BMC SOFTWARE INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MARCH 31, 2002

OR

[ ] 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 0-17136

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BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 74-2126120
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS
(Address of principal executive offices)

77042-2827
(Zip code)

Registrant's telephone number, including area code: (713) 918-8800

Securities Registered Pursuant to Section 12(b) of the Act:

COMMON STOCK, PAR VALUE $.01 PER SHARE

Securities Registered Pursuant to Section 12(g) of the Act:

NONE

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

The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of the
registrant's Common Stock on June 10, 2002 was $3,877,303,430.

As of June 10, 2002, there were outstanding 241,170,246 shares of Common
Stock, par value $.01, of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference in this
report:

Current Report on Form 8-K filed March 22, 2002 (Item 9. of this Report)

Definitive Proxy Statement filed in connection with the registrant's Annual
Meeting of Stockholders currently scheduled to be held on August 29, 2002 (Part
III of this Report)

Such Proxy Statement shall be deemed to have been "filed" only to the extent
portions thereof are expressly incorporated by reference.

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This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
identified by the use of the words "believe," "expect," "anticipate," "will,"
"contemplate," "would" and similar expressions that contemplate future events.
Numerous important factors, risks and uncertainties affect our operating
results, including, without limitation, those contained in this report, and
could cause our actual results to differ materially from the results implied by
these or any other forward-looking statements made by us or on our behalf. There
can be no assurance that future results will meet expectations. You should pay
particular attention to the important risk factors and cautionary statements
described in the section of this Report entitled "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Certain Risks and
Uncertainties." You should also carefully review the cautionary statements
described in the other documents we file from time to time with the Securities
and Exchange Commission, specifically all Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K.

PART I

ITEM 1. BUSINESS

OVERVIEW

BMC Software is one of the world's largest independent systems software
vendors, delivering comprehensive enterprise management. We focus on Assuring
Business Availability(TM) by providing software solutions that enhance the
availability, performance and recoverability of our customers' business-critical
applications to help them better manage their businesses. Our portfolio of
systems management solutions allows our customers to manage the various
components and technologies within their information technology (IT) systems
from end to end, from legacy databases and applications on large mainframes to
customer-facing web portals and exchanges.

Our integrated software solutions address the numerous technology layers
within the IT enterprise: operating systems, databases, middleware, storage and
network devices, web application servers, transaction servers and the
applications themselves. We address all of the predominant operating
environments of enterprise computing, including:

o the IBM OS/390 and z/OS mainframe operating systems;

o the predominant Unix operating system variants, including Sun Solaris,
HPUX, IBM's AIX, and Compaq's Tru64;

o the Linux operating system;

o Microsoft's Windows NT, Windows 2000 and Windows XP operating systems;
and

o e-business platforms such as IBM's WebSphere, Microsoft's Site Server
Commerce Edition and BEA Systems' WebLogic.

We also manage all the major enterprise applications, including those from
Oracle, SAP, Siebel, PeopleSoft and J.D. Edwards. We have also extended our
management of the enterprise beyond the firewall with our SiteAngel(TM) web
transactions monitoring service. Combined with our services professionals who
provide consulting, implementation and integration services, our broad portfolio
of software solutions allows us to offer our customers integrated,
cross-platform enterprise management.

We were organized as a Texas corporation in 1980 and were reincorporated in
Delaware in July 1988. Our principal corporate offices are located at 2101
CityWest Blvd., Houston, TX 77042-2827. Our telephone number is (713) 918-8800.

We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (SEC). You may read and
copy any reports, statements or other information that we file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Our filings are also available to the public at the Internet website
maintained by the SEC at http://www.sec.gov. Our annual reports on Form 10-K and
quarterly reports on Form 10-Q are also available to the public free of charge
at our website at http://www.bmc.com/investors/reports.html as soon as
reasonably practicable after, and in any event on the same day as, such material
is electronically filed with the SEC.

1

STRATEGY

Our strategy is Assuring Business Availability. The underlying premise of
this strategy is that the success of any enterprise today depends on its IT
systems. Business-critical applications typically consist of numerous components
from multiple vendors, such as packaged, custom and legacy e-business,
manufacturing, billing, supply chain, management information and payroll
applications. Even routine or baseline applications such as e-mail and
calendaring applications become business critical when an organization depends
on them for its day-to-day operations. Application downtime or performance
degradation can halt or greatly impede an enterprise's daily operations. In
addition, the explosive growth of the Internet as a platform for commerce has
placed tremendous pressure on IT operations to make these applications available
on an uninterrupted, full time basis. Our focus is on the operation and
performance of applications and their underlying components in high stress
deployments. Our strategy is to provide end-to-end enterprise management
solutions designed to ensure the availability, performance and recoverability of
critical application services with rapid deployment of the management solution.
Examples of the capabilities and benefits of our solutions include:

o Providing usage, performance and availability information about a
system that allows the user to monitor, report, manage and achieve
service levels;

o Improving the availability and responsiveness of customers'
applications so they can establish and perform under service level
agreements;

o Minimizing or eliminating system outages, whether planned due to system
upgrades or maintenance, or unplanned due to failures;

o Automating many tedious, error prone and costly administrative tasks in
production environments;

o Helping to ensure that storage systems are able to recover from
failures quickly, accurately and efficiently;

o Helping to ensure data availability, integrity and recoverability;

o Monitoring and event management of major enterprise applications;

o Maximizing the efficiency of hardware and software investments by
providing capacity planning;

o Managing enterprise storage assets in a way that optimizes application
availability, performance and recoverability;

o Automated discovery of network devices, visualization of the network
and reporting of network performance; and

o Business integrated scheduling, output management and security
administration.

We believe that major trends such as Internet computing, e-business and
continued reductions in processing, storage and telecommunications costs will
drive further gains in productivity and growing investment in existing and new
software applications and their supporting infrastructure. Our strength is that
while our solutions can monitor and manage a customer's specific e-business
applications, we also provide solutions that ensure all of the technology
required to generate a transaction is available and performing as planned, and
if it fails, can be recovered quickly. As an example, if you choose to order a
compact disc from a popular web site, you enter via a web server that is pulling
data via middleware from a legacy OS/390 server. Each server is running a unique
operating system, database and an enterprise resource planning (ERP) or legacy
application. Our strength is that we provide tools to monitor, manage, control
and optimize the performance of the entire transaction lifecycle. In doing so,
we ensure that our customers' business-critical applications provide the level
of service that both their external and internal customers demand.

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PRODUCTS

Our products empower our customers in this global economic environment where
speed, time to value, and value over time are critical. Today, it is not simply
how quickly a company can get into a market, but how quickly they can respond to
end-user requirements and customer requests. Our solutions are positioned to
move at Internet speed and aggressively build customer value. Our solutions fall
into the following broad categories: Enterprise Server Management, Business
Integrated Scheduling, Application & Database Performance Management, Recovery &
Storage Management and other software solutions.

Enterprise Server Management

Our Enterprise Server Management solutions optimize the availability and
performance of critical S/390 and z/OS online and batch applications. Our
solutions provide the ability to manage and optimize customers' S/390 and z/OS
operating environments, including the S/390 and z/OS operating systems, Linux on
the zSeries, CICS, IMS/TM, and WebSphere, as well as the network and middleware
components, including VTAM, IP and MQ. Our performance solutions also include
components that balance workloads across multiple images and optimize input and
output to minimize elapsed times and maximize throughput. These solutions
provide performance management and control, predictive analysis and capacity
planning across the S/390 and z/OS platforms. Our Enterprise Server Management
solutions also offer tools to monitor, manage and dynamically optimize the
performance of IMS and DB2 business applications to provide our customers their
desired service levels. These tools address all management and
performance-related issues in the associated subsystem, application, resource or
object. We also provide tools that administer and maintain IMS and DB2 databases
while ensuring their integrity. The coordinated, high-performance utilities
deliver intelligent automation that allows for optimal performance and
availability for business-critical applications using IMS and DB2 databases.

Our Enterprise Server Management solutions contributed approximately 43%,
38% and 35% of our license revenues in fiscal 2000, 2001 and 2002, respectively.

Business Integrated Scheduling

Our Business Integrated Scheduling solutions provide comprehensive
business-integrated scheduling over a multitude of platforms and applications
from a central point of control. They offer enhanced exception detection
capabilities that indicate location and severity efficiently and take corrective
action. This centralized solution is capable of managing applications regardless
of hardware configuration, integrates with numerous third-party products and
applications and supports over 20 platforms including Unix, OS/390, z/OS,
Windows NT, Windows 2000 and ERP applications.

Business processes span multiple applications and require solutions focused
on the business processes that comprise the complete flow, rather than the
technologies that are underlying the applications. A typical example of an
application that requires a Business Integrated Scheduling approach is the
purchase of shares in a mutual fund. What was formerly a process of the investor
receiving a telephone call from a buyer, completing a paper bid order and
sending the "stamped" acceptance through a series of manual steps, such as
valuation, account updates, receipt notification, etc., has become a dynamic and
rapid process. The initial request may now come from multiple sources, such as
telephone, e-mail, web or fax, and require cross-application data transfers from
different trading and investment systems and ad-hoc batch transactions needing
variable application input. Each process is not as independent as it once was
and our Business Integrated Scheduling solutions ensure that the entire
transaction handling is integrated across applications and managed effectively
so that funds are valued, accounts are updated, clients and brokers are notified
and service level expectations are met.

Our Business Integrated Scheduling solutions contributed approximately 5%,
9% and 9% of our license revenues in fiscal 2000, 2001 and 2002, respectively.

Application & Database Performance Management

Our Application & Database Performance Management solutions monitor and
improve all aspects of application service across the distributed IT enterprise.
The autonomous, intelligent PATROL(R) Agent, which resides on the database
management system, web or application server, is equipped to take corrective
action and can communicate these actions to a centralized console on an
as-needed basis, as defined by the user. The various products within our PATROL
family provide service level management, enhanced availability, performance
monitoring and management for the entire distributed enterprise, including
applications, databases, middleware, operating systems and network devices.
PATROL solutions provide management for e-business applications, including

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business-to-business supply chain and value chain applications, web application
servers and Internet devices. PATROL solutions also include platform support for
Windows, Linux, Unix and other services residing on those operating systems.

Also included in this product category is our distributed data management
solution family, which includes distributed database products supporting the
following databases: Oracle, Microsoft SQL Server, DB2 Universal Database,
Sybase and Informix. These products are aimed at improving the efficiency of
database administration and address the areas of: SQL development, change
management, performance monitoring and tuning, maintenance optimization and
business information delivery.

Our Application & Database Performance Management solutions contributed
approximately 28%, 29% and 30% of our license revenues in fiscal 2000, 2001 and
2002, respectively.

Recovery & Storage Management

Our Recovery & Storage Management product group provides solutions across
the entire enterprise environment, including support for new technology such as
intelligent storage and storage area networks, and provides database application
recovery solutions, leveraging the underlying storage management to help
customers achieve business availability goals. The solutions in this group are
delivered through PATROL Storage Management, MAINVIEW Storage Management, and
backup and recovery products across all major database platforms.

During fiscal 2001, we introduced our Application-Centric Storage Management
(ACSM) initiative that allows customers to manage their enterprise storage
assets in a way that optimizes application availability, performance and
recoverability. Traditional approaches to storage management focus on the
capacity and performance of storage hardware. This approach blindly treats all
of the data, often terabytes, equally and fails to recognize the relative value
of the data. ACSM instead provides an industry-leading capability to associate
storage assets to applications. The immediate benefit is an understanding of
where critical data exists, how fast it is growing and how it is performing.
ACSM recognizes that highly available applications are more important than
storage. The ACSM methodology is delivered for both distributed and mainframe
environments via PATROL and MAINVIEW technology.

Consider an enterprise application as an example. It is very unlikely that
it will have all of its data contained in one storage device, even a large one.
Before ACSM, an organization might be forced to implement storage management one
device at a time, which doesn't guarantee the requirements of the application
are met. ACSM makes it possible to manage storage by application. With PATROL
Storage Management our customers can choose the application first, then have
PATROL discover, forecast and tune the storage related to the application. Other
approaches or storage management solutions take longer, are less reliable and
require more staff to execute.

