We actively manage our business with the goal of maximizing research and development and sales and marketing productivity. To that end, we carefully evaluate capital investments in research and development projects and sales and marketing initiatives. The following is a brief description of the major components of our financial performance and how we manage them.

Revenue

We earn revenue from three primary sources: license, maintenance and services. For the nine months ended September 30, 2006, license accounted for 29.0% of total revenue, maintenance accounted for 46.0% and services and other accounted for 25.0%. License revenue is generated primarily by the sale of perpetual software licenses and, to a lesser extent, the sale of term-based licenses to existing and new customers, and includes both upfront seat purchases as well as follow-on purchases of additional seats or functionality. License sales are generally accompanied by maintenance contracts, which are priced based on a percentage of the license sale. These maintenance contracts provide for when-and-if available upgrades to our applications and technical support. Lastly, services revenue is primarily driven by license sales and includes technical services such as training and installation to facilitate the efficient implementation and usage of our licenses.

For the nine months ended September 30, 2006, approximately 55.3% of our total revenue was generated from CAx applications, while the remaining 44.7% was from cPDM. CAx licenses are usually shared at a single workstation, whereas cPDM licenses are usually specific to each end-user and are typically priced lower.

Cost of Revenue

Our license revenue has high gross margins due to low product costs. Our maintenance revenue has high gross margins due to the fact that it requires limited dedicated resources and costs after the initial sale. Services revenue is labor intensive and usually customer- or industry-specific and consequently entails more direct costs than either license or maintenance revenue. The cost of license revenue includes packaging, distribution and third-party royalties; the cost of maintenance revenue is comprised of help desk and technical support and third-party royalties; and the cost of services revenue consists of labor, labor-related costs for teams of technical specialists and third-party contractors. Cost of revenue also includes amortization of intangible assets for capitalized and acquired capitalized software and maintenance agreements.

Sales and Marketing

In general, we manage our customer relationships through a large, direct sales force organized by geography (the Americas, Europe and Asia Pacific). Additionally, we have sales representatives fully dedicated to serving our major customer accounts across the globe. Our direct sales force, including sales managers, account executives, field sales employees and pre-sales technical support, is trained to sell both CAx and cPDM software and services. Sales costs are comprised of salaries for all sales personnel and variable commissions for the field sales staff. The sales representatives are compensated on a monthly basis for new license and services revenue.

We also offer products through third-party distributors and value-added resellers. Our indirect sales channel consists of a network of distributors and resellers covering several regions, including the Americas, Eastern Europe, the Middle East, South Africa, China, Japan and South Korea. Solid Edge is primarily marketed and licensed through our indirect sales channels and is part of our mid-market CAx offering.

Our global marketing organization focuses on product level initiatives to increase brand equity. We utilize direct marketing initiatives to generate new leads for our sales force. Marketing costs include salaries, trade shows, conferences, product collateral, sponsorship fees and local seminars.

Research and Development Costs

Research and development expenses include payroll, employee benefits, other labor related costs, facilities, workstations and software costs associated with product development. These costs are expensed as research and development. Once technological feasibility is achieved on a project we capitalize the software development payroll and employee benefits cost until the resulting product is available for general release. Expenses for major projects are carefully evaluated to manage return on investment requirements. We expect that our research and development spending will continue in line with historic levels. We have agreed with one of our major customers that, unless they otherwise consent, we will maintain research and development expenses at or above a minimum percentage of net sales. The required percentage is significantly below the percentage anticipated for the foreseeable future and, accordingly, we do not anticipate any impact from this commitment.

In the comparisons that follow in this section, we define Total Research and Development Costs as the sum of research and development costs, which appears as an expense line item on our consolidated statement of operations, and capitalized software costs. We exclude third-party royalty fees and customer directed research and development, which are included in cost of revenue. The following is a summary of Total Research and Development Costs (in thousands):


	Three months
	ended
	September 30,		September 30,
	2006		2005
Research and development costs	$	43,416	$	44,350
Capitalized software costs		17,829		17,444

Total Research and Development Costs	$	61,245	$	61,794


	Nine months
	Ended
	September 30,		September 30,
	2006		2005
Research and development costs	$	142,029	$	118,990
Capitalized software costs		51,755		56,889

Total Research and Development Costs	$	193,784	$	175,879

Factors Affecting our Results of Operations

In making comparisons of our financial performance for the periods presented, it is important to be aware of the following factors that have impacted our stated financial results:

Impact of Acquisitions

The purchase prices of UGS PLM Solutions Inc. and Tecnomatix were allocated based on fair value of the specific tangible and intangible assets and liabilities at the time of the acquisition pursuant to a valuation. The excess of the total purchase price over the value of our assets and liabilities at closing was allocated to goodwill, which is subject to annual impairment testing. The purchase accounting adjustments that had a material impact on our financial position and results of operations include:

Deferred Revenue

Purchase accounting adjustments were recorded to reflect the deferred revenue balance at its fair value. These adjustments have the effect of reducing revenue in periods subsequent to the acquisitions, which result in corresponding reductions in gross profit, operating income and income before income taxes. For the nine months ended September 30, 2006, the deferred revenue adjustment related to acquisitions resulted in lower total revenue of $0.7 million. For the nine months ended September 30, 2005, the deferred revenue adjustment related to the acquisitions resulted in lower total revenue of $10.2 million.

Amortization of Acquired Intangible Assets

With the acquisition of Tecnomatix in April 2005, $121.4 million was allocated to intangible assets pursuant to a valuation. This has resulted in higher expense in cost of revenue for the amortization of capitalized and acquired software and maintenance agreements and in operating expenses for the amortization of all other intangible assets. The annual amortization is approximately $17.0 million.

Acquisition Related Interest Expense

For the acquisition of Tecnomatix, we increased our term loan borrowings under our senior secured credit facility by $225.0 million. This resulted in higher interest expense in the nine months ended September 30, 2006 when compared to the nine months ended September 30, 2005.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles

generally accepted in the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, net revenues and expenses and relating disclosure of contingent assets and liabilities. On an on-going basis we evaluate our estimates, including those related to amortization periods, intangible assets and goodwill, income taxes, restructuring activities, litigation, and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Our results would be affected if we were to make different estimates under different assumptions or conditions and if the actual results are different than the estimates.

Capitalized Software Development Costs

We account for software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” Costs related to the development of a software product to be sold are expensed until technological feasibility of a product or product enhancement has been reached. Costs incurred after this point are capitalized on a project-by-project basis. Judgment is required in determining when technological feasibility of a product or product enhancement is established. We evaluate the establishment of technological feasibility based on a detailed program design of the product or product enhancement. When the product or enhancement is available for general release to our customers we cease capitalization and begin amortization, which is calculated on a project-by-project basis as the greater of (1) the ratio that the current product revenue bears to the total of current and anticipated future years’ revenue or (2) the straight-line method over the remaining estimated economic lives of the software products. We generally amortize the software costs of new releases of enhancements over a three year period based upon the estimated future economic life of the enhancement. The carrying values of capitalized costs are evaluated for impairment when events or circumstances indicate that the carrying value of the asset may not be recoverable. The carrying values of capitalized costs are evaluated for impairment on an annual basis. If expected cash flows are insufficient to recover the carrying amount of the asset, then an impairment loss is recognized to state the asset at its net realizable value. We have had no impairments of capitalized software costs.

