UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended April 1, 2006

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

For the transition period from to

Commission file number 000-29309

MATRIXONE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

02-0372301

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

210 Littleton Road

Westford, Massachusetts 01886

(Address of Principal Executive Offices, Including Zip Code)

(978) 589-4000

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the Registrant is 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 ¨ Accelerated filer x Non Accelerated Filer ¨

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

As of May 1, 2006, there were 52,673,746 shares of common stock, $0.01 par value per share, outstanding.

MATRIXONE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED APRIL 1, 2006

TABLE OF CONTENTS


		Page
PART I - FINANCIAL INFORMATION

Item 1:	Financial Statements:

	Condensed Consolidated Balance Sheets as of April 1, 2006 (unaudited) and July 2, 2005	1

	Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended April 1, 2006 (unaudited) and April 2, 2005 (unaudited)	2

	Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended April 1, 2006 (unaudited) and April 2, 2005 (unaudited)	3

	Notes to Condensed Consolidated Financial Statements	4

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4:	Controls and Procedures	41

PART II - OTHER INFORMATION

Item 1:	Legal Proceedings	46

Item 1A:	Risk Factors	48

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 6:	Exhibits	61

Signatures		62

PART I - FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

MATRIXONE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)


	April 1, 2006			July 2, 2005
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	99,662		$	107,677
Accounts receivable, less allowance for doubtful accounts of $691 and $747		31,589			28,620
Prepaid expenses and other current assets		6,816			8,822

Total current assets		138,067			145,119
PROPERTY AND EQUIPMENT, NET		5,144			6,096
GOODWILL		11,911			11,929
OTHER INTANGIBLE ASSETS, NET		6,699			7,645
OTHER ASSETS		1,686			2,171

	$	163,507		$	172,960

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	6,596		$	5,941
Accrued expenses		18,871			22,752
Deferred revenue		35,553			37,040

Total current liabilities		61,020			65,733

LONG TERM LIABILITIES:
Long term deferred revenue		2,589			5,163
Long term deferred tax liability		519			282

Total long term liabilities		3,108			5,445

COMMITMENTS AND CONTINGENCIES (NOTE 6)

STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value per share, 5,000 shares authorized; 0 shares issued and outstanding		—			—
Common stock, $0.01 par value per share; 100,000 shares authorized; 52,417 and 51,771 shares issued and outstanding		524			518
Additional paid-in capital		231,167			227,489
Accumulated deficit		(134,348	)		(128,088	)
Accumulated other comprehensive income		2,036			1,863

Total stockholders’ equity		99,379			101,782

	$	163,507		$	172,960

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

MATRIXONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)


	Three Months Ended						Nine Months Ended
	April 1, 2006			April 2, 2005			April 1, 2006			April 2, 2005
REVENUES:
Software license	$	16,688		$	7,789		$	34,409		$	35,647
Service		27,004			19,227			68,528			55,892

Total revenues		43,692			27,016			102,937			91,539

COST OF REVENUES:
Software license		1,667			653			2,764			3,067
Amortization of purchased technology		199			199			598			531
Service (1)		15,065			12,115			39,482			35,688

Total cost of revenues		16,931			12,967			42,844			39,286

GROSS PROFIT		26,761			14,049			60,093			52,253

OPERATING EXPENSES:
Selling and marketing (1)		11,496			10,271			31,373			31,974
Research and development (1)		7,169			7,795			21,203			21,530
General and administrative (1)		5,819			2,738			15,239			8,020
Amortization of intangible assets		116			121			348			297

Total operating expenses		24,600			20,925			68,163			61,821

INCOME(LOSS) FROM OPERATIONS		2,161			(6,876	)		(8,070	)		(9,568	)

OTHER INCOME(EXPENSE):
Interest income		848			548			2,342			1,346
Other income(expense), net		(36	)		(50	)		(59	)		(93	)

Total other income(expense)		812			498			2,283			1,253

INCOME(LOSS) BEFORE INCOME TAXES		2,973			(6,378	)		(5,787	)		(8,315	)
PROVISION FOR INCOME TAXES		179			155			473			263

NET INCOME(LOSS)	$	2,794		$	(6,533	)	$	(6,260	)	$	(8,578	)

BASIC NET INCOME(LOSS) PER SHARE	$	0.05		$	(0.13	)	$	(0.12	)	$	(0.17	)

DILUTED NET INCOME(LOSS) PER SHARE	$	0.05		$	(0.13	)	$	(0.12	)	$	(0.17	)

SHARES USED IN COMPUTING:
BASIC NET INCOME(LOSS) PER SHARE		52,269			51,566			52,024			51,079

DILUTED NET INCOME(LOSS) PER SHARE		54,799			51,566			52,024			51,079

________ (1) The following summarizes the allocation of stock based compensation included in the costs and expenses noted above:

Cost of service revenues	$	181		$	—		$	460		$	—
Selling and marketing		289			—			618			—
Research and development		148			—			408			—
General and administrative		98			—			278			—

Total stock based compensation	$	716		$	—		$	1,764		$	—

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

MATRIXONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Nine Months Ended
	April 1, 2006			April 2, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(6,260	)	$	(8,578	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,730			2,343
Amortization of purchased technology and intangible assets		946			829
Stock based compensation		1,764			—
Reduction in doubtful accounts		(56	)		(125	)
Provision for deferred income taxes		240			—
Changes in assets and liabilities, net of business combination:
Accounts receivable		(3,018	)		937
Prepaid expenses and other current assets		2,095			(2,811	)
Accounts payable		650			76
Accrued expenses		(3,379	)		(232	)
Deferred revenues		(4,164	)		1,333

Net cash used in operating activities		(9,452	)		(6,228	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(781	)		(1,386	)
Other assets		395			(60	)
Cash paid for business combinations, net of cash acquired of $0 and $790		—			(6,564	)

Net cash used in investing activities		(386	)		(8,010	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of line of credit assumed in business combination		—			(1,512	)
Proceeds from stock option exercises		1,186			764
Proceeds from purchases of common stock under employee stock purchase plan		734			666

Net cash provided by (used in) financing activities		1,920			(82	)

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		(97	)		896

NET DECREASE IN CASH AND CASH EQUIVALENTS		(8,015	)		(13,424	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		107,677			118,414

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	99,662		$	104,990

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	149		$	208

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

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

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements of MatrixOne, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States. These accounting principles were applied on a basis consistent with those of the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2005 filed with the Securities and Exchange Commission (the “SEC”). The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2005. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation. The operating results for the three and nine month periods ended April 1, 2006 may not be indicative of the results expected for any succeeding quarter or for the entire fiscal year ending July 1, 2006.

On March 1, 2006, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Dassault Systèmes Corp, a Delaware corporation (“Dassault Systèmes”), and DS Newco Corp., a Delaware corporation and a wholly owned subsidiary of Dassault Systèmes (“Merger Sub”), pursuant to which Merger Sub will be merged with and into the Company, with the Company continuing after the merger as the surviving corporation and as a wholly owned subsidiary of Dassault Systèmes (the “Merger”). The Merger Agreement is subject to approval by the Company’s stockholders. The accompanying condensed consolidated financial statements do not include any adjustments or disclosures that may be required upon consummation of the merger. See Note 2 to these condensed consolidated financial statements for further information.

The Company operates on a 52 or 53 week fiscal year that ends on the Saturday closest to June 30^thand on thirteen or fourteen week fiscal quarters that end on the Saturday closest to September 30^th, December 31^st and March 31^st. Both the three and nine month periods ended April 1, 2006 and April 2, 2005 had 13 and 39 weeks, respectively. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

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

Revenue Recognition

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

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

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

Accordingly, when vendor specific objective evidence of fair value exists, software license revenue is recognized under the residual method in arrangements in which software is licensed with professional services, training or maintenance and customer support services.

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

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

•

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

•

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

•

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

•

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

If a customer is provided extended payment terms (generally in excess of 90 days), revenue is recognized when the fees become due. A software license is considered delivered when the customer receives the physical media in accordance with the applicable shipping terms or is provided electronic access to the software files.

In accordance with the Company’s agreements with its value-added resellers and distributors (“Alliance Partners”), an Alliance Partner has the right to license the Company’s software to its customers (“end users”). Therefore, the Company has no obligation to the Alliance Partner’s end users. Accordingly, the Company

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

recognizes software license revenues from an Alliance Partner upon receipt of a written confirmation from the Alliance Partner of a noncancellable, binding written arrangement with the ultimate end user, delivery of the software to the Alliance Partner and when all other revenue recognition criteria, including fulfillment of all obligations and commitments, have been met.

Professional services revenues for fixed-price contracts are recognized using a concept of proportional performance based upon the ratio of direct labor costs incurred to total expected labor costs. If conditions for acceptance are required or the arrangement includes future product deliverables, professional services revenues and related software license revenue are recognized upon customer acceptance or upon delivery of the future deliverables. Customers generally reimburse the Company for the majority of its out-of-pocket expenses incurred during the course of an engagement. We do not mark-up or add additional fees to the actual out-of-pocket expenses we incur. Training revenues are recognized as the services are provided.

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

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

The following sets forth the details of total deferred revenue:


	As of
	April 1, 2006		July 2, 2005
Deferred maintenance revenue	$	26,418	$	21,833
Deferred software license revenue		9,269		15,808
Deferred professional services revenue		2,455		4,562

Total deferred revenue	$	38,142	$	42,203

Stock Based Compensation

Pursuant to the Company’s Third Amended and Restated 1996 Stock Plan (the “1996 Plan”) and the Company’s Amended and Restated 1999 Stock Plan (the “1999 Plan”), the Company may grant incentive and nonqualified stock options, stock issuances and opportunities to make direct purchases of stock to employees, directors, officers or consultants of the Company. Pursuant to the Company’s 2000 Employee Stock Purchase Plan (the “Purchase Plan”), eligible employees may purchase common stock under the Purchase Plan at 85% of the lessor of the average market price of the Company’s common stock on the first or last day of the applicable six month payment period. On December 22, 2005, the stockholders of the Company approved an amendment to

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

the Purchase Plan to increase the number of shares of common stock that may be issued pursuant to the Purchase Plan by 1,000 shares to 3,000 shares of common stock in the aggregate. Shares allocated for issuance are 13,950, 8,000, and 3,000 for the 1996 Plan, the 1999 Plan and the Purchase Plan, respectively. Options granted generally vest over four years, except for options subject to accelerated vesting as described below, and expire no later than ten years from the date of the grant.