Our Recovery & Storage Management solutions contributed approximately 19%,
18% and 18% of our license revenues in fiscal 2000, 2001 and 2002, respectively.

Other Software Solutions

Our other software solutions primarily include our security, ERP, network
performance management, output management and subscription services. Our
security administration solutions facilitate user registration and password
administration and thereby enhance and strengthen the overall security of our
customers' information systems. Our ERP solutions include a comprehensive set of
tools and utilities for SAP as well as other ERP applications. Our network
performance management solutions enable network managers to predict network
requirements and proactively manage network performance in a cost-effective and
timely manner. Our subscription services provide comprehensive service solutions
to customers on a subscription basis for the remote monitoring and management of
information systems, including their web infrastructure.

Our other software solutions contributed approximately 5%, 6% and 8% of our
license revenues in fiscal 2000, 2001 and 2002, respectively.

4

SALES AND MARKETING

We market and sell our products principally through our direct sales force.
We supplement the efforts of our direct sales force with an indirect sales
channel. We have established channels operations groups worldwide to promote,
negotiate and support such distribution arrangements and are continuing to
invest in our channels infrastructure. We are also represented by local
distributors in geographical territories in which we have not established a
direct sales presence. During fiscal 2002, we significantly expanded our inside
sales unit to include over 100 telephone sales personnel globally, which
provides us a dedicated sales channel for expanding our customer base, and we
opened our online store that offers customers the ability to trial, download and
purchase over 100 of our products.

INTERNATIONAL OPERATIONS

Approximately 36%, 43% and 42% of our total revenues in fiscal 2000, 2001
and 2002, respectively, were derived from business outside North America. Our
international operations provide sales, sales support, product support,
marketing and product distribution services for our customers located outside of
North America. We also conduct development activities in Tel Aviv, Israel for
our scheduling, security, output management and ERP products and in Aix en
Provence, France for our network management products. Our development operations
in Singapore and Frankfurt, Germany provide local language support, product
internationalization and integration with local-market hardware and software.
Our operations in Pune, India provide new product development, maintenance and
quality assurance across all our product groups as an extension of our primary
development offices.

We believe that our operations outside the United States are located in
countries that are politically stable and that such operations are not exposed
to any special or unusual risks, except for the product development operations
in Israel and India discussed below. Our growth prospects are highly dependent
upon the continued growth of our international software license and maintenance
revenues, and such revenues have been somewhat unpredictable in the past.

Revenues from our foreign subsidiaries are denominated in local currencies,
as are operating expenses incurred in these locales. To date, we have not had
any material foreign currency exchange losses. For a discussion of our currency
hedging program and the impact of currency fluctuations on international license
revenues in fiscal 2000, 2001 and 2002, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and Note 1(f) to the
Consolidated Financial Statements contained herein. We have not previously
experienced any difficulties in exporting our products, but no assurances can be
given that such difficulties will not occur in the future.

We have a significant presence in the State of Israel where our scheduling,
security, output management and ERP product development operations are located.
We believe that Israel is home to highly talented and experienced software
developers and other personnel and we intend to continue to invest in our
Israeli operations. Our operations in India are limited and represent an
extension of our primary development offices. For a discussion of various
unusual risks associated with Israeli and Indian operations and investments, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Certain Risks and Uncertainties -- Conditions in Israel and --
Risks Related to International Operations."

RESEARCH AND PRODUCT DEVELOPMENT

In fiscal 2000, 2001 and 2002, research and development spending, net of
capitalized amounts, represented 23%, 29% and 37% of total revenues,
respectively. These costs related primarily to the compensation of research and
development personnel and the costs associated with the maintenance, enhancement
and support of our products. Although we develop many of our products
internally, we may acquire technology from third parties when appropriate and
may incur royalty and other payment obligations in connection with such
acquisitions. Traditionally, we have acquired rights from third parties to use
certain technologies that we believed would accelerate development of new
products. Our expenditures on research and development and on product
maintenance, enhancement and support, including amounts capitalized, in the last
three fiscal years are discussed below under the heading, "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Expenses -- Research and Development."

Our primary research and development activities are based in Houston and
Austin, Texas, Waltham, Massachusetts, San Jose, California, Tel Aviv, Israel
and Aix en Provence, France. We internally create and produce all user manuals,
sales materials and other documentation related to our products. Product
manufacturing and distribution for the Americas are based in Houston, Texas,
with European manufacturing and distribution based in Dublin, Ireland, and Asia
Pacific manufacturing and distribution based in Singapore.

5

MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES

Revenues from providing maintenance, enhancement and support services
comprised 28%, 35% and 45% of our total revenues in fiscal 2000, 2001 and 2002,
respectively. Payment of maintenance, enhancement and support fees entitles a
customer to telephone and Internet support and problem resolution services,
including proactive notification, electronic support requests and a resolution
database, and enhanced versions of a product released during the maintenance
period, including new versions necessary to run with the most current release of
the operating systems, databases and other software supported by the product.
Such maintenance fees are an important source of recurring revenue to us, and we
invest significant resources in providing maintenance services and new product
versions. These services are important to our customers who require immediate
problem resolution because of their use of our products to manage their
business-critical IT systems. The services are also necessary because customers
require forward compatibility when they install new versions of the software
systems supported by one of our products.

PROFESSIONAL SERVICES

Our professional services group consists of a worldwide team of experienced
software consultants who provide implementation, integration and education
services related to our products. By easing the implementation of our products,
these services help our customers accelerate the time to value. By improving the
overall customer experience, these services also drive future software license
transactions with these customers. Since fiscal 2000 we rapidly grew the
professional services group from less than 200 software consultants at the
beginning of fiscal 2000 to approximately 500 software consultants today,
achieving a critical mass in North America and Europe. Professional services
contributed approximately 3%, 6% and 7% of our revenues for fiscal 2000, 2001
and 2002, respectively.

PRODUCT PRICING AND LICENSING

Our software solutions are generally licensed under either a tiered computer
license or under an enterprise license. Under a tiered computer license, a
customer is licensed to use the product on a single computer and the license fee
for a product increases in relation to the processing capacity of the computer
on which the product is installed. Under an enterprise license, the customer is
licensed to use the products across its enterprise, subject to capacity limits
such as the aggregate processing power of all the computers in the case of
products running on mainframe systems or the number of servers in the case of
products running on a distributed network. Under tiered pricing, computers are
classified according to their processing power with more powerful computers
falling into higher tiers and carrying higher license fees. In a tiered computer
license, a license upgrade fee is owed if a product is installed on a more
powerful computer that falls into a higher tier. In an enterprise license,
additional license fees are owed when the licensed capacity is exceeded. Most of
our largest customers have entered into enterprise license agreements. Under
both tiered and enterprise licenses, we negotiate discounts from our list prices
for our software solutions, primarily discounts for multiple copies of a product
and volume discounts for enterprise license transactions.

We also have pricing and licensing models to address the service provider
market. We license our SiteAngel and GuardianAngel products to service providers
on a term basis. These subscription services are provided for a term fee based
on the agreed number of elements or transactions monitored by our services. This
revenue is recognized ratably over the term of the service contract. We
anticipate that we will continue to introduce additional pricing and licensing
models to meet the needs of the marketplace, some of which may require us to
recognize revenue over time.

We recognize revenues from licenses and upgrade fees when both parties are
legally obligated under the terms of the respective signed agreement, the
underlying software products have been delivered to and accepted by the
customer, the fees are fixed and determinable, collection is deemed probable and
there are no remaining material obligations on our part. In certain agreements,
we have negotiated flexible terms and conditions to address specific customer
needs. Because the inclusion of such terms prevents upfront revenue recognition,
the license fees are either deferred to future periods when any contingencies
are satisfied or recognized ratably over the term of the contract. In addition
to our subscription services, from which 100% of the revenue is recognized
ratably over the term of the contract, we expect a portion of our license
revenue in fiscal 2003 to be either deferred or recognized ratably due to
certain flexible terms and conditions included in agreements. During fiscal
2002, we deferred license revenues of $112.0 million for contracts with such
terms and conditions and we expect license revenue deferrals to be similar in
fiscal 2003. We recognize maintenance revenues, including maintenance bundled
with perpetual license fees, ratably over the maintenance period, and we
recognize professional services revenues as the services are provided. Our
revenue recognition policy is discussed in further detail below under the
heading "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Revenues" and in Note 1(h) to the Consolidated Financial
Statements contained herein.

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We make extended payment terms for our products and services available to
qualifying customers for qualifying transactions. By providing such financing,
we allow our customers to better manage their IT expenditures and cash flows.
Our financing program is discussed in further detail below under the heading
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Liquidity and Capital Resources."

Our products are generally marketed on a trial basis. When a customer
desires to license a trial product, a permanent product copy or a coded password
to convert the trial tape to a permanent tape is provided. We license our
software products primarily on a perpetual basis.

COMPETITION

The enterprise management software business is highly competitive, as
discussed below and in the "Management's Discussion and Analysis of Results of
Operations and Financial Condition" section of this report under the heading
"Certain Risks and Uncertainties." There are several companies, including IBM,
Computer Associates and Microsoft, as well as large computer manufacturers such
as Sun and HP, which have substantially greater resources than we have, as well
as the ability to develop and market enterprise management solutions similar to
and competitive with the solutions offered by us. In addition, there are
numerous independent software companies that compete with one or more of our
software solutions. Although no company competes with us across our entire
software solution line, we consider at least 60 firms to be directly competitive
with one or more of our enterprise software solutions. In systems management,
database management, application management, security and storage management,
there are hundreds of companies whose primary business focus is on at least one
but not all of these solutions. Certain of these companies have substantially
larger operations than ours in these specific niches.

Certain of our solutions in the Enterprise Server Management unit compete
directly with IBM, primarily with IBM's IMS and DB2 database management systems,
and its IMS/TM and CICS transaction managers. Some of our solutions, including
our core IMS and DB2 database tools and utilities, are essentially improved
versions of system software utilities that are provided as part of these
integrated IBM system software products. IBM also markets separately priced
competing utilities in addition to its base utilities. IBM continues, directly
and through third parties, to enhance and market its utilities for IMS and DB2
as lower cost alternatives to the solutions provided by us and other independent
software vendors. Although such utilities are currently less functional than our
solutions, IBM has begun to invest more heavily in the IMS and DB2 utility
market and appears to be committed to competing in these markets. If IBM is
successful with its efforts to achieve performance and functional equivalence
with our IMS, DB2 and other products at a lower cost, our business may be
materially adversely affected.

We believe that the key criteria considered by potential purchasers of our
products are as follows: the operational advantages and cost savings provided by
a product; product quality and capability; product price and the terms on which
the product is licensed; ease of integration of the product with the purchaser's
existing systems; ease of product installation and use; quality of support and
product documentation; and the experience and financial stability of the vendor.

CUSTOMERS

No single customer accounted for a material portion of our revenues during
any of the past three fiscal years. Our software products are generally used in
a broad range of industries, businesses and applications. Our customers include
manufacturers, telecommunications companies, financial service providers, banks,
insurance companies, educational institutions, retailers, distributors,
hospitals, service providers, government agencies and value-added resellers.

INTELLECTUAL PROPERTY

We distribute our products in object code form and rely upon contract, trade
secret, copyright and patent laws to protect our intellectual property. The
license agreements under which customers use our products restrict the
customer's use to its own operations and prohibit disclosure to third persons.
We now distribute certain of our products on a shrink-wrap basis, and the
enforceability of such restrictions in a shrink-wrap license is unproven in
certain jurisdictions. Also, notwithstanding those restrictions, it is possible
for other persons to obtain copies of our products in object code form. We
believe that obtaining such copies would have limited value without access to
the product's source code, which we keep highly confidential. In addition, we
employ protective measures such as CPU dependent passwords, expiring passwords
and time-based trials.

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EMPLOYEES

As of March 31, 2002, we had 6,335 full-time employees. We believe that our
continued success will depend in part on our ability to attract and retain
highly skilled technical, sales, marketing and management personnel.