Revenue Recognition

We generate revenue from new licenses, maintenance contracts for license updates and product support and professional services, which include training, consulting and implementation services. While we recognize revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions,” we exercise judgment and use estimates in connection with the determination of the amount of license, maintenance, and services revenues to be recognized in each accounting period.

We recognize revenue when all of the following are met:

	•		persuasive evidence of an arrangement exists;

	•		delivery has occurred or services have been rendered;

	•		the fee is fixed or determinable; and

	•		collectibility is probable.

Our software is sold primarily through our direct sales force. It is our practice to require that a written order signed by both the customer and us, or a purchase order from those customers that have previously negotiated an end user license arrangement, be received. Our software is also sold through indirect channels by third-party distributors and value-added resellers. Provided all other revenue recognition criteria are met, our indirect software sales are recognized on a sell-through basis, which involves obtaining persuasive evidence of the end user’s order placed with the distributor or reseller or evidence that delivery was made directly to the end user.

We deliver software by both physical and electronic means. Both means of delivery transfer title and risk to the customer. For electronic delivery of the software, delivery is complete when the customer has

been provided electronic access to their software. Acceptance provisions included in a software license agreement generally grant customers a right of refund or replacement only if the licensed software does not perform in accordance with its published specifications. Based on our history, the likelihood of non-acceptance in these situations is remote, and we recognize revenue when all other criteria of revenue recognition are met. If the likelihood of nonacceptance is determined to be other than remote, revenue is recognized upon the earlier of receipt of written acceptance or when the acceptance period has lapsed.

We perform a collectibility assessment for each transaction pursuant to the collectibility requirements of our credit policy, which includes consideration of customer creditworthiness and historical payment experience. For contracts that do not meet our collectibility criteria, revenue is recognized when cash is received. At the same time, we assess whether the fees are fixed or determinable. Fees are generally considered fixed or determinable when payment terms are set forth at the contract execution date. We recognize revenue for delivered elements only when the fair value of the undelivered elements is known, uncertainties regarding customer acceptance are resolved, and there are no refund, cancellation, or return rights affecting the revenue recognized for delivered elements.

Our license agreements generally include multiple products and services, or “elements.” For multiple element sales orders, revenue is allocated to the individual elements based on vendor-specific objective evidence of fair value (“VSOE”) of the individual elements. The application of license revenue recognition requires judgment, including the determination of whether a license arrangement includes multiple elements, and if it does, the fair value of the elements. VSOE of the undelivered elements is determined based on the historical evidence of stand-alone sales of these elements to customers. VSOE does not exist for the license element, therefore, we use the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date and VSOE of all undelivered elements exists. Under the residual method, VSOE of any undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of VSOE of one or more undelivered elements does not exist, the total revenue is deferred and recognized when delivery of those elements occurs or when fair value is established. Changes to the elements in a license arrangement and the ability to identify VSOE for those elements could materially impact the amount of earned and unearned revenue.

We defer revenue associated with payments received from customers for the delivery of future services, where VSOE of undelivered elements in a bundled arrangement does not exist, or if other conditions to revenue recognition have not been met. SOP 97-2 requires the seller of software that includes post contract customer support (maintenance or “PCS”) to establish VSOE of the undelivered element of the contract in order to account separately for the PCS revenue. We determine VSOE by a consistent pricing of PCS and PCS renewals as a percentage of the license fees and by reference to contractual renewals, when the renewal terms are substantive. In those cases where VSOE of PCS is determined by reference to contractual renewals, we consider factors such as whether the period of the initial bundled PCS term is relatively long when compared to the term of the license or whether the PCS renewal rate is significantly below our normal pricing practices. Revenues for PCS are recognized ratably over the maintenance term specified in the contract. In arrangements where VSOE of PCS cannot be determined (for example, a time-based software license with a duration of one year or less), we recognize revenue for the entire arrangement ratably over the PCS term.

Professional services generally are not considered essential to the functionality of the other elements of the arrangement and are accounted for as a separate element. Provided all other revenue recognition criteria are met, our revenues for professional services are generally recognized as the services are performed. If there is a significant uncertainty about the project completion or receipt of payment for the professional services, revenue is deferred until the uncertainty is sufficiently resolved. If we do not have a sufficient basis to measure progress towards completion, revenue is recognized when we receive final acceptance from the customer.

Business Combinations

In accordance with SFAS No. 141, “Business Combinations,” we allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair values. Valuations are performed to assist in determining the fair values of assets acquired and liabilities assumed, which requires management to make significant estimates and assumptions, especially with respect to intangible assets. Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from license sales, maintenance agreements, services contracts, customer contracts and acquired developed technologies and patents; 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 in the combined company’s product portfolio; and discount rates.

Other estimates associated with the accounting for acquisitions include restructuring costs. Restructuring costs are primarily comprised of severance costs, costs of vacating duplicate facilities, and contract termination costs. Restructuring costs were accounted for under EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” and have been recognized as a liability assumed in the business combination. Restructuring costs are based upon plans that have been committed to by management and are subject to refinement. To estimate restructuring costs accounted for under EITF Issue No. 95-3, management utilized assumptions of future costs to operate and eventually vacate duplicate facilities. Estimated restructuring costs may change as additional information becomes available regarding the assets acquired and liabilities assumed and as management continues its assessment of the pre-merger operations and executes the approved plan. Decreases to the estimates of executing the currently approved plans accounted for under EITF Issue No. 95-3 will be recorded as an adjustment to goodwill while increases to the estimates will be recorded as an adjustment to goodwill within one year of the acquisition date and to the results of operations thereafter.

Recoverability of Goodwill, Acquired Intangible Assets and Long-Lived Assets

We account for goodwill under SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires us to review goodwill for impairment on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, while the second phase, if necessary, measures the impairment. We perform our annual impairment test at October 1, or more frequently if circumstances indicate the potential for impairment which requires management to rely on a number of factors, including operating results, business plans and anticipated future cash flows. We have had no impairments of goodwill.

We review our long-lived assets and intangible assets with definite useful lives under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires us to review for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used and intangible assets with definite useful lives is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed are reported at the lower of the carrying amount or fair value, less cost to sell. There were no impairment charges in the periods presented.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial

statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Judgments and estimates are required in assessing the future tax consequences of events that have been recognized on our financial statements or tax returns.

The tax benefits for the three and nine months ended September 30, 2006 were determined on the year-to-date method. The Company assessed its forecasted annual tax position for 2006 in relation to income (loss) before tax and determined that a reliable estimate of the annualized effective tax rate (“ETR”) cannot be made at this time.