In the first quarter of fiscal 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) “Share-Based Payments” (“SFAS 123(R)”), which requires all share-based payments to employees, including stock options and stock issued under certain employee stock purchase plans, to be recognized in the Company’s financial statements at their fair value. SFAS 123(R) requires the Company to estimate future forfeitures of stock based compensation, while the pro forma disclosure for the three and nine months ended April 2, 2005 includes only those options that had been forfeited during that period. The Company has continued to use the Black-Scholes option pricing model to determine the fair value of options under SFAS 123(R) and has elected to use the modified-prospective transition method, in which prior period financial statements will not be restated but disclosure of the pro forma net loss calculation will be included in the footnotes to the financial statements for periods prior to fiscal 2006 and the adoption of SFAS 123(R). During the three and nine months ended April 1, 2006, the Company recorded stock based compensation expense of $716 and $1,764, respectively, in accordance with SFAS 123(R).

The following sets forth the impact of the adoption of SFAS 123(R) on the Company’s net income(loss) for the three and nine months ended April 1, 2006:


	Three Months Ended		Nine Months Ended
	April 1, 2006		April 1, 2006
NET LOSS:
Net income(loss), as reported	$	2,794	$	(6,260	)
Add:
Stock-based compensation expense pursuant to SFAS 123(R)		716		1,764

Net income(loss), excluding stock based compensation	$	3,510	$	(4,496	)

BASIC AND DILUTED NET LOSS PER SHARE:
Basic net income(loss) per share, as reported	$	0.05	$	(0.12	)
Diluted net income(loss) per share, as reported	$	0.05	$	(0.12	)
Basic net income(loss) per share, excluding stock based compensation	$	0.07	$	(0.09	)
Diluted net income(loss) per share, excluding stock based compensation	$	0.06	$	(0.09	)

Commencing in the first quarter of fiscal 2006, the Company began recording stock based compensation using the fair value method pursuant to SFAS 123(R). Prior to the first quarter of fiscal 2006, the Company recorded stock based compensation issued to employees and directors using the intrinsic value method and stock based compensation issued to non-employees using the fair value method. Stock based compensation was previously recognized on stock options issued to employees only if the option exercise price was less than the market price of the underlying stock on the date of grant. During the three and nine months ended April 2, 2005, no stock based compensation was recorded under the intrinsic value method.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

The fair value of stock options granted during the periods indicated has been determined using the Black-Scholes option pricing model and the assumptions set forth below. The assumptions used by the Company for the three and nine months ended April 1, 2006 were developed with the assistance of an independent appraisal firm, from which the Company has received a report.


	Three Months Ended		Nine Months Ended
	April 1, 2006	April 2, 2005	April 1, 2006	April 2, 2005
Risk-free interest rate	4.20%	3.55-4.04%	4.20%	3.10-4.04%
Expected dividend yield	None	None	None	None
Expected life	4.6 Years	4 Years	4.6 Years	3-4 Years
Expected volatility	65%	61%	65%	61%-90%
Expected forfeiture rate	33%	—	33%	—

The risk-free interest rate is derived from U.S. Treasury discount notes with maturities comparable to the remaining expected life of the options. No dividend yield is expected since the Company has never paid cash dividends and has no present intention to pay cash dividends. The expected life is based on observed and expected time to post-vesting exercise and forfeitures of options by the Company’s employees. The expected volatility is based on the historical volatility of our common stock over the period commensurate with the expected life of the options. The expected forfeiture rate was based on the Company’s historical experience with pre-vesting option cancellations.

Based on the above assumptions, the weighted-average fair value of shares subject to purchase under the employee stock purchase plan for the three months ended April 1, 2006 was $1.68. No stock option grants were made during the three months ended April 1, 2006. The weighted-average fair values of the options granted under the stock option plans and shares subject to purchase under the employee stock purchase plan for the nine months ended April 1, 2006 were $2.58 and $1.53, respectively.

The following is a summary of the status of the Company’s stock options as of April 1, 2006 and the stock option activity for all stock option plans during the nine months ended April 1, 2006.


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value⁽¹⁾
Outstanding at July 2, 2005	11,536		$	6.15
Granted	45		$	5.00
Exercised	(450	)	$	2.63
Forfeited	(483	)	$	5.27

Outstanding at April 1, 2006	10,648		$	6.34	5.91	$	8,776

Vested and expected to vest at April 1, 2006	10,125		$	6.39	6.16	$	7,796

Exercisable at April 1, 2006	9,062		$	6.54	5.57	$	5,581

⁽¹⁾	The aggregate intrinsic value was calculated based on the positive difference between the closing price of our common stock on March 31, 2006 of $7.16 and the exercise price of the underlying options.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

The total intrinsic value of options exercised was $1,412.

On July 1, 2005, the Company accelerated the vesting of substantially all outstanding, unvested “out-of-the-money” options held by employees, officers and directors with exercise prices of at least $5.75 per share, which was equal to 115% of the $5.00 closing price of the Company’s common stock on the NASDAQ National Market on June 30, 2005. The vesting of options to purchase approximately 1.8 million shares of common stock with exercise prices ranging from $5.82 per share to $19.48 per share, with a weighted average exercise price of $6.58 per share, were accelerated, including options to purchase approximately 495,000 shares held by executive officers of the Company and options to purchase 15,000 shares held by non-employee directors. The primary purpose of this vesting acceleration is to avoid recognizing stock-based compensation under SFAS 123(R) associated with these “out-of-the-money” options.

As of April 1, 2006, there was unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan totaling $3,323. This compensation cost is expected to be recognized over a weighted-average period of 2.26 years.

Had compensation expense for all stock options been determined based on fair value as prescribed by SFAS 123, the Company’s pro forma net loss and pro forma basic and diluted net loss per share for the three and nine months ended April 2, 2005 would have been as follows:


	Three Months Ended			Nine Months Ended
	April 2, 2005			April 2, 2005
NET LOSS:
Net loss, as reported	$	(6,533	)	$	(8,578	)
Include:
Stock based compensation expense related to stock options using the fair value the fair value method		(2,576	)		(8,660	)
Stock based compensation expense related to the Company’s Employee Stock Purchase Plan using the fair value method		(134	)		(395	)

Pro forma net loss	$	(9,243	)	$	(17,633	)

BASIC AND DILUTED NET LOSS PER SHARE:
As reported:
Basic and diluted net loss per share	$	(0.13	)	$	(0.17	)
Pro forma:
Basic and diluted net loss per share	$	(0.18	)	$	(0.35	)

Reclassifications

Certain previously reported amounts have been reclassified to conform to the current period presentation.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Note 2: Agreement and Plan of Merger

On March 1, 2006, the Company entered into the Merger Agreement with Dassault Systèmes. At the effective time of the Merger, each issued and outstanding share of common stock, par value $0.01 per share, of the Company (“MatrixOne Common Stock”) will be converted into the right to receive $7.25 in cash. Also, at the effective time of the Merger, each outstanding option to purchase MatrixOne Common Stock, whether or not then exercisable or vested, will be cancelled in consideration for a cash payment equal to the excess of (i) $7.25 over (ii) the per share exercise price of such stock option, multiplied by the number of shares of MatrixOne Common Stock subject to such stock option. Due to the status of the regulatory and required stockholder approvals and the related uncertainty as of April 1, 2006, the Company has not recorded a liability related to the potential cash payment for certain stock options as of April 1, 2006.

Consummation of the Merger is subject to several closing conditions, including the adoption of Merger Agreement by the stockholders of the Company and the receipt of antitrust approvals or the expiration of applicable waiting periods in certain jurisdictions as discussed below. The Merger is currently expected to close during the second quarter of calendar 2006 subject to the satisfaction of the closing conditions. The Merger has been unanimously approved by the Company’s Board of Directors.

The Merger Agreement contains certain termination rights for both the Company and Dassault Systèmes and provides that in certain specified circumstances, the Company must pay Dassault Systèmes a termination fee of $14,000 and up to $2,000 in reimbursement of certain expenses.

On April 19, 2006, the waiting period required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, relating to the proposed merger expired. Additionally, the Federal Cartel Office in Germany has issued a letter confirming the clearance of the planned acquisition pursuant to Germany’s Act Against Restraints of Competition. The Company does not believe any additional regulatory filings are required related to the proposed merger. In addition, the Company filed a Definitive Proxy Statement with the Securities and Exchange Commission setting the date of the special stockholder meeting for May 10, 2006 to allow stockholders to vote on the adoption of the merger agreement.

Note 3. Business Combinations

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

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

On the date of the acquisition, the combined Company committed to a plan to exit certain activities of Synchronicity at a cost of approximately $806 in the aggregate which was included in the purchase price allocation as acquisition liabilities. These acquisition liabilities relate to certain severance and other employee benefits related to the planned termination of ten Synchronicity employees at a cost of approximately $641, and the cost of vacating a Synchronicity facility of approximately $165. The Company paid severance and other related benefits and the lease termination costs through September 2005.

The significant components of the exit plan, cash payments and remaining accrual as of April 1, 2006 were as follows:


	Employee Severance and Fringe Benefits			Facilities and Other Associated Costs			Total
Exit plan costs	$	641		$	165		$	806
Non-cash adjustment		(29	)		(16	)		(45	)
Cash payments		(491	)		(149	)		(640	)

Accrual balance as of July 2, 2005		121			—			121
Cash payments		(121	)		—			(121	)

Accrual balance as of April 1, 2006	$	—		$	—		$	—

The non-cash adjustment of $29 represents the reversal of certain severance and other employee benefits related to the retention of two employees previously planned to be terminated. The non-cash adjustment of $16 related to facilities and other associated costs represents an adjustment to the estimated costs incurred in vacating the Synchronicity facility.

The following unaudited pro forma financial information presents the combined results of the Company and Synchronicity as if the Synchronicity acquisition had taken place on July 4, 2004. The pro forma amounts give effect to certain adjustments, including the amortization of intangible assets, increased commission expense, decreased interest income, incremental rent expense and certain one-time adjustments which had been recorded by Synchronicity in its historical financial statements. This pro forma information does not necessarily reflect the results of operations as they would have been if the business had been managed by the Company during these periods and is not indicative of results that may be obtained in the future.


	Nine Months Ended
	April 2, 2005
Pro forma total revenues	$	92,701
Pro forma net loss	$	(9,322	)
Pro forma basic and diluted net loss per share	$	(0.18	)

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

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

Note 4. Goodwill and Other Intangible Assets, Net

Other intangible assets, net were comprised of the following as of April 1, 2006:


Identified Intangible Asset	Useful Life in Years	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technology
Core technology	7	$	3,780	$	(900	)	$	2,880
Application technology – DesignSync	4		710		(296	)		414
Application technology – ProjectSync	3		240		(133	)		107

Total developed technology			4,730		(1,329	)		3,401

Customer contracts and related customer relationships—Synchronicity	10		3,600		(600	)		3,000
Customer contracts and related customer relationships—Centor	5		210		(58	)		152
Trademarks and trade names	4		250		(104	)		146

			4,060		(762	)		3,298

Total		$	8,790	$	(2,091	)	$	6,699

For the three and nine months ended April 1, 2006, amortization expense related to identified intangible assets was $315 and $946, respectively, of which $199 and $598, respectively, was related to developed technology and included in cost of revenues and $116 and $348 as related to customer contracts and related customer relationships and trademarks and trade names and included in operating expenses. For the three and nine months ended April 2, 2005, amortization expense related to identified intangible assets was $320 and $828, respectively, of which $199 and $531, respectively, was related to developed technology and included in cost of revenues and $121 and $297, respectively, was related to customer contracts and related customer relationships and trademarks and trade names and included in operating expenses.