ITEM 2. PROPERTIES

Our headquarters and principal marketing and product development operations
are located in Houston, Texas, where we own and occupy four office buildings
totaling approximately 1,515,000 square feet. We also maintain development and
sales organizations in various locations around the world where we lease the
necessary facilities, none of which are significant individually or in the
aggregate.

ITEM 3. LEGAL PROCEEDINGS

We are subject to various legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. Management does not
believe that the outcome of any of these legal matters will have a material
adverse effect on our financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

From August 12, 1988 to March 12, 2001, our common stock was traded in the
NASDAQ National Market System under the symbol "BMCS." Since March 13, 2001, our
common stock has been traded on the New York Stock Exchange under the symbol
"BMC." At June 10, 2002, there were 1,585 holders of record of common stock.

The following table sets forth the high and low bid quotations per share of
common stock for the periods indicated.

The only dividends declared or paid since 1988 relate to BGS Systems, Inc.
(BGS) prior to our acquisition of the company. We do not intend to pay any cash
dividends in the foreseeable future. We currently intend to retain any future
earnings otherwise available for cash dividends on the common stock for use in
our operations, for expansion and for stock repurchases. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Liquidity and Capital Resources."

8

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data presented under the
captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of
the end of, each of the years in the five-year period ended March 31, 2002, are
derived from the Consolidated Financial Statements of BMC Software, Inc. and its
subsidiaries. Our historical financial data has been restated to include the
historical financial results of Boole & Babbage, Inc. (Boole) and BGS for each
of the periods presented. As BMC, Boole and BGS had different fiscal year ends,
necessary adjustments have been made to conform fiscal year ends for certain
periods. As a result of the adjustments made to conform the fiscal year ends for
only the year ended March 31, 1999, in accordance with SEC regulations, the
selected Consolidated Statement of Operations data excludes the results of
operations of Boole for the six months ended March 31, 1998, which included
total revenues of $106.5 million and net earnings of $17.8 million and of BGS
for the two months ended March 26, 1998, which included total revenues of $6.5
million and net loss of $8.0 million. The BMC financial statements for fiscal
1998 through fiscal 2001 have been audited by Arthur Andersen LLP, independent
public accountants. The financial statements of BMC for fiscal 2002 and the
financial statements of Boole have been audited by Ernst & Young LLP,
independent auditors. The selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements as of March 31, 2001 and
2002, and for each of the three years in the period ended March 31, 2002, the
accompanying notes and the reports of independent public accountants and
independent auditors thereon, which are included elsewhere in this Form 10-K.

In April 1998, we announced that the board of directors approved a
two-for-one stock split (in the form of a dividend) that was payable to
stockholders of record on May 1, 1998 and was effective May 15, 1998. Share and
per share data presented here and throughout the Consolidated Financial
Statements, have been adjusted to give effect to this two-for-one split.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

INTRODUCTION

This section includes historical information, certain forward looking
information and the information provided below under the heading "Certain Risks
and Uncertainties " about certain risks and uncertainties that could cause our
future operating results to differ materially from the results indicated by any
forward looking statements made by us or others. It is important that the
business discussion in Item 1 of this report and the historical discussion below
be read together with the discussion of risks and uncertainties, and that these
discussions be read in conjunction with the accompanying Consolidated Financial
Statements and notes thereto.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. On an on-going basis, we evaluate estimates and
judgments, including those related to revenue recognition, capitalized software
development costs, acquired in-process research and development, intangible
assets, deferred tax assets and marketable securities. We base our estimates on
historical experience and on various other assumptions that

9

are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about amounts and timing of revenues and
expenses, the carrying values of assets and the recorded amounts of liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates and such estimates may change if the underlying conditions or
assumptions change. The critical accounting policies related to the estimates
and judgments listed above are discussed further throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations where
such policies affect our reported and expected financial results.

HISTORICAL INFORMATION

Historical performance should not be viewed as indicative of future
performance, as there can be no assurance that operating income (loss) or net
earnings (loss) as a percentage of revenues will be sustained at these levels.
For a discussion of factors affecting operating margins, see the discussions
below under the heading "Certain Risks and Uncertainties."

Acquisitions

In April 1999, we acquired New Dimension Software Ltd. (New Dimension) in a
cash tender offer. This transaction was accounted for using the purchase
accounting method and accordingly, New Dimension's financial results have been
included in our fiscal 2000 financial results since the acquisition date.

In April 2000, we acquired Evity, Inc. (Evity) for 1.6 million shares of
common stock and cash of $10.0 million. Stock options to purchase 0.4 million
common shares were issued to replace outstanding Evity stock options. In August
2000, we acquired OptiSystems Solutions, Ltd. (OptiSystems) for cash. These
transactions, along with various other immaterial technology acquisitions, were
accounted for using the purchase accounting method and accordingly, the
financial results for these entities have been included in our financial results
since the applicable acquisition dates.

Results of Operations

The following table sets forth, for the fiscal years indicated, the
percentages that selected items in the Consolidated Statements of Operations and
Comprehensive Income (Loss) bear to total revenues.

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Revenues

We generate revenues from licensing software, providing maintenance,
enhancement and support for previously licensed products and providing
professional services. We generally utilize written contracts as the means to
establish the terms and conditions by which our products, support and services
are sold to our customers.

We recognize revenue in accordance with the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue
Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." These statements provide
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. In applying these statements, we recognize
software license fees upon meeting the following four criteria: execution of the
signed contract, delivery of the underlying products to the customer and the
acceptance of such products by the customer, determination that the software
license fees are fixed and determinable, and determination that collection of
the software license fees is probable. In instances when any one of the four
criteria are not met, we will either defer recognition of the software license
revenue until the criteria are met or will recognize the software license
revenue on a ratable basis, as required by SOPs 97-2 and 98-9. Maintenance,
enhancement and support revenues are recognized ratably over the term of the
arrangement on a straight-line basis. Revenues from license and maintenance
transactions that are financed are generally recognized in the same manner as
those requiring current payment. We have an established business practice of
offering installment contracts to customers and have a history of successfully
enforcing original payment terms without making concessions. Further, the
payment obligations are unrelated to product implementation or any other
post-transaction activity. Revenues from sales through agents, distributors and
resellers are recorded either at the gross amount charged the customer or net of
commissions paid, based on the economic risks and ongoing product support
responsibilities we assume. Revenues from professional services are typically
recognized as the services are performed for time-and-materials contracts, or on
a percentage-of-completion basis.

When several elements, including software licenses, maintenance, enhancement
and support and professional services, are sold to a customer through a single
contract, the revenues from such multiple-element arrangements are allocated to
each element based upon the residual method, whereby the fair value of the
undelivered elements of the contract is deferred. We have established
vendor-specific objective evidence of fair value for maintenance, enhancement
and support and professional services. Accordingly, software license fees are
recognized under the residual method for arrangements in which the software is
licensed with maintenance, enhancement and support and/or professional services,
and where the maintenance, enhancement and support and/or professional services
are not essential to the functionality of the delivered software. In those
instances where professional services are essential to the functionality of the
software licenses, contract accounting is applied to both the software license
and services elements of the arrangement. In the event a contract contains terms
which are inconsistent with our vendor-specific objective evidence, all revenues
from the contract are deferred until such evidence is established or are
recognized on a ratable basis.

Based on our interpretation of SOP 97-2 and SOP 98-9, we believe that our
current sales contract terms and business arrangements have been properly
reported. However, the AICPA and its Software Revenue Recognition Task Force
continue to issue interpretations and guidance for applying the relevant
standards to a wide range of sales contract terms and business arrangements that
are prevalent in the software industry. Also, the Securities and Exchange
Commission (SEC) has issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," which provides guidance related to revenue
recognition based on interpretations and practices followed by the SEC. Future
interpretations of existing accounting standards or changes in our business
practices could result in future changes in our revenue accounting policies that
could have a material adverse effect on our business, financial condition and
results of operations.

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The total revenue decline of 12% in fiscal 2001 resulted primarily from a
decrease in enterprise license transactions during the year and a reduction in
license upgrade fees as discussed under Product License Revenues below. Demand
weakness was experienced across the board during fiscal 2001 by independent
software vendors with mainframe product portfolios. We believe that this
indicates that external market factors contributed significantly to this
weakness. While it is impossible to assign weights to any individual factors,
market factors that may have contributed to this weakness and the resultant
negative effect on license revenues experienced by us and our competitors
included uncertainties associated with the roll-out of IBM's Z-series mainframe
product family and workload-based pricing model and continued customer
absorption of capacity purchased in association with Year 2000 compliance
programs. These factors also impacted revenues for our other products because
many of our mainframe customers are also customers of our other products and
sometimes purchase these other products together with mainframe products in
enterprise solutions. Revenues from companies we acquired in purchase accounting
transactions during fiscal 2001 did not provide a significant offset to the
revenue declines discussed above. Total revenues declined 15% in fiscal 2002.
Continued absorption of prepaid capacity and difficult economic conditions in
domestic and international markets throughout fiscal 2002 have resulted in
reduced information technology spending by many of our customers. Though the
number of license transactions declined only 4% during fiscal 2002 as compared
to fiscal 2001, tighter budgets and higher required approval levels caused many
customers to enter into smaller transactions in terms of dollar value. Fiscal
2002 revenues were also impacted by the deferral of $112.0 million of license
revenue due to certain flexible terms and conditions included in a number of
customer agreements. Though fiscal 2002 revenues were down in all quarters
compared to the prior year, revenues in the third and fourth quarters of fiscal
2002 showed sequential growth over the immediately preceding quarters. Product
revenue growth was only nominally impacted by price increases and inflation in
fiscal 2001 and 2002.

Product License Revenues

Our product license revenues primarily consist of product license fees and
license upgrade fees, both of which are related to products licensed to
customers on a perpetual basis. Product license fees are all fees associated
with a customer's licensing of a given software product for the first time.
License upgrade fees are all fees associated with a customer's purchase of the
right to run a previously licensed product on a larger computer or computers.
License upgrade fees are primarily generated by our mainframe products and
include fees associated both with current and future additional processing
capacity. In addition to product license fees and license upgrade fees, license
revenues also include, to a lesser extent, term license fees which are generated
when customers are granted license rights to a given software product for a
limited period of time.

Our North American operations generated 66%, 54% and 56% of total license
revenues in fiscal 2000, 2001 and 2002, respectively. North American license
revenues decreased 38% from fiscal 2000 to fiscal 2001 and 27% from fiscal 2001
to fiscal 2002. While license revenues were down across all product groups, the
largest contributor to the revenue declines in both fiscal 2001 and 2002 was
decreased capacity-based license upgrade fees.

International license revenues represented 34%, 46% and 44% of total license
revenues in fiscal 2000, 2001 and 2002, respectively. International license
revenues increased 2% from fiscal 2000 to fiscal 2001 and decreased 33% from
fiscal 2001 to fiscal 2002. Fiscal 2001 growth in Application & Database
Performance Management license fees was partially offset by decreases in
Enterprise Server Management license and upgrade fees. While license revenues
were down across most product groups from fiscal 2001 to fiscal 2002, decreased
capacity-based license upgrade fees were the largest contributor to the revenue
decline for the year.

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The international license revenue increase for fiscal 2001 and decline for
fiscal 2002 both included a decrease of 2% due to foreign currency exchange rate
changes during the periods, after giving effect to our foreign currency hedging
program.

Maintenance, Enhancement and Support Revenues

Maintenance, enhancement and support revenues represent the ratable
recognition of fees to enroll licensed products in our software maintenance,
enhancement and support program. Maintenance, enhancement and support enrollment
entitles customers to product enhancements, technical support services and
ongoing compatibility with third-party operating systems, database management
systems and applications. These fees are generally charged annually and have
historically equaled 15% to 20% of the discounted price of the product. In
addition, customers may be entitled to reduced maintenance percentages for
entering into long-term maintenance contracts that include prepayment of the
maintenance fees or that are supported by a formal financing arrangement.