Our operations were included in EDS’ consolidated income tax returns in certain countries through May 26, 2004. While we were in EDS’ consolidated income tax return, current and deferred taxes were calculated as if taxes were computed on the “separate return” method. Tax attributes allocated to the Company upon our departure from the EDS consolidated group will be made in accordance with the appropriate provisions of the Internal Revenue Code. Certain of our tax attributes, such as net operating loss and tax credit carryforwards, may be impacted by tax authority audits of EDS. Such tax attributes as presented in our financial statements represent management’s estimate based on information available at the time of the financial statements.

We are not contractually obligated to pay EDS for our share of any consolidated income tax liabilities while part of the EDS consolidated tax return group. Any consolidated income tax liabilities calculated on a separate return basis as due and payable by us were treated as non-cash capital contributions from EDS to us. Furthermore, pursuant to the stock purchase agreement between us and EDS, all income tax liabilities for all tax periods up to, and including, the period ending May 26, 2004 are the financial responsibility of EDS.

Recent Accounting Pronouncements

In June 2006, the FASB issued FIN No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on accounting for derecognition, interest, penalties, accounting in interim periods, disclosure and classification of matters related to uncertainty in income taxes, and transitional requirements upon adoption of FIN No. 48. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are evaluating the effect that adoption of this interpretation will have on our consolidated financial position and results of operations.

In June 2006, the EITF ratified EITF Issue No. 06-3, “How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” A consensus was reached that entities may adopt a policy of presenting taxes in the statement of operations on either a gross or net basis. An entity should disclose its policy of presenting taxes and the amount of any taxes presented on a gross basis should be disclosed, if significant. The guidance is effective for periods beginning after December 15, 2006. The impact of EITF Issue No. 06-3 on our consolidated financial position or statement of operations will be immaterial.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is applicable whenever another accounting pronouncement requires or permits assets or liabilities to be measured at fair value, but does not expand the use of fair value to any new circumstances. The requirements of SFAS No. 157 are effective for our fiscal year beginning January 1, 2008. We are evaluating the effect that adoption of SFAS No. 157 will have on our consolidated financial position and results of operations.

In September 2006, the FASB issued a SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This statement requires us to fully recognize the over-funded or under-funded status of our defined benefit pension plans as an asset or liability in our financial statements. In addition, the statement eliminates the use of a measurement date that is different than the date of our year-end financial statements. The standard is effective for our fiscal year ending December 31, 2007. We are evaluating the effect that adoption of this statement will have on our consolidated financial position and results of operations.

Segment Revenue and Operating Income

Our business consists of three primary operating segments based on geographic location: the Americas (which is comprised of North and South America), Europe and Asia Pacific. We use several metrics to measure the performance of each segment, including revenue and operating income. These results are used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses, which are separately managed at the corporate level, are not allocated to the reportable segments. Unallocated costs not reflected in segment operating income include research and development costs, amortization of capitalized software and intangible assets and corporate general and administrative costs, including finance, human resources, legal and information technology (“IT”).

Geographic Segment Revenue

The following table compares our segment revenue for the periods presented (in thousands):


	Three months
	ended							Percentage
	September 30,		September 30,		Increase/			Increase/
	2006		2005		(Decrease)			(Decrease)
Americas	$	122,930	$	123,847	$	(917	)		(0.7	%)
Europe		110,650		110,820		(170	)		(0.2	%)
Asia Pacific		61,965		55,582		6,383			11.5	%

Total revenue	$	295,545	$	290,249	$	5,296			1.8	%

The Americas is our largest segment representing 41.6% of total segment revenue for the three months ended September 30, 2006 and 42.7% for the three months ended September 30, 2005. Total segment revenue was lower primarily due to a decrease in license revenue of $2.6 million that resulted from license deals with a lower average deal size. This decrease was partially offset by an increase in maintenance revenue due, in part, to renewals on the existing customer base.

Europe is our second largest segment representing 37.4% of total segment revenue for the three months ended September 30, 2006 and 38.2% for the three months ended September 30, 2005. The decrease in total segment revenue was primarily due to lower license revenue of $4.8 million that resulted from license deals with a lower average deal size. This decrease was partially offset by higher maintenance and services revenues.

Asia Pacific is our third largest segment representing 21.0% of total segment revenue for the three months ended September 30, 2006 and 19.1% for the three months ended September 30, 2005. Total segment revenue benefited from higher license revenue of $3.1 million due, in part, to growth in China, which helped to drive increases in average deal size and overall sales volume. Total segment revenue also increased due to higher maintenance revenue of $2.9 million.


	Nine months
	ended
	September 30,		September 30,				Percentage
	2006		2005		Increase		Increase
Americas	$	370,746	$	358,368	$	12,378		3.5	%
Europe		323,366		313,381		9,985		3.2	%
Asia Pacific.		171,886		156,075		15,811		10.1	%

Total revenue	$	865,998	$	827,824	$	38,174		4.6	%

Americas represented 42.8% of total segment revenue for the nine months ended September 30, 2006 and 43.3% for the nine months ended September 30, 2005. Total segment revenue in 2006 included $7.6 million from Tecnomatix that was not part of our operations during the first three months of 2005. Total segment revenue benefited primarily from increased maintenance revenue of $11.4 million, which was due, in part, to renewals on the existing customer base. The increase in maintenance revenue was more pronounced due to the purchase accounting adjustment of $3.6 million for deferred revenue.

Europe represented 37.3% of total segment revenue for the nine months ended September 30, 2006 and 37.9% for the nine months ended September 30, 2005. Total segment revenue in 2006 included $7.1 million from Tecnomatix that was not part of our operations during the first three months of 2005. Although maintenance revenue was higher by $8.4 million, the increase was more pronounced due to the purchase accounting adjustment of $3.9 million for deferred revenue. However, total segment revenue for the nine months ended September 30, 2006 was negatively impacted by approximately $9.4 million by the decline of Euro compared to the U.S. Dollar.

Asia Pacific represented 19.9% of total segment revenue for the nine months ended September 30, 2006 and 18.8% for the nine months ended September 30, 2005. Total segment revenue in 2006 included $4.0 million from Tecnomatix that was not part of our operations during the first three months of 2005. Total segment revenue benefited, in part, from higher license revenue of $5.8 million due to license deals in the last six months with a higher average deal size. Total segment revenue also benefited from higher maintenance revenue of $8.9 million due, in part, to the sale of maintenance on the increased license base.

Geographic Segment Operating Income

The following table compares our operating income for reportable segments for the periods presented (in thousands):


	Three months
	ended
	September 30,		September 30,		Increase/			Percentage
	2006		2005		(Decrease)			Increase/(Decrease)
Americas	$	56,204	$	56,123	$	81			0.1	%
Europe		47,881		51,322		(3,441	)		(6.7	%)
Asia Pacific		36,729		30,382		6,347			20.9	%

Total operating income	$	140,814	$	137,827	$	2,987			2.2	%

In the Americas, total operating income was relatively flat because of improved services margins that were offset by higher operating expenses. For the three months ended September 30, 2006, the operating margin changed slightly to 45.7% compared to 45.3% in 2005. Operating expenses in the Americas increased due to higher selling costs associated with additions in headcount and increased spending on marketing activities. This increase was offset by a decrease in cost of revenue that was primarily due to lower costs for third-party consultants. The Americas represented 39.9% of total segment operating income for the three months ended September 30, 2006 and 40.7% for the three months ended September 30, 2005.