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

The following is the estimated future amortization expense related to other intangible assets as of April 1, 2006:


Fiscal Year
Remainder of 2006	$	316
2007		1,262
2008		1,188
2009		962
2010		916
2011		900
Thereafter		1,155

Total	$	6,699

The following sets forth changes to goodwill for the nine months ended April 1, 2006:


Goodwill balance as July 2, 2005	$	11,929
Adjustment to goodwill related to the Centor Acquisition		(18	)

Goodwill balance as of April 1, 2006	$	11,911

Note 5. Professional Services Warranty

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


Accrual balance as of July 2, 2005	$	250
Net provisions for warranty charged to cost of services during the nine months ended April 1, 2006		127
Payments made (in kind or in cash) during the nine months ended April 1, 2006		(227	)

Accrual balance as of April 1, 2006	$	150

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Note 6. Commitments and Contingencies

Contingencies

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

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

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

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Consummation of the proposed settlement is conditioned upon obtaining final approval by the Court. On September 1, 2005, the Court preliminarily approved the proposed settlement, directed that notice of the terms of the proposed settlement be provided to class members. Thereafter, the Court held a fairness hearing on April 24, 2006, at which objections to the proposed settlement were heard. After the fairness hearing, the Court took under advisement whether to grant final approval to the proposed settlement.

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

Indemnification

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

The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the SLA and MSA. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights of its employees’ development work to the Company. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims are outstanding as of April 1, 2006. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the SLA and MSA, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. However, the Company does not believe any amounts would be material to the Company’s consolidated financial condition, results of operations or cash flows.

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

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

MATRIXONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(In thousands, except per share amounts)

Potentially dilutive common stock options aggregating 5,012 and 11,633 shares for the three months ended April 1, 2006 and April 2, 2005, respectively, and 10,651 and 11,892 shares for the nine months ended April 1, 2006 and April 2, 2005, respectively, have been excluded from the computation of diluted net income(loss) per share because their inclusion would be antidilutive.

The following represents a reconciliation of basic and diluted earnings per share:


	Three Months Ended					Nine Months Ended
	April 1, 2006		April 2, 2005			April 1, 2006			April 2, 2005
Numerator:
Net income(loss)	$	2,794	$	(6,533	)	$	(6,260	)	$	(8,578	)

Denominator:
Weighted-average common shares outstanding		52,269		51,566			52,024			51,079
Effect of dilutive securities:
Employee stock options		2,476		—			—			—
Employee stock purchase plan		54		—			—			—

Weighted-average shares assuming dilution		54,799		51,566			52,024			51,079

Basic net income(loss) per share	$	0.05	$	(0.13	)	$	(0.12	)	$	(0.17	)

Diluted net income(loss) per share	$	0.05	$	(0.13	)	$	(0.12	)	$	(0.17	)

Note 8. Comprehensive Income(Loss)

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


	Three Months Ended					Nine Months Ended
	April 1, 2006		April 2, 2005			April 1, 2006			April 2, 2005
Net income(loss)	$	2,794	$	(6,533	)	$	(6,260	)	$	(8,578	)
Foreign currency translation adjustments		455		(829	)		173			882

Comprehensive income(loss)	$	3,249	$	(7,362	)	$	(6,087	)	$	(7,696	)

Note 9: Segment Information

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

Note 10: Recently Issued Accounting Pronouncement

In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FAS Statement No. 3” (“SFAS 154”). SFAS 154 changes the requirements for the accounting and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS 154 requires that changes in accounting principle be retrospectively applied. The correction of an error continues to be reported as a prior period adjustment by restating prior period financial statements as of the beginning of the first period presented. SFAS 154 will be effective for the Company beginning in fiscal year 2007. The Company does not expect the adoption of SFAS 154 to have a material effect on its consolidated financial statements.

In February 2006, the Financial Accounting Standards Board issued a Staff Position related to FAS 123(R) and cash settlement of options upon the occurrence of a contingent event. As part of the Agreement and Plan of Merger described in Note 2, the Company’s stock options will be settled in cash upon closing of the merger. However, due to the number of unsatisfied requirements, including regulatory clearance and stockholder approval, existing at April 1, 2006, the Company determined that settlement of the options in cash was not probable at April 1, 2006 and therefore, the options have not been recorded as a liability in the Company’s financial statements as of April 1, 2006.

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

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

Business Overview

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

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

Our long-term strategy is to achieve a leadership position within the PLM market by effectively enabling our customers to achieve measurable improvements in their business by unifying and streamlining processes across the product lifecycle. Currently, there are three key elements to our growth strategy: driving new customer adoption of our solutions in collaboration with our key alliance partners, upgrading our growing base of existing customers to the latest releases of our solutions, and extending our position in key industrial markets.

On March 1, 2006, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Dassault Systèmes Corp, a Delaware corporation (“Dassault Systèmes”), and DS Newco Corp., a Delaware corporation and a wholly owned subsidiary of Dassault Systèmes (“Merger Sub”), pursuant to which Merger Sub will be merged with and into MatrixOne, Inc., with the MatrixOne continuing after the merger as the surviving corporation and as a wholly owned subsidiary of Dassault Systèmes (the “Merger”). At the effective time of the Merger, each issued and outstanding share of common stock, par value $0.01 per share, of MatrixOne, Inc. (“MatrixOne Common Stock”) will be converted into the right to receive $7.25 in cash. Also, at the effective time of the Merger, each outstanding option to purchase MatrixOne Common Stock, whether or not then exercisable or vested, will be cancelled in consideration for a cash payment equal to the excess of (i) $7.25 over (ii) the per share

exercise price of such company stock option, multiplied by the number of shares of MatrixOne Common Stock subject to such stock option. Due to the status of the regulatory and required stockholder approvals and the related uncertainty as of April 1, 2006, we did not record a liability related to the potential cash payment for certain stock options as of April 1, 2006.

Consummation of the Merger is subject to several closing conditions, including the adoption of the Merger Agreement and approval of the Merger by the stockholders of MatrixOne and the receipt of antitrust approvals or the expiration of applicable waiting periods in certain jurisdictions. The Merger is currently expected to close during the second quarter of calendar 2006 subject to the satisfaction of the closing conditions. The Merger has been unanimously approved by our Board of Directors.

The Merger Agreement contains certain termination rights for both the MatrixOne and Dassault Systèmes and provides that in certain specified circumstances, MatrixOne must pay Dassault Systèmes a termination fee of $14 million and up to $2 million in reimbursement of certain expenses.

On April 19, 2006, the waiting period required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, relating to the proposed merger expired. Additionally, the Federal Cartel Office in Germany has issued a letter confirming the clearance of the planned acquisition pursuant to Germany’s Act Against Restraints of Competition. We do not believe any additional regulatory filings are required related to the proposed merger. In addition, we filed a Definitive Proxy Statement with the Securities and Exchange Commission setting the date of the special shareholder meeting for May 10, 2006 to allow shareholders to vote on the adoption of the merger agreement.

During the three months ended April 1, 2006, we incurred certain professional fees related to the proposed merger, which are included in general and administrative expenses, aggregating $1.4 million.

Financial Overview

We generate revenues from licensing our software and providing professional services, training and maintenance and customer support services through our offices in the United States, Canada, England, France, Germany, Italy, Japan, Korea, Singapore and the Netherlands and indirectly through our Alliance Partner network throughout Europe and Asia/Pacific. Revenues by geographic region fluctuate each period based on the timing, size and number of software license and professional services transactions and the fluctuation in the value of foreign currencies relative to the U.S. Dollar. We expect our revenues by geographic region to continue to fluctuate in the future. Our total revenues by major geographic region, including exports into such regions, for the three and nine months ended April 1, 2006 and April 2, 2005 were as follows:


	Three Months Ended				Nine Months Ended
(In thousands)	April 1, 2006		April 2, 2005		April 1, 2006		April 2, 2005
North America	$	26,985	$	13,094	$	58,244	$	48,446
Europe		14,072		9,991		37,468		31,641
Asia/Pacific		2,635		3,931		7,225		11,452

Total revenues	$	43,692	$	27,016	$	102,937	$	91,539

Our international subsidiaries generally invoice their customers and pay their employees and suppliers in local currency. Therefore, our revenues and expenses from these international subsidiaries, when translated to U.S. Dollars, are subject to foreign currency risk. We currently do not enter into contracts or agreements to minimize our exposure to the effects of changes in foreign currency when the results of our international subsidiaries are translated to U.S. Dollars. Accordingly, if the dollar weakens relative to foreign currencies, our revenues and expenses would increase when stated in U.S. Dollars. Conversely, if the dollar strengthens, our revenues and expenses would decrease. If the revenues from our international subsidiaries for the three and nine months ended April 1, 2006 had been translated at exchange rates for the comparable period a year ago, our total revenues would have been approximately $0.2 million and $1.2 million higher, respectively.

Our current and long term deferred revenues fluctuate from period to period due to the timing of the recognition or deferral of software license, professional services and maintenance and customer support transactions. Software license and professional services transactions may be deferred if 1) commitments or agreements are made to provide certain software functionality or significant modifications to licensed software; 2) extended payment terms are provided; or 3) vendor specific objective evidence of fair value does not exist. Maintenance and customer support arrangements are generally paid for in advance and recognized ratably over the term of the contract.

The following sets forth the details of our total deferred revenue:


	As of
(In thousands)	April 1, 2006		December 31, 2005		July 2, 2005
Deferred maintenance revenue	$	26,418	$	17,317	$	21,833
Deferred software license revenue		9,269		15,900		15,808
Deferred professional services revenue		2,455		6,630		4,562

Total deferred revenue	$	38,142	$	39,847	$	42,203

In fiscal 2006 we adopted Statement of Financial Accounting Standards No. 123(R) “Share-Based Payments” (“SFAS 123(R)”), which requires all share-based payments to employees, including stock options and stock issued under certain employee stock purchase plans, to be recognized in our financial statements at their fair value. SFAS 123(R) requires us to estimate future forfeitures of stock based compensation, while the pro forma disclosure for the three and nine months ended April 2, 2005 includes only those options that had been forfeited during that period. We have continued to use the Black-Scholes option pricing model to determine fair value of options under SFAS 123(R) and have elected to use the modified-prospective transition method, in which prior period financial statements will not be restated but disclosure of the pro forma net loss calculation will be included in the footnotes to the financial statements for periods prior to fiscal 2006 and the adoption of SFAS 123(R). (Refer to Note 1 “Summary of Significant Accounting Policies – Stock Based Compensation” to our Condensed Consolidated Financial Statements included in Part 1, Item 1 in this Quarterly Report on Form 10-Q).