During the fourth quarter of fiscal 2002, we revised our maintenance program
to a single maintenance offering of 24x7 support at a standard rate of 20% of
the discounted price of the associated product. In connection with this
revision, we have extended our standard warranty and initial support period to
one year for all our products, whereas prior to this revision such periods were
90 days for distributed systems products and one year for mainframe products.
Because our maintenance revenues include the ratable recognition of the bundled
fees for any initial maintenance services covered by the related perpetual
license agreement, in certain new license transactions the extension of the
initial support period for distributed systems products will cause us to
recognize more maintenance revenues over time and less license revenues when the
transactions occur. While this change in our maintenance program will not have a
material effect on our total revenues over time, there will be a negative
short-term revenue impact. In addition, there is a risk that our revenues could
be negatively impacted if customers do not accept these changes to the
maintenance program and choose to license competing products instead. Because
this change was made late in the year, the impact on fiscal 2002 license and
maintenance revenues was not significant.

Maintenance revenues have increased over the last three fiscal years as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase in proportion
to the aggregate processing capacity on which the products are installed;
consequently, we receive higher absolute maintenance fees as customers install
our products on additional processing capacity. Due to the increased discounting
for higher levels of additional processing capacity, the maintenance fees on a
per unit of capacity basis are typically reduced in enterprise license
agreements for mainframe products. Historically, we have enjoyed high
maintenance renewal rates for our mainframe-based products. Should customers
migrate from their mainframe applications or find alternatives to our products,
increased cancellations could adversely impact the sustainability and growth of
our maintenance revenues. To date, we have been successful in extending our
traditional maintenance, enhancement and support pricing model to the
distributed systems market.

Product Line Revenues

We market over 300 software solutions designed to improve the availability,
performance and recoverability of enterprise applications, databases and other
IT systems components operating in mainframe, distributed computing and Internet
environments. These solutions fall into the five broad categories above. In
managing our investment in these product categories we have considered each to
be included in one of three strategic groups. The first group includes our
Enterprise Server Management and Business Integrated Scheduling solutions. Our
objective for this group has been to extend our core strengths in these markets.
The second strategic group includes our Application & Database Performance
Management and Recovery & Storage Management solutions. Our objective for this
group has been to build our business in fast-growing markets. The last group
includes our other software products, such as our security, ERP, network
management, output management and subscription services. The objective for this
group has been to make strategic investments in what we anticipate will be
sources of future growth.

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Our Enterprise Server Management and Business Integrated Scheduling
solutions combined represented 51%, 50% and 49% of total software revenues for
fiscal 2000, 2001 and 2002, respectively. Total software revenues for this group
declined 17% both from fiscal 2000 to fiscal 2001 and from fiscal 2001 to fiscal
2002. Because this group includes a high proportion of mainframe solutions, the
external market factors discussed above were the primary cause of the revenue
decline in fiscal 2001, more than offsetting the revenue growth for our Business
Integrated Scheduling solutions. In fiscal 2002, license revenue decreases for
both product groups due to the economic factors and the decline in
capacity-based license upgrade fees discussed above more than offset maintenance
revenue increases.

Our Application & Database Performance Management and Recovery & Storage
Management solutions combined contributed 44% of total software revenues for
each of fiscal 2000, 2001 and 2002, respectively. Total software revenues for
this group declined 14% from fiscal 2000 to fiscal 2001 and 16% from fiscal 2001
to fiscal 2002. Though this group does not include a significant proportion of
mainframe products, fiscal 2001 revenues for these solutions were negatively
impacted by the reduction in enterprise license transactions as discussed above,
because many of our mainframe customers are also customers of these products and
sometimes purchase these products together with mainframe products in enterprise
solutions. In fiscal 2002, license revenue decreases for both product groups due
to the economic factors discussed above more than offset maintenance revenue
increases.

Our other software solutions contributed 5%, 6% and 7% of total software
revenues for fiscal 2000, 2001 and 2002, respectively. Total software revenues
for this group declined 5% from fiscal 2000 to fiscal 2001 and grew 4% from
fiscal 2001 to fiscal 2002. In fiscal 2001, revenue decreases from our output
management and ERP solutions more than offset growth from our security solutions
and from our acquisitions of Evity in April 2000 and OptiSystems in August 2000.
Fiscal 2002 growth includes increases in revenues from our ERP and security
solutions, our subscription services and the network management solutions that
were associated with our acquisition of Perform SA (Perform) in February 2001,
which more than offset the license revenue decline for our output management
solutions.

Professional Services Revenues

Professional services revenues, representing fees from implementation,
integration and education services performed during the period, represented 3%,
6% and 7% of total revenues, respectively, for fiscal 2000, 2001 and 2002.
Professional services revenues increased 75% from fiscal 2000 to fiscal 2001 as
we increased the related headcount to meet the increased demand for our service
offerings during that period. The 6% decline in professional services revenues
from fiscal 2001 to fiscal 2002 related to our decreased license revenues, as
this results in less demand for our implementation and integration services.

Expenses

Selling and Marketing

Our selling and marketing expenses include personnel and related costs,
sales commissions and costs associated with advertising, industry trade shows
and sales seminars, and represented 33%, 40% and 42% of total revenues in fiscal
2000, 2001 and 2002, respectively. Personnel costs and sales commissions were
the largest single contributor to the expense growth in fiscal 2001 and the
expense decline in fiscal 2002. Selling and marketing year-end headcount
increased 5% from the end of fiscal 2000 to the end of fiscal 2001 and decreased
16% from the end of fiscal 2001 to the end of fiscal 2002. Sales commissions
increased from fiscal 2000 to fiscal 2001 even though fiscal 2001 license
revenues declined, because of sales incentives implemented in the last half of
the year.

14

The decline in commissions and other personnel costs from fiscal 2001 to fiscal
2002 related to decreased license revenues and headcount reductions throughout
the year. Selling and marketing expenses were further impacted in fiscal 2001 by
the costs associated with our first global users conference and increased
consulting fees for implementation of a customer relationship management system.
In fiscal 2002, consulting fees and travel costs declined.

Research and Development

Research and development expenses mainly comprise personnel costs related to
software developers and development support personnel, including software
programmers, testing and quality assurance personnel and writers of technical
documentation such as product manuals and installation guides. These expenses
also include costs associated with the maintenance, enhancement and support of
our products, computer hardware/software costs and telecommunications expenses
necessary to maintain our data processing center, royalties and the effect of
software development cost capitalization and amortization. Research and
development costs were reduced in all three fiscal years by amounts capitalized
in accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed." We capitalize our software development costs when the projects under
development reach technological feasibility as defined by SFAS No. 86, and
amortize these costs over the products' estimated useful lives. During fiscal
2000, 2001 and 2002, we capitalized approximately $102.7 million, $112.2 million
and $104.2 million, respectively, of software development and purchased software
costs. We amortized $40.2 million, $60.2 million and $115.7 million in fiscal
2000, 2001 and 2002, respectively, of capitalized software development and
purchased software costs pursuant to SFAS No. 86, including $8.2 million, $16.5
million and $57.2 million, respectively, to accelerate the amortization of
certain software products. We accelerated the amortization of these software
products in each of these years as they were not expected to generate sufficient
future revenues to realize the carrying value of the assets. As a result of the
changes in market conditions and research and development headcount reductions
during fiscal 2002, we have begun focusing more on our core and high-potential
growth businesses. As part of this effort, we reviewed our product portfolio
during fiscal 2002 and discontinued certain products throughout the portfolio.
To the extent that there were any capitalized software development costs
remaining on the balance sheet related to these products, we accelerated the
amortization to write these balances off. This caused the increase in
accelerated amortization from fiscal 2001 to fiscal 2002.

The increase in our research and development expenses for fiscal 2001 was
primarily the result of increased compensation costs associated with both
software developers and development support personnel, as well as associated
benefits and facilities costs, and the net effect of software cost
capitalization and amortization. We increased our headcount in the research and
development organization 11% from the end of fiscal 2000 to the end of fiscal
2001, including the addition of personnel from acquired companies. Research and
development expenses increased from fiscal 2001 to fiscal 2002 primarily due to
the net effect of software capitalization and amortization, including the
accelerated amortization discussed above, and a $5.0 million write-off of
prepaid royalties and other assets related to technology we no longer plan to
utilize. These additional expenses more than offset reduced headcount costs,
travel costs and consulting fees during the period. We reduced our research and
development headcount by 14% from the end of fiscal 2001 to the end of fiscal
2002.

Total capitalized software development costs, net of amortization, at March
31, 2002, were $211.8 million. Under SFAS No. 86, we evaluate our capitalized
software costs at each balance sheet date to determine if the unamortized
balance related to any given product exceeds the estimated net realizable value
of that product. Any such excess is written off through accelerated amortization
in the quarter it is identified. Determining net realizable value as defined by
SFAS No. 86 requires that we estimate future cash flows to be generated by the
products and to use judgment in quantifying the appropriate amount to write off,
if any. Actual cash flows and amounts realized from the software products could
differ from our estimates. Also, any future changes to our product portfolio
could result in significant research and development expenses related to
software asset write-offs.

During fiscal 2002, we also wrote off software assets totaling $14.9 million
associated with certain business information integration products that were
discontinued during the year as a result of the dissolution of that business
unit as part of our restructuring plan. This charge is included in restructuring
and severance costs in the accompanying Consolidated Statement of Operations and
Comprehensive Income (Loss) for fiscal 2002 and is discussed further below under
the heading " -- Restructuring and Severance Costs."

15

Cost of Professional Services

Cost of professional services consists primarily of personnel costs
associated with implementation, integration and education services that we
perform for our customers, and the related infrastructure to support this
business. The increase in these costs from fiscal 2000 to fiscal 2001 resulted
from increased headcount to support the 75% growth in professional services
revenues during that period. The decrease in these costs from fiscal 2001 to
fiscal 2002 is consistent with the 6% professional services revenue decline for
the period and the resulting headcount reductions.

General and Administrative

General and administrative expenses are comprised primarily of compensation
and personnel costs within executive management, finance and accounting,
facilities management and human resources. Other costs included in general and
administrative expenses are fees paid for legal and accounting services,
consulting projects, insurance, costs of managing our foreign currency exposure
and bad debt expense related to maintenance billings. The expense growth in
fiscal 2001 primarily related to increased personnel costs, including $5.1
million of severance costs for management personnel who terminated their
employment during the fourth quarter of that year. This severance amount
included cash and restricted stock expense. The decline in general and
administrative expenses in fiscal 2002 was primarily related to decreased
personnel costs, travel costs and bad debt expense related to maintenance
billings. Fiscal year end headcount within the general and administrative
organizations grew 13% from fiscal 2000 to fiscal 2001 and declined 6% from
fiscal 2001 to fiscal 2002.

Acquired Research and Development

In executing our product strategies, we employ both internal research and
development and the acquisition of emerging technologies and, in the case of
Boole, BGS and New Dimension, established software companies. We believe that
time-to-market is critical to our success in the rapidly evolving distributed
systems software market, where we must compete with a variety of software
vendors, and where our products must integrate with the predominant database
management systems, operating systems, network protocols and applications within
the enterprise computing environment. Accordingly, we must continuously evaluate
whether it is more efficient and effective to develop a given solution
internally or acquire a technology that must be completed and then integrated
into our existing product architecture. The acquired technology companies are
often small, early stage software companies with minimal to no revenues, quality
and documentation standards and name recognition in the marketplace. This
strategy involves a high degree of risk and is costly in that a premium is
typically paid for software code that is incomplete and only partially
contributes to our overall development plans.

The following table presents information concerning the purchase price
allocations for the acquisitions accounted for under the purchase method for
fiscal 2000, 2001 and 2002.

In April 1999, we acquired through a public tender offer in excess of 95% of
the outstanding ordinary shares of New Dimension. Total consideration paid
approximated $673.0 million, including the cost of the remaining 5% of
outstanding shares acquired during fiscal 2000 and the historical cost of
approximately $2.0 million for shares of New Dimension previously owned by
Boole. We allocated $126.3 million to acquired technology, $435.9 million to
goodwill and other intangibles and $30.0 million to equipment, receivables and
other non-software assets, net of liabilities assumed. We allocated $80.8
million, or 12% of the purchase price, to in-process research and development
(IPR&D), which represents the present value of the estimated after-tax cash
flows expected to be generated by the purchased technology, which, at the
acquisition date, had not yet reached technological feasibility nor had an
alternative future use.