In Europe, the decrease in total operating income was primarily due to lower license revenue discussed above. For the three months ended September 30, 2006, the operating margin decreased to 43.3% from 46.3%. The margin decrease was in large part due to an increase in cost of services at a greater rate than the increase in services revenue. Cost of services was higher primarily due to an increase in the number of billable services personnel. Operating income for the three months ended September 30, 2005

in Europe included a reduction of revenue of $1.2 million resulting from purchase accounting. Europe represented 34.0% of total segment operating income for the three months ended September 30, 2006 and 37.2% for the three months ended September 30, 2005.

In Asia Pacific, the increase in total operating income was primarily driven by the higher revenue discussed above. For the three months ended September 30, 2006, the operating margin in Asia Pacific increased to 59.3% from 54.7% for the three months ended September 30, 2005. The margin increase was primarily attributable to the increase in license and maintenance revenues, which typically have higher margins than services revenue. Asia Pacific represented 26.1% of total segment operating income for the three months ended September 30, 2006 and 22.1% for the three months ended September 30, 2005.


	Nine months
	ended
	September 30,		September 30,				Percentage
	2006		2005		Increase		Increase
Americas	$	170,764	$	157,293	$	13,471		8.6	%
Europe		137,286		133,194		4,092		3.1	%
Asia Pacific		99,510		82,887		16,623		20.1	%

Total operating income	$	407,560	$	373,374	$	34,186		9.2	%

In the Americas, the increase in total operating income was primarily driven by the higher maintenance revenue. For the nine months ended September 30, 2006, the operating margin increased to 46.1% from 43.9% reflecting a decrease of $6.6 million in cost of revenue and an increase of $12.4 million in revenue. Although selling costs were higher as a result of additions in headcount in the sales organization, this increase was offset by a decrease in cost of revenue that was primarily due to lower costs for third-party consultants. The improved margin was primarily due to higher maintenance revenue, which typically carries a higher margin than services revenue. The Americas represented 41.9% of total segment operating income for the nine months ended September 30, 2006 and 42.1% for the nine months ended September 30, 2005.

In Europe, the increase in total operating income was primarily driven by the higher maintenance revenue. For the nine months ended September 30, 2006 and 2005, the operating margin was 42.5%. The margin on services improved, but was partially offset by higher selling costs. Europe represented 33.7% of total segment operating income for the nine months ended September 30, 2006 and 35.7% for the nine months ended September 30, 2005.

In Asia Pacific, the increase in total operating income was primarily driven by the higher revenue discussed above. For the nine months ended September 30, 2006, operating margin in Asia Pacific increased to 57.9% from 53.1% for the nine months ended September 30, 2005. The margin increase was primarily attributable to the increase in license and maintenance revenue, which typically has a higher margin than services revenue. Asia Pacific represented 24.4% of total segment operating income for the nine months ended September 30, 2006 and 22.2% for the nine months ended September 30, 2005.

A reconciliation of operating income for reportable segments to operating income is as follows (in thousands):


	Three months
	ended
	September 30,			September 30,
	2006			2005
Total operating income for reportable segments	$	140,814		$	137,827
Research and development		(43,416	)		(44,350	)
Amortization of capitalized and acquired software and other intangible assets		(47,088	)		(41,077	)
Corporate and unallocated costs		(34,415	)		(33,052	)

Operating income	$	15,895		$	19,348


	Nine months
	ended
	September 30,			September 30,
	2006			2005
Total operating income for reportable segments	$	407,560		$	373,374
Research and development		(142,029	)		(118,990	)
In-process research and development		—			(4,100	)
Restructuring		535			(1,774	)
Amortization of capitalized and acquired software and other intangible assets		(139,213	)		(114,610	)
Corporate and unallocated costs		(106,283	)		(97,558	)

Operating income	$	20,570		$	36,342

Results of Operations

The following tables set forth information regarding our revenue, operating expenses, net loss and other information for the periods indicated (in thousands):


	Three months ended
	September 30, 2006						September 30, 2005
				(percentage of total revenue)						(percentage of total revenue)
Revenue:
License	$	85,527			28.9	%	$	89,842			31.0	%
Maintenance		137,542			46.6	%		129,706			44.6	%
Services and other (a)		72,476			24.5	%		70,701			24.4	%

Total revenue		295,545			100.0	%		290,249			100.0	%

Cost of revenue (includes amortization of capitalized and acquired software)		116,216			39.3	%		109,730			37.8	%

Gross profit		179,329			60.7	%		180,519			62.2	%


Operating expenses:
Selling, general and administrative		112,027			37.9	%		107,803			37.1	%
Research and development		43,416			14.7	%		44,350			15.3	%
Amortization of other intangible assets		7,991			2.7	%		9,018			3.1	%

Total operating expenses		163,434			55.3	%		161,171			55.5	%

Operating income		15,895			5.4	%		19,348			6.7	%
Interest expense and amortization of deferred financing fees		(27,576	)		-9.3	%		(25,197	)		-8.7	%
Other income (expense), net		1,087			0.4	%		(919	)		-0.3	%

Loss before taxes		(10,594	)		-3.5	%		(6,768	)		-2.2	%
Benefit for income taxes		(3,161	)		-1.1	%		(2,002	)		-0.7	%

Net loss	$	(7,433	)		-2.4	%	$	(4,766	)		-1.5	%


(a)		Other revenue consists primarily of hardware sales.


	Nine months ended
	September 30, 2006					September 30, 2005
	(percentage of total revenue)					(percentage of total revenue)
Revenue:
License	$	251,054		29.0	%	$	244,738		29.6	%
Maintenance		398,373		46.0	%		369,614		44.6	%
Services and other (a)		216,571		25.0	%		213,472		25.8	%

Total revenue		865,998		100.0	%		827,824		100.0	%

Cost of revenue (includes amortization of capitalized and acquired software)		340,889		39.4	%		327,909		39.6

Gross profit		525,109		60.6	%		499,915		60.4	%


Operating expenses:
Selling, general and administrative		337,688		39.0	%		313,382		37.9	%
Research and development		142,029		16.4	%		118,990		14.4	%
In-Process research and development		—		0.0	%		4,100		0.5	%
Restructuring		(535	)	-0.1	%		1,774		0.2	%
Amortization of other intangible assets		25,357		2.9	%		25,327		3.1	%

Total operating expenses		504,539		58.3	%		463,573		55.9	%

Operating income		20,570		2.4	%		36,342		4.4	%
Interest expense and amortization of deferred financing fees		(80,543	)	-9.3	%		(71,576	)	-8.6	%
Other income (expense), net		11,024		1.3	%		(14,326	)	-1.7	%

Loss before taxes		(48,949	)	-5.7	%		(49,560	)	-6.0	%
Benefit for income taxes		(15,943	)	-1.8	%		(14,601	)	-1.8	%

Net loss	$	(33,006	)	-3.9	%	$	(34,959	)	-4.2	%


(a)		Other revenue consists primarily of hardware sales.

Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005

Total Revenue

The following table compares revenues for the three months ended September 30, 2006 to the three months ended September 30, 2005 (in thousands):


	Three months
	ended
	September 30,		September 30,		Increase/			Percentage
	2006		2005		(Decrease)			Increase/(Decrease)
License	$	85,527	$	89,842	$	(4,315	)		(4.8	%)
Maintenance		137,542		129,706		7,836			6.0	%
Services and other		72,476		70,701		1,775			2.5	%

Total revenue	$	295,545	$	290,249	$	5,296			1.8	%

For the three months ended September 30, 2006, total revenue increased primarily due to higher maintenance revenue compared to the same period in 2005. The purchase accounting adjustment for deferred revenue had the effect of reducing total revenue by $0.3 million in 2006 and $2.2 million in 2005, which resulted in higher total revenue in 2006 of $1.9 million.

	•		License. Although license revenue was higher in Asia Pacific for the three months ended September 30, 2006, total license revenue decreased due to license sales with a lower average deal size in our Americas and Europe segments. License revenue accounted for 28.9% of total revenue for the three months ended September 30, 2006 and 31.0% for the three months ended September 30, 2005.

	•		Maintenance. Maintenance revenue for the three months ended September 30, 2006 was higher for all operating segments. Also, maintenance revenue reflected a greater increase of $1.8 million because of the purchase accounting adjustment described above. Maintenance revenue accounted for 46.6% of total revenue for the three months ended September 30, 2006 and 44.6% for the three months ended September 30, 2005.

•

Services and other. Services and other revenue was higher primarily due to the increase in Europe service revenue. Services and other revenue accounted for 24.5% of total revenue for the three months ended September 30, 2006 and 24.4% of total revenue for the three months ended September 30, 2005.

Gross Profit

For the three months ended September 30, 2006, gross profit decreased $1.2 million, or 0.7%, to $179.3 million from $180.5 million for the three months ended September 30, 2005. The decrease was primarily due to license sales with a lower average deal size in our Americas and Europe operating segments. Gross margin for the three months ended September 30, 2006 was 60.7% compared to 62.2% for the three months ended September 30, 2005. The decrease in gross margin was primarily attributable to higher amortization of capitalized software and acquired intangible assets in relation to a smaller increase in total revenue.

Operating Expenses

Selling, General and Administrative

For the three months ended September 30, 2006, selling, general and administrative expenses increased $4.2 million, or 3.9%, to $112.0 million from $107.8 million for the three months ended September 30, 2005. The increase was primarily due to the costs of additional headcount in our sales organization. The increase was also due to increased spending on marketing programs. As a percentage of total revenue, selling, general and administrative expenses increased to 37.9% for the three months ended September 30, 2006 from 37.1% for the three months ended September 30, 2005.

Research and Development

For the three months ended September 30, 2006, research and development expenses decreased $1.0 million, or 2.2%, to $43.4 million from $44.4 million for the three months ended September 30, 2005. The decrease was primarily due to more development hours being used for billable engagements. As previously discussed, we capitalize software development costs once technological feasibility is established. For the three months ended September 30, 2006, cash outflows for capitalized software costs increased $0.4 million, or 2.3%, to $17.8 million from $17.4 million for the three months ended September 30, 2005. The decrease in research and development expenses and increase in capitalized software costs was due to development activity resources from completed projects being shifted into projects for which technological feasibility has been established.

For the three months ended September 30, 2006, Total Research and Development Expenses, as previously defined, decreased $0.6 million, or 1.0%, to $61.2 million from $61.8 million for the three months ended September 30, 2005. This decrease was primarily due to the reasons described above. For the three months ended September 30, 2006, Total Research and Development Costs as a percent of revenue increased to 20.7% from 21.3% for the three months ended September 30, 2005.

Amortization of Other Intangible Assets

For the three months ended September 30, 2006, amortization of other intangible assets decreased $1.0 million, or 11.4%, to $8.0 million from $9.0 million for the three months ended September 30, 2005.

Operating Income

For the three months ended September 30, 2006, operating income decreased $3.4 million, to $15.9 million from $19.3 million for the three months ended September 30, 2005. Operating income decreased primarily due to a decrease in gross profit described above and an increase in selling, general, and administrative expense described above.

Interest Expense and Amortization of Deferred Financing Fees

For the three months ended September 30, 2006, interest expense and amortization of deferred financing fees increased $2.4 million to $27.6 million from $25.2 million for the three months ended September 30, 2005. The increase was primarily a result of the higher interest rate on the $592.0 million term loan facility.

Benefit for Income Taxes

For the three months ended September 30, 2006, the benefit for income taxes increased $1.2 million, or 60.0%, to a benefit of $3.2 million from a benefit of $2.0 million for the three months ended September 30, 2005. The effective tax rate changed from a benefit of 29.6% for the three months ended September 30, 2005 to a benefit of 29.8% for the three months ended September 30, 2006. These changes were primarily the result of an increase in the loss before taxes from $6.8 million for the three months ended September 30, 2005 to a loss of $10.6 million for the three months ended September 30, 2006 combined with the effect of increased valuation allowances and extraterritorial income exclusion in 2006.

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

Total Revenue

The following table compares revenues for the nine months ended September 30, 2006 to the nine months ended September 30, 2005 (in thousands):


	Nine months
	ended
							Percentage
	September 30, 2006		September 30, 2005		Increase		Increase
License	$	251,054	$	244,738	$	6,316		2.6	%
Maintenance		398,373		369,614		28,759		7.8	%
Services and other		216,571		213,472		3,099		1.5	%

Total revenue	$	865,998	$	827,824	$	38,174		4.6	%

For the nine months ended September 30, 2006 revenue increased for all components compared to the same period in 2005. Total revenue included $18.7 million from Tecnomatix that was not part of our operations during the first three months of 2005. The purchase accounting adjustment for deferred revenue had the effect of reducing total revenue by $0.7 million in 2006 and $10.2 million in 2005, which resulted in higher total revenue in 2006 of $9.5 million. These items were partially offset by the negative impact of exchange rates in our Europe segment of approximately $9.4 million for the nine months ended September 30, 2006 as a result of the decline of the Euro compared to the U.S. Dollar.

	•		License. License revenue in the 2006 period benefited from $7.0 million from Tecnomatix that was not part of our operations during the first three months of 2005. License revenue also benefited from license sales in the last six months with a higher average deal size in our Asia Pacific segment. License revenue accounted for 29.0% of total revenue for the nine months ended September 30, 2006 and 29.6% for the nine months ended September 30, 2005.