On July 1, 2005, we accelerated the vesting of substantially all outstanding, unvested “out-of-the-money” options held by employees, officers and directors with exercise prices of at least $5.75 per share, which was equal to 115% of the $5.00 closing price of the Company’s common stock on the NASDAQ National Market on June 30, 2005. The vesting of options to purchase approximately 1.8 million shares of common stock with exercise prices ranging from $5.82 per share to $19.48 per share, with a weighted average exercise price of $6.58 per share, were accelerated, including options to purchase approximately 495,000 shares held by executive officers and options to purchase 15,000 shares held by non-employee directors. The primary purpose of this vesting acceleration was to avoid recognizing stock-based compensation under SFAS 123(R) associated with these “out-of-the-money” options. In connection with the adoption with SFAS 123(R), we modified our stock option issuance practice to adjust the quantity of options granted per employee and the groups or classes of employees eligible to receive stock options.

During the three and nine months ended April 1, 2006, we recorded stock compensation expense of $0.7 million and $1.8 million in accordance with SFAS 123(R). The following summarizes the allocation of stock based compensation included in our costs and expenses:


	Three Months Ended		Nine Months Ended
(In thousands)	April 1, 2006		April 1, 2006
Cost of service revenues	$	181	$	460
Selling and marketing		289		618
Research and development		148		408
General and administrative		98		278

Total stock based compensation	$	716	$	1,764

We have incurred significant costs to develop our technology and products, market, license, sell, implement and support our products and services, and maintain an infrastructure to support our global operations. These costs have historically exceeded our total revenues. As of April 1, 2006, we had an accumulated deficit of approximately $134.3 million. If our operating expenses are higher than we anticipate or our revenues are lower than anticipated, we may incur significant net losses in fiscal 2006 and beyond.

During fiscal 2006, we incurred substantial costs related to the pending sale of the Company, which ultimately resulted in entering into an Agreement and Plan of Merger with Dassault Systèmes on March 1, 2006. The total costs incurred to date in relation to the proposed sale of the Company were $1.4 million.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

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

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

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

•

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

•

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

•

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

•

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

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

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

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

Allowance for Doubtful Accounts

We periodically assess the collectibility of customer accounts receivable. We maintain an allowance for estimated losses resulting from uncollectible customer accounts receivable. In estimating this allowance, we consider customer specific factors such as historical collection experience, current credit worthiness, the aggregate amount due, age of the receivable and general economic conditions that may affect a customer’s ability to pay. We also consider factors such as the overall balance and aging of our accounts receivable, as well as

customer and geographic concentrations. Actual customer collections could differ materially from our estimates. The use of different estimates or assumptions could produce a materially different allowance. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Our allowance for doubtful accounts was approximately $0.7 million at April 1, 2006 and July 2, 2005, respectively.

Property and Equipment

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

Deferred Tax Assets

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

Accounting for Business Combinations

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

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

•

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

•

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

•

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

•

discount rates.

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

Goodwill Impairment

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

Impairment of Long-Lived Assets

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

Professional Services Warranty

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

We estimate our professional services warranty liability based on historical activity. Warranty expense is included in cost of services. If our actual warranty activities differ from these estimates, revisions to the estimated warranty liability would be required and result in additional charges to cost of services. We primarily satisfy our warranty obligations by providing in-kind services. Our warranty accrual was $0.2 million and $0.3 million at April 1, 2006 and July 2, 2005, respectively. For additional information regarding the activity related to our warranty accrual, refer to Note 5 “Professional Services Warranty” to our Condensed Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.

Stock Based Compensation

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

The calculation of stock based compensation requires the use of a valuation model and related assumptions. We use the Black-Scholes option pricing model to estimate the fair value of our share-based instruments. The use of the Black-Scholes option pricing model requires the use of subjective assumptions including an estimate of the volatility of our stock, the expected life of our share-based instruments, the expected forfeitures of share-based instruments, the expected dividend rate on our common stock and the risk free interest rates that can materially affect our fair value estimate of our share-based instruments. Changes in these estimates and assumptions could materially impact the calculation of stock based compensation.

Results of Operations

The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. The data has been derived from the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. The operating results for any period should not be considered indicative of the results expected for any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended July 2, 2005.


	Three Months Ended				Nine Months Ended
	April 1, 2006		April 2, 2005		April 1, 2006		April 2, 2005
Revenues:
Software license	38.2	%	28.8	%	33.4	%	38.9	%
Service	61.8		71.2		66.6		61.1

Total revenues	100.0		100.0		100.0		100.0

Cost of Revenues:
Software license	3.8		2.4		2.7		3.4
Amortization of purchased technology	0.5		0.7		0.6		0.6
Service	34.5		44.9		38.4		39.0

Total cost of revenues	38.8		48.0		41.7		43.0

Gross profit	61.2		52.0		58.3		57.0

Operating Expenses:
Selling and marketing	26.3		38.0		30.5		34.9
Research and development	16.4		28.9		20.6		23.5
General and administrative	13.3		10.1		14.8		8.8
Amortization of intangible assets	0.3		0.4		0.3		0.3

Total operating expenses	56.3		77.4		66.2		67.5

Income(Loss) from Operations	4.9		(25.4	)	(7.9	)	(10.5	)
Other income(expense), net	1.9		1.8		2.3		1.4

Income(Loss) Before Income Taxes	6.8		(23.6	)	(5.6	)	(9.1	)
Provision for income taxes	0.4		0.6		0.5		0.3

Net Income(Loss)	6.4	%	(24.2	)%	(6.1	)%	(9.4	)%

Comparison of the Three Months Ended April 1, 2006 and April 2, 2005

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

Software license revenues from our suite of software products, the number of software license transactions and the number of software license transactions in excess of $1.0 million for the three months ended April 1, 2006 and April 2, 2005 were as follows:


	Three Months Ended				Increase (Decrease)			Percentage Increase (Decrease)
(In thousands, except transaction volumes)	April 1, 2006		April 2, 2005		Increase (Decrease)			Percentage Increase (Decrease)
Matrix PLM Platform	$	4,415	$	2,455	$	1,960		79.8	%
Business Process Applications and MatrixOne Accelerators		9,094		4,253		4,841		113.8	%
Enterprise Integrations		3,179		1,081		2,098		194.1	%

Total software license revenues	$	16,688	$	7,789	$	8,899		114.3	%

Number of software license transactions recognized⁽¹⁾		70		64		6		9.4	%
Number of software license transactions in excess of $1.0 million recognized⁽¹⁾		2		—		2		100.0	%
_________ ⁽¹⁾ Excludes transactions recognized on a ratable basis. Software license revenues by geographic region fluctuate each period based on the timing, size and number of software license transactions. We report software license revenues in the geographic region of the customer placing the software license order. However, the customer may deploy software licenses in other geographic regions. Software license revenues by geographic region for the three months ended April 1, 2006 and April 2, 2005 were as follows:
	Three Months Ended				Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006		April 2, 2005		Increase (Decrease)			Percentage Increase (Decrease)
North America	$	11,301	$	2,081	$	9,220		443.1	%
Europe		4,578		3,583		995		27.8	%
Asia/Pacific		809		2,125		(1,316	)	(61.9	)%

Total software license revenues	$	16,688	$	7,789	$	8,899		114.3	%

Software license revenues increased during the three months ended April 1, 2006 due to the recognition of certain previously deferred software license transactions, an increase in the number of software license transactions, higher average software license transaction values and an increase in the number of software license transactions over $1.0 million due to improvement in technology spending, improvement in both the number and value of transactions with new customers, and significant expansions of existing customer implementations.

During the three months ended April 1, 2006, we recognized previously deferred software license transactions with six customers aggregating $4.2 million that met the applicable revenue recognition criteria during the period. Software license revenues for the three months ended April 1, 2006 also included the recognition of various previously deferred software license transactions such as the amortization of time based software licenses, software license revenues in Japan recognized ratably, and certain software license transactions recognized using contract accounting.

During the three months ended April 1, 2006, we recorded two software license transactions in excess of $1.0 million from customers located in North America. One was from a new customer and one was with an existing customer. Software license revenues in both North America and Europe increased during the three months ended April 1, 2006 due to the factors previously discussed, including the recognition of previously deferred software license transactions. Software license revenue in Asia/Pacific decreased due to the restructuring of our sales operations in Japan, ratable revenue recognition for software license transactions in Japan, and weakness in other regions in Asia.

Software license revenues from Matrix PLM Platform, Business Process Application and MatrixOne Accelerators and our Enterprise Integration offerings increased during the three months ended April 1, 2006 due to the factors previously discussed. Software license revenues from our MatrixOne Accelerators also increased as a result of recent introduction of our Apparel and Semiconductor Accelerators.

Service revenues. We provide services to our customers and systems integrators consisting of professional services, training and maintenance and customer support services. Our service revenues also include reimbursements received for out-of-pocket expenses incurred. Our professional services, which include implementation and consulting services, are primarily provided on a time and materials basis. Typically, our customers reimburse us for the majority of our out-of-pocket expenses incurred during the course of an engagement. We do not mark-up or add additional fees to the actual out-of-pocket expenses we incur. We also offer training services to our customers, distributors and systems integrators either in our offices throughout the world or at customer locations. Customers that license our products generally purchase annually renewable maintenance contracts, which provide customers with the right to receive unspecified software upgrades and technical support over the term of the contract. The components of our services revenues for the three months ended April 1, 2006 and April 2, 2005 were as follows:


	Three Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
Maintenance revenues	$	11,934		$	10,196		$	1,738		17.0	%
Professional services revenues		14,460			8,248			6,212		75.3	%
Training revenues		610			783			(173	)	(22.1	)%

Total service revenues	$	27,004		$	19,227		$	7,777		40.4	%


Maintenance as a percentage of service revenues		44.2	%		53.0	%

Service revenues increased during the three months ended April 1, 2006 due to an increase in both maintenance revenues and professional services revenues. Professional services revenues increased as a result of new consulting projects, expansion of existing consulting projects and the recognition of previously deferred professional services revenue primarily from six customers aggregating $4.7 million. Maintenance revenues increased as a result of incremental maintenance revenues related to the continued expansion of our customer base. Training revenues decreased due to the timing of new and existing customers attending training classes and customer purchases of our web-based training products.