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At the acquisition date, New Dimension was conducting design, development,
engineering and testing activities in the following areas:

o Integrated Operations Architecture(R) for the Enterprise, which was to
be the supporting infrastructure for all of the distributed systems
products from New Dimension. This project, as originally intended, was
cancelled as we determined it was more appropriate to gradually extend
the existing distributed systems infrastructure rather than replace it.

o Expansion of the output management product family to include products
for distributed systems.

o E-business enablement, the development of the infrastructure necessary
to "Internet-ize" the entire New Dimension product family.

o Security, including additional features and add-on applications for
existing security applications.

o Enhancements to the CONTROL-M(R), CONTROL-D(R), CONTROL-SA(R) and
Enterprise Controlstation(R) products.

As of the date of the New Dimension acquisition, we concluded that the
in-process technology had no alternative future use after taking into
consideration the potential use of the technology in different products, the
stage of development and life cycle of each project, resale of the software and
internal use. As such, the value of the purchased IPR&D was expensed at the time
of the acquisition. As of March 31, 2002, the Integrated Operations Architecture
for the Enterprise project has been cancelled and the remaining projects have
been completed and the related products were made generally available.

On April 25, 2000, we acquired all of the outstanding shares of Evity in a
transaction accounted for as a purchase. The aggregate purchase price totaled
$67.3 million, including cash consideration of $10.0 million, 1.0 million shares
of common stock, 0.4 million common stock options and transaction costs, and was
allocated as follows: $2.5 million to acquired technology, $57.8 million to
goodwill and other intangibles and $7.0 million (10% of the purchase price) to
purchased in-process research and development. Net tangible assets acquired were
insignificant. The amount allocated to purchased IPR&D represents the estimated
fair value, based on risk-adjusted cash flows, related to Evity's research and
development projects not yet completed. At the date of acquisition, the
development of these projects had not yet reached technological feasibility, and
the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date, during the
quarter ended June 30, 2000.

At the acquisition date, Evity was conducting design, development,
engineering and testing activities associated with the completion of SiteAngel
2.0, an enhanced version of Evity's SiteAngel website performance monitoring
product, as well as new technologies in the areas of load testing and network
infrastructure. The projects under development at the valuation date represented
next-generation technologies that are expected to address emerging market
demands for the web performance market.

At the acquisition date, the technologies under development were
approximately 45% complete based on engineering man-month data and technological
progress. Evity had incurred nearly $1.0 million on the in-process projects and
expected to spend approximately $1.3 million to complete all phases of the
research and development. Anticipated completion dates ranged from 4 to 18
months, at which times we expected to begin benefiting from the developed
technologies. We completed SiteAngel 2.0 during fiscal 2001 and project costs
were materially consistent with management's estimates at the acquisition date.
Also during fiscal 2001, the remaining projects in-process at the acquisition
date were suspended indefinitely.

On August 8, 2000, we acquired all of the outstanding shares of OptiSystems
in a transaction accounted for as a purchase. The aggregate purchase price
totaled $71.5 million in cash, including transaction costs, and was allocated as
follows: $6.3 million to acquired technology, $55.2 million to goodwill and
other intangibles, $4.0 million to equipment, receivables and other non-software
assets, net of liabilities assumed, and $6.0 million (8% of the purchase price)
to purchased in-process research and development. The amount allocated to
purchased IPR&D represents the estimated fair value, based on risk-adjusted cash
flows, related to OptiSystems' incomplete research and development projects. At
the date of acquisition, the development of these projects had not yet reached
technological feasibility, and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date, during the quarter ended September 30, 2000.

At the acquisition date, OptiSystems was conducting design, development,
engineering and testing activities associated with the completion of several
components of its Energizer(R) for R/3 product. The projects under development
at the valuation date represent next-generation technologies that are expected
to address emerging market demands for the enterprise application performance
market.

17

At the acquisition date, the technologies under development were
approximately 50% complete based on engineering man-month data and technological
progress. OptiSystems had incurred approximately $1.0 million on the in-process
projects, and expected to spend approximately $1.2 million to complete all
phases of the research and development. Anticipated completion dates ranged from
2 to 11 months, at which times we expected to begin benefiting from the
developed technologies. The projects have been completed and project costs were
materially consistent with management's estimates at the acquisition date.

We completed other immaterial acquisitions during fiscal 2001 and 2002 which
were accounted for under the purchase method as indicated in the table above.

In making our purchase price allocations, we considered present value
calculations of income, analyses of project accomplishments and remaining
outstanding items, assessments of overall contributions, as well as project
risks. The values assigned to purchased in-process technology were determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projections
used to value the in-process research and development were based on estimates of
relevant market sizes and growth factors, expected trends in technology, and the
nature and expected timing of new product introductions by us and our
competitors. The resulting net cash flows from such projects are based on our
estimates of cost of sales, operating expenses, and income taxes from such
projects.

In the present value calculations, aggregate revenues for the New Dimension,
Evity and OptiSystems developed, in-process and future products were estimated
to grow at compounded annual growth rates of approximately 38%, 155% and 43%,
respectively, for the four years, five years and five years following
acquisition, respectively, assuming the successful completion and market
acceptance of the major current and future research and development programs.
The estimated revenues for the in-process projects were expected to peak within
three years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market.

The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations and venture capital rates of return.
Due to the nature of the forecasts and risks associated with the projected
growth and profitability of the developmental projects, discount rates of 20% to
30% were used to value the acquired IPR&D for the various acquisitions during
fiscal 2000, 2001 and 2002. Specifically, discount rates of 20%, 30% and 25%
were used to value the acquired IPR&D for New Dimension, Evity and OptiSystems,
respectively. Rates of 15%, 20% and 20% were used in discounting the cash flows
associated with the respective developed technologies. These discount rates were
commensurate with the respective stage of development and the uncertainties in
the economic estimates described above.

We believe that the assumptions used in the valuation of purchased
in-process technology represent a reasonably reliable estimate of the future
benefits attributable to the purchased in-process technology. No assurance can
be given that actual results will not deviate from those assumptions in future
periods.

The IPR&D charge for fiscal 2001 also includes the write-off of assets
totaling $4.7 million related to a technology agreement with Envive Corporation
that was terminated during the first quarter of fiscal 2001.

Amortization and Impairment of Acquired Technology, Goodwill and Intangibles

Under the purchase accounting method for certain of our acquisitions,
portions of the purchase prices were allocated to goodwill, workforce, customer
base, software and other intangible assets. We are amortizing these intangibles
over three to five-year periods, which reflect the estimated useful lives of the
respective assets. The increase in amortization expense from fiscal 2000 to
fiscal 2001 is related to the Evity, OptiSystems and other acquisitions
completed during fiscal 2001.

During fiscal 2002, we performed an assessment of the carrying values of our
acquired technology, goodwill and intangibles recorded in connection with
various acquisitions. The assessment was performed because sustained negative
economic conditions impacted our operations and expected future revenues.
Current economic indicators suggest that these conditions may continue for the
foreseeable future. As a result, we recorded impairment charges of $15.5 million
related to acquired technology to reflect these assets at their current
estimated net realizable values and $47.8 million related to goodwill to reflect
these assets at their current estimated fair values. These charges are reflected
together with amortization expense in the accompanying Consolidated Statements
of Operations and Comprehensive Income (Loss) for fiscal 2002, as amortization
and impairment of acquired technology, goodwill and intangibles.

18

We evaluated our acquired technology under the provisions of SFAS No. 86,
our other intangibles under the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and of Long-lived Assets to be Disposed Of," and
our enterprise-level goodwill under the provisions of Accounting Principles
Board (APB) Opinion No. 17, "Intangible Assets." The impairment charges for
acquired technology reflect the amounts by which the carrying values exceeded
the estimated net realizable values of the products. The net realizable values
for acquired technology were estimated as the future gross revenues from the
products reduced by the estimated future costs of completing and disposing of
the products, including the costs of performing maintenance and customer support
required to satisfy our responsibilities set forth at the time of sale. The
impairment charges for goodwill reflect the amounts by which the carrying values
exceeded the estimated fair values of these assets. Fair value was determined by
discounting estimated future net cash flows related to these assets. No
impairment was identified for our other intangible assets. Impairment charges by
asset category were as follows:

As of March 31, 2002, acquired technology of $50.2 million and goodwill and
intangibles of $133.6 million remained. As of April 1, 2002, we will adopt SFAS
No. 142, "Goodwill and Other Intangible Assets." Under this pronouncement,
goodwill and those intangible assets with indefinite lives will no longer be
amortized, but rather will be tested for impairment annually and when events or
circumstances indicate that their fair value has been reduced below carrying
value. Acquired technology will continue to be amortized under SFAS No. 86.
Goodwill and intangibles of $124.9 million will remain at April 1, 2002, that
will no longer be amortized. Intangible assets of $8.7 million with finite lives
will continue to be amortized over those useful lives.

We review the realizability of acquired technology, goodwill and intangibles
on an ongoing basis, and when there is an indication of impairment, we perform
the procedures under the applicable accounting pronouncements to quantify any
impairment that exists. Determining the amount of impairment of these assets, if
any, requires that we estimate future cash flows and make judgments regarding
discount rates and other variables that impact the net realizable value or fair
value of those assets, as applicable. Actual future cash flows and other assumed
variables could differ from our estimates. Future impairment charges under
existing pronouncements and under SFAS No. 142 to be adopted April 1, 2002,
could be material.

Restructuring and Severance Costs

During fiscal 2002, we implemented a restructuring plan to better align our
cost structure with existing market conditions. This plan included the
involuntary termination of 1,260 employees during the year. These actions were
across all divisions and geographies and the affected employees received cash
severance packages. During fiscal 2002, we also discontinued certain business
information integration products as a result of the dissolution of that business
unit, and announced the closure of certain locations throughout the world. A
charge of $52.9 million was recorded during fiscal 2002 for employee severance,
the write-off of software assets related to discontinued products, net of
proceeds from the sale of a portion of the related technology, and office
closures.

During fiscal 2002, we sold our enterprise data propagation (EDP) technology
for a minority equity investment in the purchaser and future cash payments to be
made based on the purchaser's quarterly sales to our former EDP customers over
the next four years. As these products were part of the discontinued business
information integration products, the proceeds will be recorded as a reduction
of restructuring and severance costs, as a recovery of the amount previously
written off for these products. For fiscal 2002, proceeds of $0.2 million were
recorded, reflecting the estimated fair value of the equity investment received.
As the future cash payments, if any, cannot be currently estimated, they will be
recorded in the periods received as a reduction of restructuring and severance
costs up to the amount previously written off. Any receipts in excess of the
related asset write-off will be reflected as other income.

19

As of March 31, 2002, $2.6 million of severance and facilities costs related
to actions completed under the restructuring plan remained accrued for payment
in future periods, as follows:

Legal Settlement

In October 1999, we settled all claims in a lawsuit styled BMC Software,
Inc., plaintiff, vs. Peregrine/Bridge Transfer Corp., Skunkware, Inc., Neon
Systems, Inc., Peregrine Systems, Inc., Wayne E. Fisher and John J. Moores,
defendants, vs. BMC Software, Inc. and Max P. Watson, counter-defendants. See
Note 9 to the Consolidated Financial Statements contained herein.

Merger-Related Costs and Compensation Charges

In conjunction with our merger with Boole in March 1999, management approved
a formal plan of restructuring which included steps to be taken to integrate the
operations of the two companies, consolidate duplicate facilities and streamline
operations to achieve reductions in overhead expenses in future periods. During
fiscal 2000, $14.1 million was incurred related to the plan, primarily for
termination benefits. During fiscal 2001 and 2002, $2.8 million and $0.4
million, respectively, of previously accrued merger costs were reversed, as
certain lease and severance obligations were satisfied at amounts below the
amounts originally estimated. These reversals are reflected as a reduction of
merger-related costs and compensation charges in the accompanying Consolidated
Statements of Operations and Comprehensive Income (Loss) for fiscal 2001 and
2002. As of March 31, 2002, we have minimal facilities costs that remain
accrued.