	•		Maintenance. Maintenance revenue in the 2006 period benefited from $7.3 million from Tecnomatix that was not part of our operations during the first three months of 2005. Maintenance revenue also benefited from renewals on the existing customer base. Also, maintenance revenue reflected a greater increase of $9.0 million because of the purchase accounting adjustment described above. Maintenance revenue accounted for 46.0% of total revenue for the nine months ended September 30, 2006 and 44.6% of total revenue for the nine months ended September 30, 2005.

•

Services and other. Services and other revenue in the 2006 period benefited from $4.4 million from Tecnomatix that was not part of our operations during the first three months of 2005. Services and other revenue also benefited from higher revenue in our Europe segment, which was partially offset by a decrease in revenue in the Americas automotive sector. Services and other revenue accounted for 25.0% of total revenue for the nine months ended September 30, 2006 and 25.8% of total revenue for the nine months ended September 30, 2005.

Gross Profit

For the nine months ended September 30, 2006, gross profit increased $25.2 million, or 5.0%, to $525.1 million from $499.9 million for the nine months ended September 30, 2005. The increase was due, in part, to higher maintenance revenue which carries a higher gross margin. Also, gross profit was higher because of a greater increase of $9.5 million in total revenue due to the purchase accounting adjustment described above. Gross margin for the nine months ended September 30, 2006 was 60.6% compared to 60.4% for the nine months ended September 30, 2005. Gross margin was relatively unchanged because the increase in amortization of capitalized software and acquired intangible assets was slightly higher than the increase in total revenue.

Operating Expenses

Selling, General and Administrative

For the nine months ended September 30, 2006, selling, general and administrative expenses increased $24.3 million, or 7.8%, to $337.7 million from $313.4 million for the nine months ended September 30, 2005. The increase was due, in part, to the costs of additional headcount in our sales organization. The increase was also due to increased spending on marketing staff and programs. As a percentage of total revenue, selling, general and administrative expenses increased to 39.0% for the nine months ended September 30, 2006 from 37.9% for the nine months ended September 30, 2005.

Research and Development

For the nine months ended September 30, 2006, research and development expenses increased $23.0 million, or 19.4%, to $142.0 million from $119.0 million for the nine months ended September 30, 2005. The increase was primarily attributable to investment in the Teamcenter product line and $6.0 million more for Tecnomatix that was not part of our operations during the first three months in 2005. As previously discussed, we capitalize software development costs once technological feasibility is established. For the nine months ended September 30, 2006, cash outflows for capitalized software costs decreased $5.1 million, or 9.0%, to $51.8 million from $56.9 million for the nine months ended September 30, 2005. The increase in research and development expenses was primarily due to additional investment in the Teamcenter product line and the decrease in capitalized software costs was due to development activity resources, from completed projects, being shifted into projects for which technological feasibility has not yet been established.

For the nine months ended September 30, 2006, Total Research and Development Expenses, as previously defined, increased $17.9 million, or 10.2%, to $193.8 million from $175.9 million for the nine months ended September 30, 2005. This increase was primarily due to continued investments in the Teamcenter product line and the addition of Tecnomatix described above. For the nine months ended September 30, 2006, Total Research and Development Costs as a percent of revenue increased to 22.3% from 21.2% for the nine months ended September 30, 2005.

Restructuring

In April 2005, we acquired Tecnomatix and initiated restructuring activities designed to reduce the overall cost structure of the organization. These activities provided for workforce reductions of approximately 140 people across all geographical segments totaling $8.1 million, with approximately $1.8 million recorded as a restructuring expense in the nine months ended September 30, 2005. For the nine

months ended September 30, 2006, the restructuring provision was reduced by $1.2 million due to fewer workforce reductions and lower separation payments to employees than originally estimated. Of the $1.2 million reduction, $0.7 million was recorded to goodwill for the reductions associated with the acquired entity. The remaining $0.5 million related to workforce reductions of the Company and was recorded to restructuring in the statement of operations for the nine months ended September 30, 2006. Adjustments recognized correspond to the same financial statement line item in which the original accrual was recorded.

Amortization of Other Intangible Assets

For the nine months ended September 30, 2006, amortization of other intangible assets increased slightly to $25.4 million from $25.3 million for the nine months ended September 30, 2005. The increase in amortization was directly related to the intangibles associated with the acquisition of Tecnomatix.

Operating Income

For the nine months ended September 30, 2006, operating income decreased $15.7 million, to $20.6 million from $36.3 million for the nine months ended September 30, 2005. Operating income was lower primarily due to the increases in selling, general, and administrative expenses and research and development expenses described above.

Interest Expense and Amortization of Deferred Financing Fees

For the nine months ended September 30, 2006, interest expense and amortization of deferred financing fees increased $8.9 million to $80.5 million from $71.6 million for the nine months ended September 30, 2005. The increase was directly related to the interest expense associated with the debt incurred for the acquisition of Tecnomatix and an increase in the interest rate on the $592.0 million term loan facility.

Benefit for Income Taxes

For the nine months ended September 30, 2006, the benefit for income taxes increased $1.3 million, or 8.9%, to a benefit of $15.9 million from a benefit of $14.6 million for the nine months ended September 30, 2005. The effective tax rate changed from a benefit of 29.5% for the nine months ended September 30, 2005 to a benefit of 32.6% for the nine months ended September 30, 2006. These changes were primarily the result of enhanced extraterritorial income exclusion benefits in 2006, increased valuation allowances in 2006, and a decrease in the write-off of in-process research and development costs when compared to the nine months ended September 30, 2005.

Liquidity and Capital Resources

Non-GAAP Measures

EBITDA is presented solely as a supplemental disclosure with respect to liquidity because we believe it provides a key indicator of our ability to meet our financial obligations. Further, we have included information concerning EBITDA because we use such information in determining compensation of our management and in our review of the performance of our business. EBITDA as presented herein is not necessarily comparable to similarly titled measures. EBITDA represents net income (loss) before interest expense, income taxes, depreciation and amortization. EBITDA is not a recognized term under generally accepted accounting principles, or GAAP. EBITDA does not represent net income, as that term is defined under GAAP, and should not be considered as an alternative to net income as an indicator of our operating performance. Additionally, EBITDA is not intended to be a measure of free cash flow available for management or discretionary use as such measures do not consider certain cash requirements such as capital expenditures (including capitalized software expense), tax payments, and debt service requirements. The following is a reconciliation of our EBITDA to net cash provided by operating activities and net loss, the GAAP measures we believe to be most directly comparable to EBITDA (in thousands):


	Nine months
	ended
	September 30,			September 30,
	2006			2005
Reconciliation of EBITDA to net cash provided by operating activities:
EBITDA	$	186,480		$	148,808
Benefit for deferred income taxes		(21,241	)		(40,246	)
Amortization of deferred financing fees		4,148			4,231
In-process research and development		—			4,100
Stock-based compensation		438			467
Other		3,205			2,920
Unrealized (gain) loss on revaluation of foreign denominated assets and liabilities		(24,062	)		22,782
Unrealized loss (gain) on foreign currency revaluation of derivative instruments		7,680			(17,044	)
Changes in operating assets and liabilities		19,568			49,418
Interest expense		(80,543	)		(71,576	)
Benefit for income taxes		15,943			14,601

Net cash provided by operating activities	$	111,616		$	118,461


Reconciliation of EBITDA to net loss:
EBITDA	$	186,480		$	148,808
Interest expense		(80,543	)		(71,576	)
Benefit for income taxes		15,943			14,601
Depreciation and amortization		(154,886	)		(126,792	)

Net loss	$	(33,006	)	$	(34,959	)

Debt and Commitments

Our debt structure consists of a senior secured credit facility, consisting of (i) a $592.0 million term loan facility with a maturity on March 31, 2012, and (ii) a $125.0 million revolving credit facility with a maturity on May 27, 2010 and $550.0 million aggregate principal amount of senior subordinated notes maturing June 1, 2012.