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


	Three Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	April 1, 2006		April 2, 2005		Increase (Decrease)		Percentage Increase (Decrease)
Cost of software licenses	$	1,667	$	653	$	1,014	155.3	%
Amortization of purchased technology		199		199		—	0.0	%

Total cost of software licenses	$	1,866	$	852	$	1,014	119.0	%

Cost of software license revenues increased during the three months ended April 1, 2006 due to $0.6 million and $0.4 million increases in royalties related to our Enterprise Integration offerings, Business Process Applications, and MatrixOne Accelerators due to increased software license revenues from those products. Amortization of purchased technology relates to the identified intangible assets purchased in the Synchronicity acquisition, which are amortized on a straight-line basis over their estimated useful lives of three to seven years. We expect to incur amortization expense of approximately $0.2 million during the fourth quarter of fiscal 2006.

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


	Three Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	April 1, 2006		April 2, 2005		Increase (Decrease)		Percentage Increase (Decrease)
Cost of services	$	15,065	$	12,115	$	2,950	24.3	%

Cost of services increased $3.0 million during the three months ended April 1, 2006 due primarily to a $3.0 million increase in personnel costs primarily related to the recognition of costs for certain previously deferred professional services engagements recognized in the period, and a $0.2 million increase in stock based compensation. These increases were partially offset by a $0.2 million decrease in travel and other employee related expenses.

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


	Three Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
Gross profit on software license revenues	$	14,822		$	6,937		$	7,885		113.7	%
Gross profit on service revenues		11,939			7,112			4,827		67.9	%

Total gross profit	$	26,761		$	14,049		$	12,712		90.5	%


Gross margin on software license revenues		88.8	%		89.1	%		(0.3	)%
Gross margin on service revenues		44.2	%		37.0	%		7.2	%
Total gross margin		61.2	%		52.0	%		9.2	%

Percentage of total revenues derived from software license revenues		38.2	%		28.8	%		9.4	%
Percentage of total revenues derived from service revenues		61.8	%		71.2	%		(9.4	)%

Total gross profit increased during the three months ended April 1, 2006 primarily due to a increase in gross profit from software license revenues as a result of a increase in software license revenues, as well as an increase in gross profit and gross margin from services revenues due to an increase in professional services and maintenance revenues and related gross margins. Gross margin on software license revenues was consistent with the year ago period as a result of a consistent proportion of our software license revenues derived from our Enterprise Integration and Business Process Applications products, which bear software royalty costs. Gross margin on professional services increased as a result of continuing improvement in the gross margin on our professional services due to improvement in the utilization of our professional services personnel and an increase in maintenance revenues.

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


	Three Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
Selling and marketing expenses	$	11,496		$	10,271		$	1,225		11.9	%
Selling and marketing expenses as a percentage of total revenues		26.3	%		38.0	%		(11.7	)%

Selling and marketing expenses increased during the three months ended April 1, 2006 as a result of a $1.2 million increase in commission expense due to increased software license revenues and a $0.3 million increase in stock based compensation. These increases were partially offset by a $0.1 million decrease in other employee costs and a $0.2 million decrease in advertising and marketing programs.

Research and development. Research and development expenses include salaries, related expenses and stock based compensation expense related to employees and external costs incurred to develop our intellectual property and are charged to expense as incurred. To date, software development costs have been charged to expense as incurred because the costs incurred from the attainment of technological feasibility to general product release have been immaterial. Research and development costs may fluctuate based on the use of third-parties to assist in the development of our software products.


	Three Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
Research and development expenses	$	7,169		$	7,795		$	(626	)	(8.0	)%
Research and development expenses as a percentage of total revenues		16.4	%		28.9	%		(12.5	)%

Research and development expenses decreased during the three months ended April 1, 2006 primarily due to a $0.3 million decrease in personnel costs and a $0.4 million decrease in outside contractor and consultant costs, offset by a $0.1 million increase in stock based compensation expense.

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


	Three Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
General and administrative expenses	$	5,819		$	2,738		$	3,081		112.5	%
General and administrative expenses as a percentage of total revenues		13.3	%		10.1	%		3.2	%

General and administrative expense increased during the three months ended April 1, 2006 primarily due to a $2.1 million increase in professional fees which includes $1.4 million related to due diligence and other costs related to the proposed sale of the Company, a $0.6 million increase in contractor expense to assist the Company in filling open positions until certain functions can be transitioned to permanent employees, $0.3 million increase in personnel costs primarily related to additional personnel hired in order to strengthen our internal controls, and a $0.1 million increase in stock based compensation expense.

Amortization of intangible assets. Amortization of intangible assets consists of the amortization of the identified intangible assets related to customer contracts and related customer relationships and trademarks and trade names acquired in the Synchronicity and Centor acquisitions, which are amortized on a straight-line basis over the estimated useful lives of the assets of four to ten years. We expect to incur amortization expense of approximately $0.1 million during the fourth quarter of fiscal 2006.


	Three Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
Amortization of intangible assets	$	116		$	121		$	(5	)	(4.1	)%
Amortization of intangible assets as a percentage of total revenues		0.3	%		0.4	%		(0.1	)%	—

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


	Three Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	April 1, 2006		April 2, 2005		Increase (Decrease)		Percentage Increase (Decrease)
Other income(expense), net	$	812	$	498	$	314	63.1	%

Other income increased during the three months ended April 1, 2006 primarily due to increased interest income from higher yields on our investments.

Provision for income taxes. During the three months ended April 1, 2006 and April 2, 2005, we recorded a provision for income taxes of $0.1 million and $0.2 million, respectively, primarily related to minimum taxes due in certain domestic and foreign tax jurisdictions. During the three months ended April 1, 2006, we also recorded amortization of a deferred tax liability related to goodwill of $0.1 million.

Comparison of the Nine Months Ended April 1, 2006 and April 2, 2005

Software license revenues. Software license revenues from our suite of software products, the number of software license transactions and the number of software license transactions in excess of $1.0 million for the nine months ended April 1, 2006 and April 2, 2005 were as follows:


	Nine Months Ended				Increase (Decrease)			Percentage Increase (Decrease)
(In thousands, except transaction volumes)	April 1, 2006		April 2, 2005		Increase (Decrease)			Percentage Increase (Decrease)
Matrix PLM Platform	$	10,489	$	11,584	$	(1,095	)	(9.5	)%
Business Process Applications and MatrixOne Accelerators		18,740		17,819		921		5.2	%
Enterprise Integrations		5,180		6,244		(1,064	)	(17.0	)%

Total software license revenues	$	34,409	$	35,647	$	(1,238	)	(3.5	)%


Number of software license transactions recognized⁽¹⁾		205		249		(44	)	(17.7	)%
Number of software license transactions in excess of $1.0 million recognized⁽¹⁾		5		5		––		0	%

⁽¹⁾	Excludes transactions recognized on a ratable basis

Software license revenues by geographic region for the nine months ended April 1, 2006 and April 2, 2005 were as follows:


	Nine Months Ended				Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006		April 2, 2005		Increase (Decrease)			Percentage Increase (Decrease)
North America	$	19,853	$	16,009	$	3,844		24.0	%
Europe		12,343		13,419		(1,076	)	(8.0	)%
Asia/Pacific		2,213		6,219		(4,006	)	(64.4	)%

Total software license revenues	$	34,409	$	35,647	$	(1,238	)	(3.5	)%

Software license revenues decreased during the nine months ended April 1, 2006 as a result of a decrease in the number of software license transactions in both the first two fiscal quarters of 2006 due to weakness in technology spending and uncertainty regarding the Company as a result of the restatement. During the nine months ended April 1, 2006, we recognized software license transactions from five customers that were deferred in a prior fiscal year aggregating $3.5 million that met the applicable revenue recognition criteria during the period. Software license revenues for the nine months ended April 1, 2006, also included the recognition of various previously deferred software license transactions such as the amortization of time based software licenses, software license revenue in Japan recognized ratably, and certain software license transactions recognized using contract accounting.

Software license revenues in North America increased due to the recognition of previously deferred software license transactions, an increase in software license revenue from new customers, a higher average value per software license transaction and two additional software license transactions over $1.0 million. Software license revenues in Europe decreased during the nine months ended April 1, 2006 due to a decrease in the number of software license transactions and license transactions in excess of $1.0 million, offset by the recognition of

previously deferred software license transactions. Software license revenue in Asia/Pacific decreased due to the restructuring of our sales operations in Japan, ratable revenue recognition for software license transactions in Japan, and weakness in other regions in Asia.

Software license revenues from our Matrix PLM Platform decreased primarily due to a decrease in the number of software license transactions. Software license revenues from our Business Process Applications and MatrixOne Accelerators increased as a result of an increase in software license revenues from new customers, adoption of our Business Process Applications by our existing customers and the recent introduction of our Apparel and Semiconductor Accelerators. During the nine months ended April 2, 2005, software license revenues from Enterprise Integration products were higher due to the introduction of several new software product offerings in fiscal 2005. Software license revenues from these offerings were significantly lower during the nine months ended April 1, 2006.

Service revenues. The components of our service revenues for the nine months ended April 1, 2006 and April 2, 2005 were as follows:


	Nine Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
Maintenance revenues	$	33,685		$	29,078		$	4,607		15.8	%
Professional services revenues		33,079			24,697			8,382		33.9	%
Training revenues		1,764			2,117			(353	)	(16.7	)%

Total service revenues	$	68,528		$	55,892		$	12,636		22.6	%

Maintenance as a percentage of service revenues		49.2	%		52.0	%

Service revenues increased during the nine months ended April 1, 2006 due to an increase in both professional services and maintenance revenues. Professional services revenues increased as a result of new consulting projects, expansion of existing consulting projects and the recognition of professional services revenue deferred in a prior fiscal year from five customers aggregating approximately $3.8 million. Maintenance revenues increased as a result of incremental maintenance revenues related to the continued expansion of our customer base. Training revenues decreased due to the timing of new and existing customers attending training classes and customer purchases of our web-based training products.

Cost of software licenses.


	Nine Months Ended				Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006		April 2, 2005		Increase (Decrease)			Percentage Increase (Decrease)
Cost of software licenses	$	2,764	$	3,067	$	(303	)	(9.9	)%
Amortization of purchased technology		598		531		67		12.6	%

Total cost of software licenses	$	3,362	$	3,598	$	(236	)	(6.6	)%

Cost of software licenses decreased during the nine months ended April 1, 2006 due to a $0.4 million decrease in royalties related to certain of our Enterprise Integration offerings due to decreased software license revenues from these products offset by a $0.1 million increase in royalties related to certain of our Business Process Applications due to increased software license revenues from these products.

Cost of services.