During fiscal 2001 and 2002, we recorded merger-related compensation charges
of $11.4 million and $13.2 million, respectively. These compensation charges are
primarily related to the vesting of common stock issued as part of the Evity
acquisition to certain Evity employee shareholders who we employed after the
acquisition. The vesting of the Evity-related common stock will be complete
during the first quarter of fiscal 2003.

Other Income, net

Other income, net consists primarily of interest earned on cash, cash
equivalents and marketable securities, realized gains and losses on marketable
and other investment securities, and interest expense on short-term borrowings.
Other income, net increased 68% from fiscal 2000 to fiscal 2001 and decreased
23% from fiscal 2001 to fiscal 2002. Other income for fiscal 2001 includes a
$2.9 million one-time gain related to the sale of a financial instrument and a
one-time $6.3 million gain related to a real estate transaction. The remaining
increases in other income, net for fiscal 2001 are primarily due to decreased
interest expense on short-term borrowings. In fiscal 2002, the decrease in other
income, net primarily relates to the one-time gains in the prior year discussed
above, a $6.4 million loss on a marketable security and $4.6 million of
impairment charges related to other equity investments. These decreases were
partially offset by lower interest expense as a result of our payment of all
short-term borrowings in the first quarter of fiscal 2002.

Income Taxes

We recorded income tax expense of $68.9 million and $18.0 million in fiscal
2000 and 2001, respectively, and an income tax benefit of $46.4 million in
fiscal 2002. Our effective tax rates were 22%, 30% and 20% for fiscal 2000, 2001
and 2002, respectively. During fiscal 2000, the decreased effective income tax
rate is the result of lower taxes associated with our European operations and
the effect of tax exempt interest on certain investments. The effective tax
rates for fiscal 2001 and 2002 are primarily impacted by acquisition-related
charges during those years that are not deductible for tax purposes. For an
analysis of the differences between the statutory and effective income tax
rates, see Note 6 to the Consolidated Financial Statements contained herein.

20

Recording income tax benefits results in the recognition of tax assets
representing current tax refunds receivable from net operating loss carrybacks
and/or the future benefit of utilizing net operating loss carryforwards and tax
credit carryforwards to reduce future tax obligations. We evaluate the deferred
tax assets related to net operating loss carryforwards and tax credit
carryforwards at each balance sheet date to determine their realizability,
considering currently enacted tax laws. If we determine that the assets are not
fully realizable, a valuation allowance will be recorded to reduce the asset
balances to their realizable values through a charge to income tax expense.
Determining whether we will be able to utilize the net operating loss
carryforwards and tax credit carryforwards requires that we estimate future
taxable income and make judgments regarding the timing of future tax
obligations. Actual taxable income could differ from our estimates. As of March
31, 2002, we believe it is more likely than not that we will be able to realize
the tax asset related to net operating loss carryforwards and therefore no
valuation allowance is recorded related to this asset. If we conclude that this
tax asset requires a valuation allowance in the future, the effect on income tax
expense could be material. As of March 31, 2002, we believe that it is more
likely than not that a portion of the deferred tax asset related to tax credit
carryforwards will not be realized and therefore we have recorded a valuation
allowance for this amount. If we conclude that this tax asset requires an
additional valuation allowance in the future, the effect on income tax expense
could be material. See Note 6 to the Consolidated Financial Statements contained
herein.

Earnings per Share

Basic earnings (loss) per share was $1.01, $0.17 and $(0.75) in fiscal 2000,
2001 and 2002, respectively. Diluted earnings (loss) per share was $0.96, $0.17
and $(0.75), respectively. The changes in earnings per share over the three
years primarily resulted from the factors discussed above. Weighted average
shares outstanding did not fluctuate significantly between these periods.

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for business
combinations and requires that all business combinations be accounted for using
one method, the purchase method. The Statement applies to all business
combinations initiated after June 30, 2001. SFAS No. 142 addresses financial
accounting and reporting at the point of acquisition for intangible assets
acquired individually or with a group of other assets, other than those acquired
in a business combination, and the financial accounting and reporting for
goodwill and other intangible assets subsequent to their acquisition. Under this
Statement, all goodwill and those intangible assets with indefinite useful lives
will no longer be amortized, but rather will be tested for impairment annually
and when events or circumstances indicate that their fair value has been reduced
below carrying value. Intangible assets with finite useful lives will continue
to be amortized over those useful lives. The provisions of SFAS No. 142 are
required to be applied for fiscal years beginning after December 15, 2001,
except that goodwill and intangibles that arise from business combinations after
June 30, 2001 will not be amortized. As such, we will adopt the Statement in its
entirety on April 1, 2002. Adoption of this Statement will eliminate a portion
of the amortization expense from our Consolidated Statement of Operations and
Comprehensive Income (Loss), which for fiscal 2002 totaled $130.0 million.
Goodwill and intangibles of $124.9 million will remain at April 1, 2002, that
will no longer be amortized. We are in the process of determining the impairment
charge, if any, that will be required upon adoption of this Statement. If such a
charge is required, it will be reflected as the effect of a change in accounting
principle in the Consolidated Statement of Operations and Comprehensive Income
(Loss) for the quarter ending June 30, 2002.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143
requires the recognition of a liability for the fair value of an asset
retirement obligation in the period in which the obligation is incurred, if a
reasonable estimate of fair value can be made. If a reasonable estimate of fair
value cannot be made in the period the obligation is incurred, the liability
must be recognized when a reasonable estimate of fair value can be made. Upon
initial recognition of such a liability, an equal amount must be capitalized
into the carrying amount of the related long-lived asset and subsequently
expensed over its useful life. The provisions of SFAS No. 143 are required to be
applied for fiscal years beginning after June 15, 2002. SFAS No. 144 supercedes
SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30
for the disposal of a segment of a business. This statement establishes a single
accounting model, based on the framework in SFAS No. 121, for long-lived assets
to be disposed of by sale and resolves significant implementation issues related
to Statement 121. The provisions of SFAS No. 144 are required to be applied for
fiscal years beginning after December 15, 2001. We believe that adoption of SFAS
No. 143 and SFAS No. 144 will not have a material effect on our financial
position or results of operations.

21

Quarterly Results

The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended March 31, 2001 and 2002. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with the
Consolidated Financial Statements and notes thereto.

Our quarterly results are subject to seasonality and can be volatile and
difficult to predict accurately prior to a quarter's end as discussed under
"Certain Risks and Uncertainties." Historical quarterly financial results and
trends may not be indicative of future results.

Liquidity and Capital Resources

At March 31, 2002, our cash and cash equivalents were $330.0 million and our
marketable securities were $773.7 million, for a total of $1,103.7 million, an
increase of $99.7 million from the March 31, 2001 total. Our working capital as
of March 31, 2002, was $316.2 million, reflecting an increase from the March 31,
2001 balance of $73.7 million due primarily to positive operating cash flow.
Stockholders' equity as of March 31, 2002, was $1.5 billion.

We continue to invest a portion of our cash in securities with maturities
beyond one year. While typically yielding greater returns, this reduces reported
working capital. Our marketable securities are primarily investment grade and
are highly liquid. The majority of our marketable securities are classified as
held-to-maturity under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." As such, they are recorded at amortized cost and changes
in their fair values during the holding period are not reflected in the
financial statements. If the creditworthiness of an issuer of these securities
deteriorates, losses would be recorded when we determine the decline in fair
value is other than temporary, when we sell the securities or upon default by
the issuer. The remainder of our marketable securities are classified as
available-for-sale under SFAS No. 115. Changes in the fair values of these
securities are reflected as unrealized gains and losses in stockholders' equity
and as a component of comprehensive income (loss). Gains and losses on these
securities are reflected in earnings either when realized through our sale of
the securities or when a decline in fair value is determined to be other than
temporary. Determining whether a value decline is other than temporary requires
that we make judgments about expected future events. Actual future fair values
could differ from our expectations.

We continue to finance our operations primarily through funds generated from
operations. For the year ended March 31, 2002, net cash provided by operating
activities was $522.8 million. Our primary source of cash is the sale of our
software licenses, software maintenance and professional services. We provide
financing on a portion of these sales transactions, to customers that meet our
specified standards of creditworthiness. We participate in established programs
with third-party financing institutions to securitize or sell a significant
portion of our finance receivables. We utilize certain wholly-owned, fully
consolidated special-purpose entities in these transfers. In addition, we
securitize finance receivables from customers with investment-grade credit
ratings through two special-purpose entities sponsored by third-party financial
institutions. The entities sponsored by third-party financial institutions are

22

multi-seller conduits with access to commercial paper markets, that purchase
interests in similar receivables from numerous other companies unrelated to us.
We have no ownership in either of the third-party financial institution
sponsored entities and have no voting influence over either of these entities'
operating and financial decisions. As a result, we do not consolidate these
entities. When we sell receivables in securitizations of software installment
contracts, we retain a beneficial interest in the securitized receivables, which
is subordinate to the interests of the entities sponsored by the third-party
financial institutions. The subordinate interests are measured and recorded at
fair value based on the present value of future expected cash flows estimated
using our best estimates of the key assumptions, including expected credit
losses and discount rates commensurate with the risks involved. We periodically
review the key assumptions and estimates used in determining the fair value of
the retained interest. The financing institutions have no recourse to our other
assets for failure of debtors to pay when due. Our retained interests are
subordinate to the investors' interests and the value of the retained interests
is subject to credit and interest rate risks on the transferred financial
assets. At March 31, 2001 and 2002, our retained interests were $25.0 million
and $14.9 million, respectively. Other finance receivables are sold to
third-party financial institutions on a non-recourse basis. We record such
transfers of beneficial interests in finance receivables to third-party
financing institutions as sales of such finance receivables when we have
surrendered control of such receivables, including determining that such assets
have been isolated beyond our reach and the reach of our creditors. We have not
guaranteed the transferred receivables and have no obligation upon default.
During the year ended March 31, 2002, we transferred $263.0 million of such
receivables through these programs. The high credit quality of our finance
receivables and the existence of these third-party facilities extend our ability
to offer financing to qualifying customers on an ongoing basis without a
negative cash flow impact.

Net cash used in investing activities in the year ended March 31, 2002 was
$48.6 million, primarily related to capitalized software development costs and
disbursements for the purchase of marketable securities which were partially
offset by receipts from the maturities of marketable securities. Net cash used
in financing activities in the year ended March 31, 2002 was $283.8 million,
which derived primarily from the repayment of all short-term borrowings and
treasury stock purchases. On April 24, 2000, our board of directors authorized
the purchase of up to $500.0 million in common stock. During the year ended
March 31, 2002, we purchased 9.0 million shares for $155.1 million. From the
inception of the repurchase plan through March, 2002, we have purchased 16.2
million shares for $310.2 million. We plan to continue to buy stock on the open
market from time to time, depending on market conditions, cash flows and other
possible uses of our cash.

We have no short-term or long-term debt outstanding. Our obligations for
future minimum lease payments under non-cancelable operating leases are $65.7
million in fiscal 2003, $58.7 million in fiscal 2004, $48.6 million in fiscal
2005, $40.9 million in fiscal 2006, $36.9 million in fiscal 2007 and $66.5
million in fiscal 2008 and beyond.

We believe that our existing cash balances and funds generated from
operations will be sufficient to meet our liquidity requirements for the
foreseeable future.

CERTAIN RISKS AND UNCERTAINTIES

Our Stock Price is Volatile.

Our stock price has been and is highly volatile. Our stock price is highly
influenced by current expectations of future revenue and earnings growth rates.
Any failure to meet anticipated revenue and earnings levels in a period or any
negative change in our perceived long-term growth prospects would likely have a
significant adverse effect on our stock price. Our historical financial results
should not be seen as indicative of future results.

The Timing and Size of License Contracts Could Cause Our Quarterly Revenues and
Earnings to Fluctuate.

Our revenues and results of operations are difficult to predict and may
fluctuate substantially quarter to quarter. The timing and amount of our license
revenues are subject to a number of factors that make estimation of operating
results prior to the end of a quarter extremely uncertain. We generally operate
with little or no sales backlog and, as a result, license revenues in any
quarter are dependent upon contracts entered into or orders booked and shipped
in that quarter. A significant amount of our license transactions are completed
during the final weeks and days of the quarter, and therefore we generally do
not know whether revenues and earnings will meet expectations until the final
days or day of a quarter.