The borrowings under our senior secured credit facility bear interest at either a floating base rate or a LIBOR rate, in each case plus an applicable margin. The term loan currently carries an interest rate of LIBOR plus 1.75%. In addition to paying interest on the outstanding principal under our senior secured credit facility, we pay a commitment fee (calculated in arrears) to the lenders under the revolving credit facility in respect of the unused revolving credit facility, currently at a rate equal to 0.50% per annum.

Our primary sources of liquidity are cash flow generated from operations and availability under the revolving portion of our senior secured credit facility. As of September 30, 2006, we had approximately $109.4 million of borrowing availability under our revolving credit facility, which takes into consideration approximately $0.6 million of letters of credit outstanding on that date and $15.0 million of overdraft lines. Our primary cash requirements have been and are expected to be for debt service, research and development, capital expenditures, and working capital.

In June 2005, the term loan began to amortize in an amount equal to 1.0% per annum in equal quarterly installments for the first six years, with the remaining 94.0% payable in year seven, in equal quarterly installments. During the nine months ended September 30, 2006, we permanently repaid $62.3 million of term loan borrowings, prepaying the mandatory quarterly 1% principal payment until 2011. Subject to certain exceptions as defined in our senior secured credit facility, we are required to make mandatory prepayments of the term loans with the net cash proceeds of specified asset sales or other asset dispositions and issuances of debt securities. Beginning in 2007, we may be required to make mandatory prepayments from our excess cash flow as defined in our credit agreement. The obligations under our senior secured credit facility are guaranteed by UGS Holdings Inc., UGS PLM Solutions Asia/Pacific

Incorporated, UGS Japanese Holdings, Inc., UGS European Holdings, Inc. and UGS Israeli Holdings, Inc. and will be guaranteed by all of our existing and future wholly owned domestic subsidiaries (except for unrestricted subsidiaries) and by our parent and will be secured by a perfected security interest in substantially all of our assets and the assets of our direct and indirect restricted domestic subsidiaries that are guarantors, in each case, now owned or later acquired, including a pledge of all of our capital stock, the capital stock of each of our domestic subsidiaries and 65% of the capital stock of some of our foreign subsidiaries that are directly owned by us or one of our restricted domestic subsidiaries.

The senior subordinated notes are 10% notes due June 1, 2012. From time to time prior to June 1, 2007, the Company may, at its option and subject to certain requirements, redeem up to 35% of the notes from the proceeds of certain equity offerings. In addition, the Company may redeem some or all of the notes at any time prior to June 1, 2008 at a price equal to 100.0% of the principal amount plus accrued and unpaid interest, plus a make-whole premium. At any time on or after June 1, 2008, the Company may redeem the notes in whole or in part, at redemption prices of 105.0% in 2008, 102.5% in 2009 and 100.0% in 2010 and thereafter, plus accrued and unpaid interest, if any, to the redemption date. The notes are guaranteed, jointly and severally, on an unsecured senior subordinated basis, by UGS PLM Solutions Asia/Pacific Incorporated, UGS Japanese Holdings, Inc., UGS European Holdings, Inc., UGS Israeli Holdings, Inc., and, as required by the indenture by all of our existing and future subsidiaries that guarantee our indebtedness or indebtedness of other guarantors of the notes. Interest on the notes is payable semi-annually. Financing fees incurred in connection with the subordinated notes were deferred and are included in other assets in the consolidated balance sheet. These fees are being amortized to interest expense (approximately $1.5 million each quarter) over the term of the notes.

The subordinated notes and the credit facility contain various covenants including limitations on additional indebtedness, capital expenditures, restricted payments, the incurrence of liens, transactions with affiliates and sales of assets. In addition, the credit facility requires us to comply with certain financial covenants, including leverage and interest coverage ratios and capital expenditure limitations. We were in compliance with all of the covenants of the subordinated notes and the credit facility as of September 30, 2006.

Based on our current and anticipated levels of operations and conditions in our markets and industry, we believe that our cash on hand, cash flow from operations and availability under the revolving credit facility will enable us to meet our working capital, capital expenditure, debt service and other funding requirements for the foreseeable future. However, our ability to fund our debt payments, research and development activities, working capital needs, and other obligations, and to comply with the financial covenants under our debt agreements, depends on our future operating performance and cash flow, which are in turn subject to prevailing economic conditions, the level of IT spending and other factors, many of which are beyond our control. Any sizeable future acquisitions, joint ventures or other similar transactions will likely require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms, if at all.

In June 2006, UGS Capital Corp. II issued senior PIK notes in the aggregate principal amount of $300.0 million. Interest on the senior PIK notes accrues and is payable semiannually in arrears on June 1 and December 1 of each year, commencing on December 1, 2006 at a rate per annum equal to the six month LIBOR rate plus 5.00%. The interest is payable in the form of additional notes, or in cash if so elected. The senior PIK notes mature on June 1, 2011. Neither we nor any of our subsidiaries guarantee the senior PIK notes. The senior PIK notes do not limit our ability to incur additional indebtedness, pay dividends, or make other distributions. Because UGS Capital Corp. II is a holding company with no operations and has only the senior PIK notes and its investment in UGS Holdings, Inc., which wholly owns us, future cash flows or assets of ours through 2011 may be required to service the senior PIK notes upon their maturity.

Capital Expenditures

Capital expenditures including capitalized software decreased to $59.3 million for the nine months ended September 30, 2006 from $65.4 million for the nine months ended September 30, 2005. The

decrease was primarily due to development activity resources from completed projects being shifted into projects for which technological feasibility has not yet been established. We expect to spend approximately $81.0 million in capital expenditures in calendar year 2006.

Historical Cash Flow

Our largest source of operating cash flows is from our customers upon the purchase of license and maintenance services, maintenance renewals and professional services. Our primary uses of cash from operating activities are for personnel and facilities related expenditures. For the nine months ended September 30, 2006 cash flows from operating activities decreased by $6.8 million primarily due to higher interest payments on our long-term debt.