	Nine Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	April 1, 2006		April 2, 2005		Increase (Decrease)		Percentage Increase (Decrease)
Cost of services	$	39,482	$	35,688	$	3,794	10.6	%

Cost of services increased during the nine months ended April 1, 2006 primarily due to a $2.6 million increase in personnel costs, a $1.5 million increase in offshore, domestic and international contractor expense to support our new consulting projects and expansion of existing consulting projects, a $0.5 million increase in stock based compensation, and a $0.4 million increase in royalty expenses due to an increase in maintenance revenues related to certain of our royalty bearing software products. These increases were offset by a $0.4 million decrease in travel and other employee expenses, a $0.3 million decrease in rent and facilities expenses, and a $0.5 million decrease in depreciation, maintenance, utilities, and other expenses.

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


	Nine Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
Gross profit on software license revenues	$	31,047		$	32,049		$	(1,002	)	(3.1	)%
Gross profit on service revenues		29,046			20,204			8,842		43.8	%

Total gross profit	$	60,093		$	52,253		$	7,840		15.0	%


Gross margin on software license revenues		90.2	%		89.9	%		0.3	%
Gross margin on service revenues		42.4	%		36.1	%		6.3	%
Total gross margin		58.3	%		57.0	%		1.3	%

Percentage of total revenues derived from software license revenues		33.4	%		38.9	%		(5.5	)%
Percentage of total revenues derived from service revenues		66.6	%		61.1	%		5.5	%

Total gross profit and gross margin increased during the nine months ended April 1, 2006 primarily due to an increase in gross profit from service revenues due to an increase in professional services and maintenance revenues and related gross margins. Gross margin on software license revenues remained relatively flat as a result of a consistent proportion of our software license revenues derived from our Enterprise Integration and Business Application products, which bear software royalty cost. Gross margin on professional services increased as a result of continuing improvement in the gross margin on our professional services due to the improvement in the utilization of our professional services personnel, and an increase in maintenance revenues.

Selling and marketing.


	Nine Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
Selling and marketing expenses	$	31,373		$	31,974		$	(601	)	(1.9	)%
Selling and marketing expenses as a percentage of total revenues		30.5	%		34.9	%		(4.4	)%

Selling and marketing expenses decreased during the nine months ended April 1, 2006 primarily due to a $0.4 million decrease in travel and other employee expenses, a $0.5 million decrease in marketing and events expenses and a $0.3 million decrease in outside contractors and consultants expenses as a result of our cost containment efforts. These decreases were partially offset by a $0.6 million increase related to stock based compensation and a $0.1 million increase in salaries expense.

Research and development.


	Nine Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
Research and development expenses	$	21,203		$	21,530		$	(327	)	(1.5	)%
Research and development expenses as a percentage of total revenues		20.6	%		23.5	%		(2.9	)%

Research and development expenses decreased during the nine months ended April 1, 2006 primarily due to a $0.8 million decrease in contractor costs as a result of our cost containment efforts, a $0.1 million decrease in travel expenses, and a $0.1 million decrease in depreciation and other expenses. These decreases were partially offset by $0.3 million increase in personnel and related expenses and a $0.4 million increase in stock based compensation.

General and administrative.


	Nine Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
General and administrative expenses	$	15,239		$	8,020		$	7,219		90.0	%
General and administrative expenses as a percentage of total revenues		14.8	%		8.8	%		6.0	%

General and administrative expenses increased during the nine months ended April 1, 2006 primarily due to a $5.1 million increase in legal and accounting expenses primarily related to the financial review and restatement completed in November 2005 and due diligence and other costs related to the proposed sale of the Company, and a $1.2 million increase in contractor expense to assist the Company in the completion of the financial review and restatement and to fill open positions until certain functions can be transitioned to permanent employees. In addition, the increase relates to a $0.6 million increase in personnel costs primarily related to additional personnel hired in order to strengthen our internal controls and a $0.3 million increase in stock based compensation.

Amortization of Intangible Assets.


	Nine Months Ended						Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)		Percentage Increase (Decrease)
Amortization of intangible assets	$	348		$	297		$	51	17.2	%
Amortization of intangible assets as a percentage of total revenues		0.3	%		0.3	%		—

Other income(expense).


	Nine Months Ended				Increase (Decrease)		Percentage Increase (Decrease)
(In thousands)	April 1, 2006		April 2, 2005		Increase (Decrease)		Percentage Increase (Decrease)
Other income(expense), net	$	2,283	$	1,253	$	1,030	82.2	%

Other income increased during the nine months ended April 1, 2006 primarily due to increased interest income from higher yields on our investments.

Provision for income taxes. During the nine months ended April 1, 2006 and April 2, 2005, we recorded a provision for income taxes of $0.3 million, primarily related to minimum taxes due in certain domestic and foreign tax jurisdictions. During the nine months ended April 1, 2006, we also recorded amortization of a deferred tax liability related to goodwill of $0.2 million.

Liquidity and Capital Resources

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


	As of				Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006		July 2, 2005		Increase (Decrease)			Percentage Increase (Decrease)
Cash and cash equivalents	$	99,662	$	107,677	$	(8,015	)	(7.4	)%
Working capital	$	77,047	$	79,386	$	(2,339	)	(2.9	)%

During the nine months ended April 1, 2006, our cash and cash equivalents and working capital decreased primarily due to our loss from operations.

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


	Nine Months Ended						Increase (Decrease)			Percentage Increase (Decrease)
(In thousands)	April 1, 2006			April 2, 2005			Increase (Decrease)			Percentage Increase (Decrease)
Net cash used in operating activities	$	(9,452	)	$	(6,228	)	$	(3,224	)	(51.8	)%
Net cash used in investing activities	$	(386	)	$	(8,010	)	$	7,624		95.2	%
Net cash provided by (used in) financing activities	$	1,920		$	(82	)	$	2,002		2441.5	%


	Three Months Ended
	April 1, 2006	April 2, 2005
Days sales outstanding	66	100

Net cash used in operating activities during the nine months ended April 1, 2006 resulted primarily from our net loss, decreases in accrued expenses, which includes the payment of expenses related to the financial review and restatement and certain personnel related costs, a decrease in deferred revenues due primarily to the timing of recognition of certain previously deferred transactions, and an increase in accounts receivable due to the increase in revenue and the timing of sales transactions. These uses of cash were partially offset by a reduction in prepaid expenses due to recognition of costs related to previously deferred revenue transactions, and non-cash depreciation, amortization and stock based compensation. Net cash used in operating activities during the nine months ended April 2, 2005 resulted primarily from our net loss and an increase in prepaid expenses and other current assets due to the deferral of costs related to certain deferred revenue transactions, offset by non-cash depreciation and amortization of purchased technology and intangible assets and an increase in deferred revenues.

Net cash used in investing activities for the nine months ended April 1, 2006 reflects our investments in computer hardware and software, leasehold improvements and office furniture and equipment of $0.8 million. Net cash used in investing activities for the nine months ended April 2, 2005 reflects net cash payments related to acquisitions aggregating approximately $6.6 million, and our investments in computer hardware and software, leasehold improvements and office furniture and equipment of $1.4 million.

Net cash provided by financing activities for both the nine months ended April 1, 2006 and April 2, 2005 includes proceeds from stock option exercises and purchases of common stock under our employee stock purchase plan of $1.9 million and $1.4 million, respectively. Additionally, net cash used in financing activities for the nine months ended April 2, 2005 includes the $1.5 million repayment of a line of credit assumed in the Synchronicity acquisition.

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

terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund an expansion of our business, take advantage of unanticipated opportunities or develop or enhance our services or products would be significantly limited.

Recently Issued Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FAS Statement No. 3” (“SFAS 154”). SFAS 154 changes the requirements for the accounting and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS 154 requires that changes in accounting principle be retrospectively applied. The correction of an error continues to be reported as a prior period adjustment by restating prior period financial statements as of the beginning of the first period presented. SFAS 154 will be effective for the Company beginning in fiscal year 2007. We do not expect the adoption of SFAS 154 to have a material effect on our consolidated financial statements.

In February 2006, the Financial Accounting Standards Board issued a Staff Position related to FAS 123(R) and cash settlement of options upon the occurrence of a contingent event. As part of the Agreement and Plan of Merger described in the Business Overview on page 18, our stock options will be settled in cash upon closing of the merger. However, due to the number of unsatisfied requirements, including regulatory clearance and stockholder approval, existing at April 1, 2006, we determined that settlement of the options in cash was not probable at April 1, 2006 and therefore, the options have not been recorded as a liability in our financial statements as of April 1, 2006.

Commitments and Contractual Obligations

Our commitments and contractual obligations that we guarantee or for which we owe minimum fees primarily consist of operating leases for facilities, automobiles and office equipment, product development agreements under which we pay fees to third-parties for development or assistance in development of certain Business Process Applications and Enterprise Integration software, and other contractual arrangements to support certain programs or activities. Our commitments and contractual obligations that we guarantee or for which we have minimum fees due consisted of the following as of April 1, 2006:


(In thousands)	Remainder of 2006		2007		2008		2009		2010		Thereafter
Leases	$	1,157	$	3,594	$	2,958	$	2,168	$	1,882	$	972
Development agreements		740		—		—		—		—		—
Minimum royalty fees		13		13		—		—		—		—
Other contractual arrangements		294		639		2		—		—		—

	$	2,204	$	4,246	$	2,960	$	2,168	$	1,882	$	972

We do not have any other commitments or contractual obligations in addition to those set forth above and those included in our condensed consolidated financial statements as of April 1, 2006.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as of April 1, 2006.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have foreign subsidiaries in Austria, Canada, England, France, Germany, Italy, Japan, Korea, Singapore and the Netherlands. Our international revenues and expenses are generally transacted from our foreign subsidiaries in their respective countries and are typically denominated in local currency. Approximately 36.3%, 35.8% and 40.9% of our total revenues for the nine months ended April 1, 2006, fiscal 2005 and fiscal 2004, respectively, were from our foreign subsidiaries. In addition, approximately 26.2%, 26.6% and 29.0% of our expenses for the nine months ended April 1, 2006, fiscal 2005 and fiscal 2004, respectively, were from our foreign subsidiaries. At April 1, 2006 and July 2, 2005, approximately 26.8% and 23.9%, respectively, of our total assets were located at our foreign subsidiaries.