23

We have a High Degree of Operating Leverage.

Our business model is characterized by a very high degree of operating
leverage. A substantial portion of our operating costs and expenses consists of
employee and facility-related costs, which are relatively fixed over the short
term. In addition, our expense levels and hiring plans are based substantially
on our projections of future revenues. If near term demand weakens in a given
quarter, there would likely be a material adverse effect on operating results
and a resultant drop in our stock price.

We May Have Difficulty Achieving our EPS Goal.

There is a risk that we may not be able to achieve our earnings per share
goal in the near-term. If current weak global economic conditions continue or if
there is continued global economic uncertainty due to terrorism or wartime
conditions, we may find it difficult to sustain our revenues or achieve revenue
growth. Although we have taken steps to reduce our expenses in light of current
conditions, our ability to achieve our earnings per share goal for fiscal 2003
is dependent upon increasing revenues year over year. If we are unable to
achieve our earnings per share goal, our stock price may be adversely affected.

Decreasing Demand for Enterprise License Transactions Could Adversely Affect
Revenues.

Fees from enterprise license transactions have historically been a
fundamental component of our revenues. These revenues depend on our customers
planning to grow their computer processing capacity and continuing to perceive
an increasing need to use our existing software products on substantially
greater processing capacity in future periods. Prior to 2000, we licensed many
of our larger customers to operate our mainframe products on significant levels
of processing capacity in excess of their then current mainframe processing
capacity. During the past several years, we also entered into many enterprise
license agreements with our larger customers to operate our distributed systems
products on significant levels of processing capacity in excess of their then
current distributed processing capacity. In a weak economy, these customers may
elect not to license our products for additional processing capacity until their
actual processing capacity or expected future processing capacity exceeds the
capacity they have already licensed from us. If economic conditions weaken
further, demand for data processing capacity could continue to slow or even
decline. In addition, the uncertain economic environment has reduced customers'
expectations of future capacity growth, thus lessening demand for licensing
excess processing capacity in anticipation of future growth. If our customers
who have entered into multi-year capacity-based licenses for excess processing
capacity do not increase their processing capacity beyond the levels previously
licensed from us or license additional processing capacity in anticipation of
future growth, then our license revenues may not grow and our earnings could be
adversely affected.

Increased Competition and Pricing Pressures Could Adversely Affect Our Earnings.

The market for systems management software has been increasingly competitive
for the past number of years. We compete with a variety of software vendors
including IBM and Computer Associates. We derived over half of our total
revenues in fiscal 2002 from software products for IBM and IBM-compatible
mainframe computers. IBM continues, directly and through third parties, to
enhance and market its utilities for IMS and DB2 as lower cost alternatives to
the solutions provided by us and other independent software vendors. Although
such utilities are currently less functional than our solutions, IBM has begun
to invest more heavily in the IMS and DB2 utility market and appears to be
committed to competing in these markets. If IBM is successful with its efforts
to achieve performance and functional equivalence with our IMS, DB2 and other
products at a lower cost, our business may be materially adversely affected. CA
is also competing with us in these markets. Competition has led to increased
pricing pressures within the mainframe systems software markets. We continue to
reduce the cost to our customers of our mainframe tools and utilities in
response to such competitive pressures. Microsoft entered the distributed
systems monitoring and management market through its relationship with NetIQ and
is now competing with us in the market for management tools for the Windows
environment.

In connection with the introduction of its zSeries mainframe server in the
fourth quarter of 2000, IBM has announced changes to its mainframe software
pricing, including a new workload-based pricing model offering. We have also
announced that we will support the new workload-based pricing structure for the
zSeries mainframe server, but the software used to measure workloads is not yet
available. As such, the effect of this change on our future mainframe license
revenues cannot be determined.

24

Our Products Must Remain Compatible with Ever-changing Operating and Database
Environments.

IBM, HP, Sun, Microsoft and Oracle are by far the largest suppliers of
systems and database software and, in many cases, are the manufacturers of the
computer hardware systems used by most of our customers. Historically, operating
and database system developers have modified or introduced new operating
systems, database systems, systems software and computer hardware. Such new
products could in the future incorporate features which perform functions
currently performed by our products or could require substantial modification of
our products to maintain compatibility with these companies' hardware or
software. Although we have to date been able to adapt our products and our
business to changes introduced by hardware manufacturers and operating and
database system software developers, there can be no assurance that we will be
able to do so in the future. Failure to adapt our products in a timely manner to
such changes or customer decisions to forego the use of our products in favor of
those with comparable functionality contained either in the hardware or
operating system could have a material adverse effect on our business, financial
condition and operating results.

Future Product Development is Dependent Upon Access to Third-party Source Code.

In the past, licensees using proprietary operating systems were furnished
with "source code," which makes the operating system generally understandable to
programmers, and "object code," which directly controls the hardware and other
technical documentation. Since the availability of source code facilitated the
development of systems and applications software, which must interface with the
operating systems, independent software vendors such as us were able to develop
and market compatible software. IBM and other hardware vendors have a policy of
restricting the use or availability of the source code for some of their
operating systems. To date, this policy has not had a material effect on us.
Some companies, however, may adopt more restrictive policies in the future or
impose unfavorable terms and conditions for such access. These restrictions may,
in the future, result in higher research and development costs for us in
connection with the enhancement and modification of our existing products and
the development of new products. Although we do not expect that such
restrictions will have this adverse effect, there can be no assurances that such
restrictions or other restrictions will not have a material adverse effect on
our business, financial condition and operating results.

Future Product Development is Dependent Upon Early Access to Third-party
Operating and Database Systems.

Operating and database system software developers have in the past provided
us with early access to pre-generally available (GA) versions of their software
in order to have input into the functionality and to assure that we can adapt
our software to exploit new functionality in these systems. Some companies,
however, may adopt more restrictive policies in the future or impose unfavorable
terms and conditions for such access. These restrictions may, in the future,
result in higher research and development costs for us in connection with the
enhancement and modification of our existing products and the development of new
products. Although we do not expect that such restrictions will have this
adverse effect, there can be no assurances that such restrictions or other
restrictions will not have a material adverse effect on our business, financial
condition and operating results.

Failure to Adapt to Technological Change Could Adversely Affect Our Earnings.

If we fail to keep pace with technological change in our industry, such
failure would have an adverse effect on our revenues and earnings. We operate in
a highly competitive industry characterized by rapid technological change,
evolving industry standards, changes in customer requirements and frequent new
product introductions and enhancements. During the past several years, many new
technological advancements and competing products entered the marketplace. The
distributed systems and application management markets in which we operate are
far more crowded and competitive than our traditional mainframe systems
management markets. Our ability to compete effectively and our growth prospects
depend upon many factors, including the success of our existing distributed
systems products, the timely introduction and success of future software
products, and the ability of our products to interoperate and perform well with
existing and future leading databases and other platforms supported by our
products. We have experienced long development cycles and product delays in the
past, particularly with some of our distributed systems products, and expect to
have delays in the future. Delays in new mainframe or distributed systems
product introductions or less-than-anticipated market acceptance of these new
products are possible and would have an adverse effect on our revenues and
earnings. New products or new versions of existing products may, despite
testing, contain undetected errors or bugs that could delay the introduction or
adversely affect commercial acceptance of such products.

25

Maintenance Revenue Growth Could Slow.

Maintenance revenues have increased in each of the last three fiscal years
as a result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase as the
processing capacity on which the products are installed increases; consequently,
we receive higher absolute maintenance fees as customers install our products on
additional processing capacity. Due to increased discounting for higher levels
of additional processing capacity, the maintenance fees on a per unit of
capacity basis are typically reduced in enterprise license agreements for our
mainframe products. In addition, customers may be entitled to reduced
maintenance percentages for entering into long-term maintenance contracts that
include prepayment of the maintenance fees or that are supported by a formal
financing arrangement. Should customers migrate from their mainframe
applications or find alternatives to our products, increased cancellations could
adversely impact the sustainability and growth of our maintenance revenues.
Also, renewal rates for maintenance on our distributed systems products are
lower than on our mainframe products.

Changes in Pricing Practices Could Adversely Affect Revenues and Earnings.

We may choose in fiscal 2003 or a future fiscal year to make changes to our
product packaging, pricing or licensing programs. If made, such changes may have
a material adverse impact on revenues or earnings. During the fourth quarter of
fiscal 2002, we revised our maintenance program to a single maintenance offering
of 24x7 support at a standard rate of 20% of the discounted price of the
associated product. In connection with this revision, we have extended our
standard warranty and initial support period to one year for all our products,
whereas prior to this revision such periods were 90 days for distributed systems
products and one year for mainframe products. Because our maintenance revenues
include the ratable recognition of the bundled fees for any initial maintenance
services covered by the related perpetual license agreement, in certain new
license transactions the extension of the initial support period for distributed
systems products will cause us to recognize more maintenance revenues over time
and less license revenues when the transactions occur. While this change in our
maintenance program will not have a material effect on our total revenues over
time, there will be a negative short-term revenue impact, which we have
considered in determining our estimates of future revenues. In addition, there
is a risk that our revenues could be negatively impacted if customers do not
accept these changes to the maintenance program and choose to license competing
products instead.

Our Customers May Not Accept our Product Strategies.

Historically, we have focused on selling software products to address
specific customer problems associated with their applications. We are now
integrating multiple software products and offering packaged solutions for
customers' systems. There can be no assurance that customers will perceive a
need for such solutions. In addition, there may be technical difficulties in
integrating individual products into a combined solution that may delay the
introduction of such solutions to the market or adversely affect the demand for
such solutions.

Risks Related to Business Combinations.

As part of our overall strategy, we have acquired or invested in, and plan
to continue to acquire or invest in, complementary companies, products, and
technologies and to enter into joint ventures and strategic alliances with other
companies. Risks commonly encountered in such transactions include: the
difficulty of assimilating the operations and personnel of the combined
companies; the risk that we may not be able to integrate the acquired
technologies or products with our current products and technologies; the
potential disruption of our ongoing business; the inability to retain key
technical and managerial personnel; the inability of management to maximize our
financial and strategic position through the successful integration of acquired
businesses; and decreases in reported earnings as a result of charges for
in-process research and development and amortization of acquired intangible
assets.

In order for us to maximize the return on our investments in acquired
companies, the products of these entities must be integrated with our existing
products. These integrations can be difficult and unpredictable, especially
given the complexity of software and that acquired technology is typically
developed independently and designed with no regard to integration. The
difficulties are compounded when the products involved are well established
because compatibility with the existing base of installed products must be
preserved. Successful integration also requires coordination of different
development and engineering teams. This too can be difficult and unpredictable
because of possible cultural conflicts and different opinions on technical
decisions and product roadmaps. There can be no assurance that we will be
successful in our product integration efforts or that we will realize the
expected benefits.

26

With each of our acquisitions, we have initiated efforts to integrate the
disparate cultures, employees, systems and products of these companies.
Retention of key employees is critical to ensure the continued advancement,
development, support, sales and marketing efforts pertaining to the acquired
products. We have implemented retention programs to keep many of the key
technical, sales and marketing employees; nonetheless, we have lost some key
employees and may lose others in the future.

Enforcement of Our Intellectual Property Rights.

We rely on a combination of copyright, patent, trademark, trade secrets,
confidentiality procedures and contractual procedures to protect our
intellectual property rights. Despite our efforts to protect our intellectual
property rights, it may be possible for unauthorized third parties to copy
certain portions of our products or to reverse engineer or obtain and use
technology or other information that we regard as proprietary. There can also be
no assurance that our intellectual property rights would survive a legal
challenge to their validity or provide significant protection for us. In
addition, the laws of certain countries do not protect our proprietary rights to
the same extent as do the laws of the United States. Accordingly, there can be
no assurance that we will be able to protect our proprietary technology against
unauthorized third party copying or use, which could adversely affect our
competitive position.

Possibility of Infringement Claims.