For the nine months ended September 30, 2006, cash used in investing activities decreased $185.7 million. The change in periods presented was primarily related to $218.4 million used in the acquisition of Tecnomatix during the nine months ended September 30, 2005. Cash received from the sale of marketable securities and from EDS for the settlement of certain tax matters related to the acquisition of UGS PLM Solutions Inc. slightly offset the use of cash for the acquisition of Tecnomatix.

The change in cash flows from financing activities compared to the prior period is primarily related to the additional debt incurred, net of repayments that occurred late in the period, for the acquisition of Tecnomatix in April 2005.

Off Balance Sheet Obligations

We do not have any material off balance sheet obligations.

Inflation

Historically, inflation has not had a material effect on our results of operations.

Seasonality

Our quarterly operating results have fluctuated significantly in the past and are likely to fluctuate significantly in the future. We have historically realized, and we expect to continue to realize, higher license revenue in the last two weeks of each fiscal quarter. A large portion of our annual license revenue is typically sold during the month of December, and our license revenue, total revenue, operating income and net income have generally been lower in the first quarter of a given year than in the fourth quarter of the preceding year.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk

We are subject to inherent risks attributed to operating in a global economy. Although a sizeable portion of our revenue and costs are denominated in U.S. Dollars, we are exposed to the impact of exchange rate volatility between the U.S. Dollar and the subsidiaries’ functional currencies, primarily from the Euro and Pound Sterling. A devaluation in either of these currencies could have a negative impact on our operating results and cash flows.

We are exposed to credit loss in the event of non-performance by the counterparty to the derivative financial instruments. We mitigate this risk by entering into agreements directly with a number of major financial institutions that meet our credit standards and that we expect to fully satisfy their contractual obligations. We view derivative financial instruments purely as a risk management tool and, therefore, do not use them for speculative trading purposes.

A portion of our revenue is exposed to changes in foreign exchange rates. From time to time, we employ derivative instruments to hedge this risk. We entered into forward contracts to hedge the foreign currency exposure associated with anticipated inter-company royalties. These hedges are denominated in the following currencies: Euros, British pounds, Swedish kroners, and Swiss francs. The total forward contract commitment at September 30, 2006 was $77.3 million, with the last forward contract expiring in the first quarter of 2008.

The foreign currency forward contracts are designated as cash flow hedges and are expected both at inception and on an ongoing basis to be ‘‘highly effective’’ in achieving offsetting changes in cash flows, as defined by SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities.’’ The forward contracts are measured at fair value each reporting period with gains or (losses) deferred in other comprehensive income, until the underlying transaction impacts earnings. Any ineffectiveness of the hedge is recognized immediately into earnings in the other income (expense) section of the statement of operations. There was no significant ineffectiveness recorded into earnings for the three and nine months ended September 30, 2006. The realized gain or loss from maturing hedges is also recorded in the other income (expense) section of the income statement. In the three months ended September 30, 2006, we recorded $1.2 million of realized losses related to the foreign currency contracts that matured during the quarter. For the nine months ended September 30, 2006, we recorded $2.0 million of realized losses related to the foreign currency contracts that matured during the period.

In September 2004, we entered into two cross-currency interest rate swap contracts to hedge the impact of foreign currency fluctuations in interest and principal payments relating to inter-company loans denominated in Euros. Both swaps, effectively convert the future interest and principal payments on the hedged portion of the inter-company loans from Euros to U.S. Dollars.

As of September 30, 2006, the following contracts were outstanding:


		Interest			Notional		USD Exchange
	Expiration	Rate			Value		Rate to € 1
					(in millions)
Pay fixed	December 15, 2014		9.0	%	€	44.7		1.2238
Receive fixed			9.025	%
Pay fixed	December 15, 2016		9.0	%	€	42.3		1.2238
Receive fixed			9.08	%

The swaps are designated as cash flow hedges and are expected, both at inception and on an ongoing basis, to be ‘‘highly effective’’ in achieving offsetting changes in cash flows, as defined by SFAS No. 133. The swaps are measured at fair value each reporting period with gains or (losses) deferred in other comprehensive income, In accordance with SFAS No. 52, the notional value of the swap is re-measured at spot and the change in value from the prior period attributable to foreign exchange is reclassified from other comprehensive income to other income (expense) section of the statement of operations as an unrealized gain or (loss) each period. When the underlying transaction impacts earnings, a realized gain or (loss) on the swaps is recorded in the other income (expense) section of the statement of operations. For the three and nine months ended September 30, 2006, the realized foreign currency loss was $0.2 million.

Interest Rate Risk

We are subject to interest rate risk for the variable interest rates on our $592.0 million secured term loan and our $125.0 million revolving credit facility. During the three months ended September 30, 2006, we entered into three floating to fixed interest rate swaps. The table below shows the notional amount, maturity date, and the fixed rate we pay. The floating rate (three-month LIBOR), which we will receive, is reset quarterly. The interest swaps were entered into to limit the exposure we have to our floating rate term loan debt.

As of September 30, 2006, the notional amounts and weighted average interest rates on outstanding contracts were as follows (dollars in millions):


	Expected maturity date as of September 30, 2006															September 30, 2006
																			Fair
	2007			2008			2009			2010		2011		Therefore		Total			Value
Pay fixed/receive variable	$	100.0		$	125.0		$	175.0			—		—		—	$	400.0		$	(1.5	)
Average pay rate		5.44	%		5.34	%		5.26	%		—		—		—		5.35	%
Average receive rate *		5.08	%		4.77	%		4.87	%		—		—		—		4.89	%


*		Represents the average 3-month forward LIBOR interest rates at September 29, 2006.

The interest rate swaps are designated as cash flow hedges and in accordance with SFAS No. 133. Each reporting period, the swaps are measured at fair value, with changes in fair value deferred in other comprehensive income. Cash flow of the swaps are accounted for as adjustments to interest expense each period, thus the amount in other comprehensive income is not amortized into earnings unless the swaps are terminated. For the three and nine months ended September 30, 2006, we recorded $0.1 million of net interest income from the interest swaps. Assuming that the revolving credit facility is fully drawn, each quarter point change in our variable interest rate debt including the impact of interest rate swaps would result in $0.8 million change in interest expense.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure control and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report. Based upon this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective.

During the period covered by this report, there were no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

We are not a party to any litigation other than ordinary, routine litigation incidental to our business. In our opinion, the ultimate liability, if any, will not have a material adverse effect on our consolidated results of operations or financial position.

ITEM 1A: RISK FACTORS

There have been no material changes in the risk factors previously disclosed in our Form 10-Q for the quarterly period ended June 30, 2006.

ITEM 6: EXHIBITS

The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Plano, State of Texas, on this 13th day of November, 2006.



	/s/ Douglas E. Barnett
	Douglas E. Barnett
	Senior Vice President and Chief Financial Officer (on behalf of the Registrant and as Chief Financial Officer)

EXHIBIT INDEX


Exhibit No.		Description
10.1		First Amendment to Personal Services Agreement

31.1		Certification of President and Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)

32.1		Certification of President and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

UGS Corp. 10-Q