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

Our exposure to foreign currency exchange rate fluctuations also arises in part from intercompany transactions. Our intercompany transactions are typically denominated in the local currency of the foreign subsidiary in order to centralize foreign currency risk at the parent company in the United States. The parent company and our foreign subsidiaries may also transact business in a currency other than the local currency. Our foreign currency hedging program is principally designed to mitigate the future potential impact of changes in the value of transactions denominated in a currency other than the local currency as a result of changes in foreign currency exchange rates, which may impact our results of operations. Our foreign currency hedging program is not designed, nor do we enter into foreign currency contracts, to mitigate translation risk. We use forward contracts to reduce our exposure to foreign currency risk due to fluctuations in exchange rates underlying the value of accounts receivable and accounts payable and intercompany accounts receivable and intercompany accounts payable denominated in a currency other than the local currency. A forward contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates. These forward contracts are denominated in the same currency in which the underlying foreign currency receivables or payables are denominated and bear a contract value and maturity date that approximate the value and expected settlement date, respectively, of the underlying transactions. Unrealized gains and losses on open contracts at the end of each accounting period, resulting from changes in the fair value of these contracts, are recognized in earnings in the same period as gains and losses on the underlying foreign denominated receivables or payables are recognized and generally offset. Gains and losses on forward contracts and foreign denominated receivables and payables are included in other income(expense), net. We do not enter into or hold derivatives for trading or speculative purposes, and we only enter into forward contracts with highly rated financial institutions. At April 1, 2006 and April 2, 2005, we had no forward contracts outstanding.

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

We deposit our cash in highly rated financial institutions in North America, Europe and Asia/Pacific. We primarily invest in diversified United States and international money market mutual funds and United States Treasury and agency securities. At April 1, 2006, we had $66.7 million and $19.3 million invested in the United States and Continental Europe, respectively. At April 1, 2006, the weighted average interest rate on our investments was 4.06% per annum. Due to the short-term nature of our investments, we believe we have minimal market risk.

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

ITEM 4: CONTROLS AND PROCEDURES

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

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of April 1, 2006, which included an evaluation of disclosure controls and procedures applicable to the period covered by the filing of this periodic report. Based on this evaluation, and due to the material weaknesses in our internal control over financial reporting referenced below in this Quarterly Report on Form 10-Q and as described in our Annual Report on Form 10-K for the fiscal year ended July 2, 2005 filed with the Securities and Exchange Commission on November 9, 2005, our disclosure controls and procedures were not effective as of April 1, 2006 to ensure that the information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms.

As we previously disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2005, in the third quarter of fiscal 2005, a new manager at our Japanese subsidiary discovered a side letter, a violation of our policy, which granted a distributor an unauthorized right to return certain of our software products. The manager informed our U.S. management about the side letter, who in turn notified our independent auditors and the Audit Committee of the Board of Directors. The Audit Committee of our Board of Directors launched a review of our revenue recognition practices. As a result of the review, we concluded that certain managers and employees, principally in Japan, did not comply with our revenue recognition policies, and did not provide accurate information to us concerning arrangements included as revenue in our consolidated financial statements. Based on the review, management and the Audit Committee concluded that these errors in revenue recognition, which primarily result in the deferral of revenue into later periods than originally recognized, required us to restate previously reported financial results. The restatement affected previously reported results from fiscal 1999 through the second quarter of fiscal 2005. We completed the restatement on November 8, 2005 upon which day we filed with the Securities and Exchange Commission our Quarterly Report on Form 10-Q for the three and nine month periods ended April 2, 2005 and our Annual Report on Form 10-K for the fiscal year ended July 2, 2005.

In connection with the restatement, we assessed the effectiveness of our internal control over financial reporting as required under Section 404 of the Sarbanes Oxley Act of 2002 and Item 308 of Regulation S-K. We identified and reported to our Audit Committee and independent registered public accounting firm material weaknesses in our internal control over financial reporting, as they existed as of July 2, 2005. These material weaknesses include entity-level control weaknesses as well as weaknesses in process and transaction controls as defined in the Committee of Sponsoring Organizations of the Treadway Commission (COSO) criteria.

The nature of each of these material weaknesses is as follows:

Inadequate communication and monitoring of policies and procedures. We do not have sufficient communication to employees regarding their duties and control responsibilities, and monitoring by management, to ensure adherence by our employees to our code of business conduct and revenue recognition policy; and we do not have sufficient communication with our employees, and monitoring by management, to ensure timely notification of actual or perceived violations of our policies and procedures. We consider these to be a deficiency that is also a material weakness in the operation of entity-level controls. If we are not successful in remedying the deficiencies that caused this material weakness, our quarterly or annual financial statements could be materially misstated, which would require a restatement.

Inadequate staffing and lack of certain requisite skills and competencies within the finance and accounting organization. We do not have a sufficient number of experienced personnel in our accounting and finance organization to facilitate the financial statement close process and permit the preparation of our financial statements in accordance with generally accepted accounting principles. Our personnel also lack certain required skills and competencies to oversee the accounting operations and review, periodically inspect and test, and investigate the transactions of our foreign locations and ensure sufficient segregation of duties and financial management to permit the preparation of financial statements in accordance with generally accepted accounting principles. We consider this to be a deficiency that is also a material weakness in the operation of entity-level controls. If we are not successful in remedying the deficiencies that caused this material weakness, our quarterly or annual financial statements could be materially misstated, which would require a restatement.

Inadequate processes, personnel with requisite skills and competencies, and oversight to identify the full scope of our arrangements with our customers. We do not have adequate staffing or personnel with requisite skills and competencies, revenue recognition processes, financial systems and controls, and management oversight to reasonably a) ensure the prevention and detection of unauthorized arrangements with customers, b) ensure the prevention and detection of concessions primarily related to maintenance terms and conditions, c) ensure that documentation of vendor specific objective evidence of services was sufficient; and d) evaluate the associated accounting implications. We do not have a sufficient number of personnel or personnel with requisite skills and competencies in our accounting and finance organization to provide reasonable assurance that complex multiple element arrangements were being recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles. If we are not successful in remedying the deficiencies that caused this material weakness, our quarterly or annual financial statements could be materially misstated, which would require a restatement.

During the quarter ended July 2, 2005, we made changes, described below, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting and assist us in remediating these weaknesses:

•

We established a new policy that required that all sales personnel certify as to the awareness of any unauthorized arrangements and other commitments with customers.

•

We established a new policy that required all sales personnel to certify on a transaction by transaction basis whether they are aware of any unauthorized arrangements and other commitments with customers.

•

We amended our existing indirect channel revenue recognition policy and related written confirmation process to require additional information regarding terms and conditions between the indirect channel partner and the related end user, certain additional end user information and a copy of certain arrangements between the end user and the indirect channel partner.

•

We evaluated and began to implement more comprehensive procedures for the timely detection, prevention, and mitigation of improper activities.

•

We engaged a professional foreign language translation firm and used certain technology to assist in the independent translation of certain transactional documents and other foreign language arrangements.

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

During the three months ended December 31, 2005, we made further changes, described below, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting and assist us in remediating these weaknesses:

•

We implemented new revenue recognition policies and procedures to document, evaluate and account for the multiple elements of and arrangements with our customers.

•

We engaged senior finance professionals to assist in the oversight, evaluation and execution of our revenue related activities.

•

We implemented a new certification process for employees who report to the members of our disclosure committee to ensure important business arrangements and issues and violations of our policies and procedures are promptly reported to members of our disclosure committee.

•

We provided revenue recognition training to substantially all employees.

During the three months ended April 1, 2006, we made further changes, described below, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting and assist us in remediating these weaknesses:

•

We have created, staffed and trained a new sales operations group, consisting of senior level personnel transferred primarily from our professional services organization, to oversee the sales and professional services activities throughout the evolution of a customer arrangement, including but not limited to review and approval of responses to requests for proposals, customer communications, statements of work, customer proposals and professional services engagements.

•

We have engaged an external accounting firm to assist with periodic internal audit reviews of the financial activities of our international operations.

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

•

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

•

We plan to expand the internal audit process to include a review of the financial activities of both our domestic and international operations.

•

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

•

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

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

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

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

PART II – OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

On December 2, 2005, plaintiffs holding shares of MatrixOne, Inc. common stock filed a lawsuit in the Delaware Court of Chancery against MatrixOne’s board of directors: Oliver Press Partners, LLC, Davenport Partners, L.P., Pierson Partners, L.P., and Sidus Investment Management v. W. Patrick Decker, Gregory R. Beecher, Daniel J. Holland, Mark F. O’Connell, David G. DeWalt, and Charles R. Stuckey, Jr., C.A. No. 1817-N (Del. Ch.). Plaintiffs challenge the application of the Company’s advance notice bylaw, adopted in March 2000, that requires that nominations to MatrixOne’s board of directors be submitted within a specified period prior to MatrixOne’s annual meeting of stockholders (the “Advance Notice Bylaw”). On December 2, 2005, plaintiffs purported to nominate a slate of two directors for election at MatrixOne’s 2005 annual meeting, which was scheduled to occur December 22, 2005. Because the Advance Notice Bylaw operated to prevent a vote on plaintiffs’ alternative slate of directors at the annual meeting, plaintiffs alleged that the Advance Notice Bylaw was unreasonable and that the directors breached their fiduciary duties of loyalty and care to plaintiffs by adopting and applying the Advance Notice Bylaw. Plaintiffs sought a declaration that the Advance Notice Bylaw is invalid and inequitable as applied to them, a declaration that their slate of directors is valid and must be voted on at the 2005 annual meeting, and an order compelling the rescheduling of the annual meeting to January 2006. At the same time that plaintiffs filed their complaint, they also filed a motion to expedite proceedings, seeking expedited discovery and trial proceedings in advance of the December 22, 2005 annual meeting. On December 6, 2005, the court denied plaintiffs’ motion and ordered the parties to confer upon and submit a scheduling order. On March 3, 2006, the parties filed a stipulation of dismissal with the Delaware Court of Chancery to dismiss the case without prejudice.

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

In June 2003, we, implementing the determination made by a special independent committee of the Board of Directors, elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If ultimately approved by the Court, this proposed settlement would result in a dismissal, with prejudice, of all claims in the litigation against us and against any of the other issuer defendants who elect to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were

named as individual defendants. The proposed settlement does not provide for the resolution of any claims against the underwriter defendants, and the litigation as against those defendants is continuing. The proposed settlement provides that the class members in the class action cases brought against the participating issuer defendants will be guaranteed a recovery of $1.0 billion by insurers of the participating issuer defendants. If recoveries totaling $1.0 billion or more are obtained by the class members from the underwriter defendants, however, the monetary obligations to the class members under the proposed settlement will be satisfied. In addition, we and any other participating issuer defendants will be required to assign to the class members certain claims that they may have against the underwriters of their IPOs.

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

Consummation of the proposed settlement is conditioned upon obtaining final approval by the Court. On September 1, 2005, the Court preliminarily approved the proposed settlement, directed that notice of the terms of the proposed settlement be provided to class members. Thereafter, the Court held a fairness hearing on April 24, 2006, at which objections to the proposed settlement will be heard. After the fairness hearing, the Court took under advisement whether to grant final approval to the proposed settlement.

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

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

ITEM 1A: RISK FACTORS

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

The Price of Our Common Stock May Decline if We Fail to Complete the Proposed Plan of Merger

The price of our common stock has increased significantly since the announcement of the proposed plan of merger. On the day of the announcement of the proposed plan of merger, the price of our common stock increased from $6.01 to $7.14, and the price of our common stock on March 31, 2006 was $7.16. If we fail to complete the proposed plan of merger, the price of our common stock may decline.

Failure to Complete the Proposed Plan of Merger or Failure to Complete the Proposed Plan of Merger in a Timely Manner Could Result in Substantial Cost to the Company and Diversion of Management’s Time

Certain provisions of the Agreement and Plan of Merger with Dassault Systèmes allow for fees payable upon termination of the merger agreement. These provisions include:

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if we consummate an acquisition proposal or enter into an alternative acquisition agreement or if the merger agreement is terminated, we will, under certain circumstances, be required to pay to Dassault Systèmes a termination fee in an amount of $14.0 million, or

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if the merger agreement is terminated, we will, under certain circumstances, be required to pay to Dassault Systèmes up to $2.0 million as reimbursement for expenses of Dassault Systèmes actually incurred relating to the transactions contemplated by this Agreement prior to termination.

In addition, uncertainty related to the merger transaction may require us to spend additional time or money on integration efforts that would otherwise be spent on developing our business or on other matters. If we do not integrate our operations and technology successfully or if management spends excessive time on integration issues, it could harm our business, financial condition and results of operations and diminish the benefits of the merger as well as harm our existing business.

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

As a result of our assessment of the effectiveness of our internal control over financial reporting as of July 2, 2005 as required under Section 404 of the Sarbanes-Oxley Act of 2002 and Item 308 of Regulation S-K, we identified material weaknesses in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) in our Annual Report on Form 10-K for the fiscal year ended July 2, 2005. For a description of these material weaknesses including the nature of each material weakness, the remedial measures implemented by us to date beginning in our fourth fiscal quarter of 2005 and the actual or potential effects on our financial statements, please see “Management’s Report on Internal Control over Financial Reporting” and “Item 9A. Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended July 2, 2005 filed on November 9, 2005 as well as Item 4 included herein. Our management also evaluated the effectiveness of our disclosure controls and procedures and, due to these material weaknesses, our disclosure controls and procedures were not effective as of April 1, 2006 to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms.

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

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

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

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

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

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

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

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

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

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

We have incurred substantial net losses in the past, and we may incur net losses in future periods. We incurred net losses of approximately $6.3 million, $20.3 million and $12.4 million in the nine months ended April 1, 2006, fiscal 2005 and fiscal 2004, respectively. As of April 1, 2006, we had an accumulated deficit of approximately $134.3 million. We will need to generate increases in revenues to achieve and maintain profitability, and we may not be able to do so. If our revenues grow more slowly than we anticipate or decline or if our operating expenses increase more than we expect or cannot be reduced in the event of lower revenues, our business will be significantly and adversely affected. Although we have implemented restructuring programs to better align our operations and cost structure with market conditions, these programs may not be sufficient for us to achieve profitability in any future period. Even if we achieve profitability in the future on a quarterly or annual basis, we may not be able to sustain or increase profitability. Failure to achieve profitability or achieve and sustain the level of profitability expected by investors and securities analysts may adversely affect the market price of our common stock.

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

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

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

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

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

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

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

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changes in the mix of domestic and international revenues;

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

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

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the application of complex revenue recognition rules for customer arrangements.

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

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

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

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

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

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

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

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

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

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

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

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

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meet evolving customer requirements; and

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

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

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

We believe that revenues from licenses of our software, together with revenues from related professional services, training and maintenance and customer support services, will account for substantially all of our revenues for the foreseeable future. Our future financial performance will depend on market acceptance of our software, including our Matrix PLM Platform, Business Process Applications, Enterprise Integration and Accelerator products, and any upgrades or enhancements that we may make to our products in the future. As a result, if our software does not achieve and maintain widespread market acceptance, we may not achieve

anticipated revenues. In addition, if our competitors release new products that are superior to our software, demand for our products may not accelerate and could decline. If we are unable to increase the number and scope of our Business Process Applications, Enterprise Integration and MatrixOne Accelerator products or ship or implement any upgrades or enhancements to our products when planned, or if the introduction of upgrades or enhancements causes customers to defer orders for our existing products, we also may not achieve anticipated revenues.

We Will Not Succeed Unless We Can Compete in Our Markets

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

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larger and more established selling and marketing capabilities;

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significantly greater financial, engineering and other resources;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our international revenues and expenses are generally transacted by our foreign subsidiaries in their respective countries and are typically denominated in local currency. Approximately 36.3%, 35.8% and 40.9% of our total revenues for the nine months ended April 1, 2006, fiscal 2005 and fiscal 2004, respectively, were from our foreign subsidiaries. In addition, approximately 26.2%, 26.6% and 29.0% of our expenses for the nine months ended April 1, 2006, fiscal 2005 and fiscal 2004, respectively, were from our foreign subsidiaries. At April 1, 2006 and July 2, 2005, approximately 26.8% and 23.9%, respectively, of our total assets were located at our foreign subsidiaries. Many of our customers have operations in numerous locations around the globe. In order to attract, retain and service multi-national customers, we have to maintain strong direct and indirect sales and support organizations in Europe and Asia/Pacific. Our ability to penetrate international markets may be impaired by resource constraints and our ability to hire qualified personnel in foreign countries. We face a number of risks associated with conducting business internationally, which could negatively impact our operating results, including, without limitation:

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

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

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

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

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

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currency fluctuations and exchange rates;

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limitations on repatriation of earnings of our foreign operations;

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

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

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multiple and possibly overlapping tax structures;

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

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language barriers;

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the need to consider numerous international product characteristics;

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different accounting practices;

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import/export duties and tariffs, quotas and controls;

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complex and inflexible employment laws;

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economic or political instability in some international markets; and

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conflicting international business practices.

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

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

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

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

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

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

Systems integrators often are retained by our customers to implement our products. If experienced systems integrators are not available to implement our products, we may be required to provide these services internally, and we may not have sufficient resources to meet our customers’ implementation needs on a timely basis. Use of our professional services personnel to implement our products would also increase our expenses. In addition, we cannot control the level and quality of service provided by our current and future implementation partners. If these systems integrators do not perform to the satisfaction of our customers, our customers could become dissatisfied with our products, which could adversely affect our business and operating results.

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

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

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

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

Certain Software We Use is from Open Source Code Sources Which Under Certain Circumstances May Lead to Increased Costs

Some of our products utilize software from open source code sources. The use of such open source code may subject us to certain conditions, including the obligation to offer our products that use open source code for no cost. We monitor our use of such open source code to avoid subjecting our products to conditions we do not intend. However, the use of such open source code may ultimately subject some product(s) to unintended conditions so that we are required to take remedial action that may divert resources away from our development efforts. We believe that the use of such open source code will not have a significant impact on our operations and that our products will be viable after any remediation efforts. However, there can be no assurance that future conditions involving such open source code will not have an adverse impact on our business, financial condition, operating results, and cash flow.

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

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

Our Business May be Adversely Affected by Securities Litigation

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

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

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

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

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

The trading price of our common stock has been highly volatile and has fluctuated significantly in the past. During the nine months ended April 1, 2006, our stock price fluctuated between a low bid price of $4.36 per share and a high bid price of $7.20 per share, and during fiscal 2005, our stock price fluctuated between a low bid price of $3.87 per share and a high bid price of $7.08 per share. We believe that the price of our common stock may continue to fluctuate significantly in the future in response to a number of events and factors relating to our company, our competitors, the market for our products and services and the global economy, many of which are beyond our control, such as:

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variations in our quarterly operating results;

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changes in financial estimates and recommendations by securities analysts;

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changes in market valuations of software companies;

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

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

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additions or departures of key personnel;

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

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

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

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news relating to trends in our markets; and

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

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

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

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

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authorizing the issuance of undesignated preferred stock;

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

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

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limiting the persons who may call special meetings of stockholders;

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prohibiting stockholder action by written consent; and

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

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

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 29, 2000, the Securities and Exchange Commission declared effective our registration statement on Form S-1 (File No. 333-92731), relating to the initial public offering of our common stock, and we did a concurrent private placement of common stock. We expect to continue to use the net proceeds from the initial public offering and the concurrent private placement for general corporate purposes, including to expand our selling and marketing and services organizations, develop new distribution channels, expand our research and development efforts, improve our operational and financial systems and for other working capital purposes, and to acquire or invest in complementary businesses, products or technologies. Currently, we have no specific understandings, commitments or agreements with respect to any such acquisition or investment. Except as set forth below, we have not allocated any portion of the net proceeds for any specific purpose. Our actual use of the net proceeds from the initial public offering and the concurrent private placement may differ from the uses we have identified. Pending these uses, the net proceeds of the offering and the concurrent private placement will be invested in short-term, interest-bearing, investment-grade securities. Through April 1, 2006, we have used the proceeds from the initial public offering and concurrent private placement to (a) pay for the offering expenses, (b) fund approximately $13.2 million in investments in leasehold improvements, computer hardware and software and office furniture, (c) acquire certain businesses and technology aggregating $6.6 million of cash consideration, (d) repurchase $1.0 million of our common stock, and (e) fund approximately $21.8 million of working capital to support our operations.

On August 4, 2004, we acquired Synchronicity Software, Inc. (“Synchronicity”) for approximately $4.5 million in cash and approximately 2.3 million shares of our common stock valued at $5.37 per share, based on the average of the closing prices of our common stock on the NASDAQ National Market for the fifteen trading days immediately preceding the last trading day immediately preceding the closing date. The shares of our common stock were issued to holders of Synchronicity convertible notes and shares of certain series of Synchronicity preferred stock in reliance upon the registration exemption of Section 4(2) and Rule 506 of the Securities Act of 1933, as amended, based on information regarding those holders.

ITEM 6: EXHIBITS

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

SIGNATURES

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


	MATRIXONE, INC.

Dated: May 3, 2006	By:	/s/ Gary D.Hall
		Gary D. Hall
		Senior Vice President of Finance, Chief Financial Officer and Treasurer (principal financial and accounting officer)

EXHIBIT INDEX


Exhibit No.		Description

2.1		Agreement and Plan of Merger, dated as of March 1, 2006, by and among MatrixOne, Inc., Dassault Systemes Corp. and DS Newco Corp., incorporated herein by reference to the Company’s Report on Form 8-K dated March 1, 2006, filed on March 2, 2006

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

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

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

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

MATRIXONE INC 10-Q