From time to time, we receive notices from third parties claiming
infringement by our products of patent and other intellectual property rights.
We expect that software products will increasingly be subject to such claims as
the number of products and competitors in our industry segments grow and the
functionality of products overlap. In addition, we may receive more patent
infringement claims as companies increasingly seek to patent their software and
business methods and enforce such patents, especially given the increase in
software and business method patents issued during the past several years.
Regardless of its merit, responding to any such claim could be time-consuming,
result in costly litigation and require us to enter into royalty and licensing
agreements which may not be offered or available on terms acceptable to us. If a
successful claim is made against us and we fail to develop or license a
substitute technology, our business, results of operations or financial position
could be materially adversely affected.

Risks Related to International Operations.

We have committed, and expect to continue to commit, substantial resources
and funding to build our international service and support infrastructure.
Operating costs in many countries, including many of those in which we operate,
are higher than in the United States. In order to increase international sales
in fiscal 2003 and subsequent periods, we must continue to globalize our
software product lines; expand existing and establish additional foreign
operations; hire additional personnel; identify suitable locations for sales,
marketing, customer service and development; and recruit international
distributors and resellers in selected territories. Future operating results are
dependent on sustained performance improvement by our international offices,
particularly our European operations. Our operations and financial results
internationally could be significantly adversely affected by several risks such
as changes in foreign currency exchange rates, sluggish regional economic
conditions and difficulties in staffing and managing international operations.
Generally, our foreign sales are denominated in our foreign subsidiaries' local
currencies. If these foreign currency exchange rates change unexpectedly, we
could have significant gains or losses. Many systems and applications software
vendors are experiencing difficulties internationally.

We maintain a software development office in India which operates as an
extension of our primary development offices and we contract with third-party
developers in India. To date, hostilities between India and Pakistan in the
disputed region of Kashmir have not adversely affected our operations in India.
Should we be unable to conduct operations in India in the future, we believe
that our business would not be materially adversely affected.

Conditions in Israel.

Our scheduling, security, output management and ERP development operations
are conducted primarily in Israel and, accordingly, we are directly affected by
economic, political and military conditions in Israel. Any major hostilities
involving Israel or the interruption or curtailment of trade between Israel and
its present trading partners could materially adversely affect our business,
operating results and financial condition. Since the establishment of the State
of Israel in 1948, a state of hostility has existed, varying in degree and
intensity, between Israel and the Palestinian people and the Arab countries. In
addition, Israel and companies doing business with Israel have been the subject
of an economic boycott by the Arab countries since Israel's establishment.
Although Israel has entered into various agreements with certain Arab countries
and the Palestinian Authority, and various declarations have been signed in
connection with efforts to resolve some of the economic and political problems
in the Middle East, we cannot predict

27

whether or in what manner these problems will be resolved. We maintain
comprehensive contingency and business continuity plans, and to date, the
current conflict in the region and hostilities within Israel have not caused
disruption of our operations located in Israel.

In addition, certain of our Israeli employees are currently obligated to
perform annual reserve duty in the Israel Defense Forces and are subject to
being called for active military duty at any time. Although our businesses
located in Israel have historically operated effectively under these
requirements, we cannot predict the effect of these obligations on our
operations in the future.

Possible Adverse Impact Of Interpretations of Existing Accounting
Pronouncements.

On April 1, 1998 and 1999 we adopted AICPA SOP 97-2, "Software Revenue
Recognition," and SOP 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions," respectively. The adoption
of these standards did not have a material impact on our financial position or
results of operations. Based on our reading and interpretation of these SOPs, we
believe that our current sales contract terms and business arrangements have
been properly reported. However, the AICPA and its Software Revenue Recognition
Task Force continue to issue interpretations and guidance for applying the
relevant standards to a wide range of sales contract terms and business
arrangements that are prevalent in the software industry. Also, the SEC has
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. Future interpretations of
existing accounting standards or changes in our business practices could result
in future changes in our revenue accounting policies that could have a material
adverse effect on our business, financial condition and results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of risks, including foreign currency exchange
rate fluctuations and changes in the market value of our investments. In the
normal course of business, we employ established policies and procedures to
manage these risks including the use of derivative instruments.

Foreign Currency Exchange Rate Risk

We operate globally and the functional currency for most of our non-U.S.
enterprises is the local currency. For fiscal 2000, 2001 and 2002, approximately
36%, 43% and 42% of our total revenues were derived from customers outside of
North America, substantially all of which were billed and collected in foreign
currencies. Similarly, substantially all of the expenses of operating our
foreign subsidiaries are incurred in foreign currencies. As a result, our U.S.
dollar earnings and net cash flows from international operations may be
adversely affected by changes in foreign currency exchange rates. To minimize
our risk from changes in foreign currency exchange rates, we utilize certain
derivative financial instruments.

We primarily utilize two types of derivative financial instruments in
managing our foreign currency exchange risk: forward exchange contracts and
purchased option contracts. Forward exchange contracts are used to reduce
currency exposure associated with our rights and obligations denominated in
foreign currencies that subject us to transaction risk. The terms of these
forward exchange contracts are generally one month or less and are entered into
at the prevailing market rate at the end of each month. Forward exchange
contracts and purchased option contracts, with terms generally less than one
year, are used to hedge anticipated, but not firmly committed, sales
transactions. Principal currencies hedged are the Euro and British pound, in
Europe, the Japanese yen and Australian dollar in the Asia Pacific region and
the Israeli shekel. While we actively manage our foreign currency risks on an
ongoing basis, there can be no assurance our foreign currency hedging activities
will offset the full impact of fluctuations in currency exchange rates on our
results of operations, cash flows and financial position. Foreign currency
fluctuations did not have a material impact on our results of operations and
financial position during fiscal 2000, 2001 or 2002.

Based on our foreign currency exchange instruments outstanding at March 31,
2002, and our financial position, results of operations and net cash flows for
the year ended March 31, 2002, we estimate that a near-term change in foreign
currency rates would not have a material effect on our future results of
operations or cash flows or the fair values of the instruments. We used a
value-at-risk ("VAR") model to measure potential fair value losses due to
foreign currency exchange rate fluctuations. The VAR model estimates were made
assuming normal market conditions and a 95% confidence level. The VAR model is a
risk estimation tool, and as such, is not intended to represent actual losses in
fair value that could be incurred.

28

Interest Rate Risk - Investments

We adhere to a conservative investment policy, whereby our principle concern
is the preservation of liquid funds while maximizing our yield on such assets.
Cash, cash equivalents and marketable securities approximated $1.1 billion at
March 31, 2002, and were invested in different types of investment-grade
securities with the intent of holding these securities to maturity. Although our
portfolio is subject to fluctuations in interest rates and market conditions, no
gain or loss on any security would actually be recognized in earnings unless the
instrument was sold or the loss in value was deemed to be other than temporary.

Based on our financial position, results of operations and net cash flows
for the year ended March 31, 2002, we estimate that a near-term change in
interest rates would not have a material effect on our future results of
operations or cash flows or the fair values of the investments. We used a VAR
model to measure potential market risk on our marketable securities due to
interest rate fluctuations. The VAR model estimates were made assuming normal
market conditions and a 95% confidence level. The VAR model is a risk estimation
tool, and as such, is not intended to represent actual losses in fair value that
could be incurred.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is submitted as a separate section of this Form
10-K. See Item 14.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Reference is made to the Company's Current Report on Form 8-K filed March
22, 2002, which is incorporated herein by reference.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to our directors and executive officers is included in
our definitive Proxy Statement in connection with our 2002 Annual Meeting of
Stockholders (the "2002 Proxy Statement"), which will be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year ended March 31, 2002, under the captions "ELECTION OF DIRECTORS --
Nominees" and "OTHER INFORMATION -- Executive Officers" and is incorporated
herein by reference in response to this Item 10.

ITEM 11. EXECUTIVE COMPENSATION

Information relating to executive compensation is set forth in the 2002
Proxy Statement under the captions "ELECTION OF DIRECTORS -- Compensation of
Directors" and "EXECUTIVE COMPENSATION" and is incorporated herein by reference
in response to this Item 11.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Information relating to ownership of the Registrant's Common Stock by
management and certain other beneficial owners and the Registrant's equity
compensation plans is set forth in the 2002 Proxy Statement under the captions
"OTHER INFORMATION -- Certain Stockholders" and "OTHER INFORMATION -- Equity
Compensation Plans" and is incorporated herein by reference in response to this
Item 12.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

29

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as a part of this Report

1. The following financial statements of BMC Software, Inc. and subsidiaries
(the Company) and the related reports of independent auditors and independent
public accountants are filed herewith:

2. The following financial statement schedule of the Company and the related
reports of independent auditors and independent public accountants are filed
herewith:

Report of Independent Auditors .................................................... 56
Report of Independent Public Accountants .......................................... 57
Schedule II -- Valuation Account .................................................. 58

All other financial statement schedules are omitted because (i) such
schedules are not required or (ii) the information required has been presented
in the aforementioned financial statements.

3. The following Exhibits are filed with this Report or incorporated by
reference as set forth below.

EXHIBIT
NUMBER
- -------

3.1 -- Restated Certificate of Incorporation of the Company;
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-22892)
(the S-1 Registration Statement).

3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation; incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended March
31, 1997 (the 1997 10-K).

*3.3 -- Certificate of Amendment of Restated Certificate of
Incorporation filed November 30, 1999.

3.4 -- Bylaws of the Company; incorporated by reference to Exhibit
3.2 to the S-1 Registration Statement.

4.1 -- Rights Agreement, dated as of May 8, 1995, between the Company
and The First National Bank of Boston, as Rights Agent (the
Rights Agreement), specifying the terms of the Rights, which
includes the form of Certificate of Designation of Series A
Junior Participating Preferred Stock as Exhibit A, the form of
Right Certificate as Exhibit B and the form of the Summary of
Rights as Exhibit C (incorporated by reference to Exhibit 1 to
the Company's Registration Statement on Form 8-A dated May 10,
1995).

4.2 -- Amendment to the Rights Agreement; incorporated by reference
to Exhibit 4.3 to the 1997 10-K.

10.1(a) -- Form of BMC Software, Inc. 1994 Employee Incentive Plan;
incorporated by reference to Exhibit 10.7(a) to the Company's
Annual Report on Form 10-K for the year ended March 31, 1995
(the 1995 10-K).

30

10.1(b) -- Form of Stock Option Agreement employed under BMC Software,
Inc. 1994 Employee Incentive Plan; incorporated by reference
to Exhibit 10.7(b) to the 1995 10-K.

10.2(a) -- Form of BMC Software, Inc. 1994 Non-employee Directors' Stock
Option Plan; incorporated by reference to Exhibit 10.8(a) to
the 1995 10-K.

10.2(b) -- Form of Stock Option Agreement employed under BMC Software,
Inc. 1994 Non-employee Directors' Stock Option Plan;
incorporated by reference to Exhibit 10.8(b) to the 1995 10-K.

10.3 -- Form of Indemnification Agreement among the Company and its
directors and executive officers; incorporated by reference to
Exhibit 10.11 to the 1995 10-K.

10.4(a) -- BMC Software, Inc. 2000 Employee Stock Incentive Plan;
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.

*10.4(b) -- First Amendment to 2000 Employee Stock Incentive Plan.

*10.4(c) -- Second Amendment to 2000 Employee Stock Incentive Plan.

*10.4(d) -- Form of Stock Option Agreement employed under 2000 Employee
Stock Incentive Plan.

10.5(a) -- BMC Software, Inc. 1994 Deferred Compensation Plan;
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 dated April 2, 1999.

10.5(b) -- First Amendment to BMC Software, Inc. 1994 Deferred
Compensation Plan; incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-8 dated April
2, 1999.

10.5(c) -- Form of BMC Software, Inc. 1994 Deferred Compensation Plan
Trust Agreement; incorporated by reference to Exhibit 4.3 to
the Company's Registration Statement on Form S-8 dated April
2, 1999.

10.6(a) -- Executive Employment Agreement between BMC Software, Inc. and
Robert Beauchamp; incorporated by reference to Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the year ended
March 31, 2001.

*10.6(b) -- Amendment No. 1 to Executive Employment Agreement between BMC
Software, Inc. and Robert Beauchamp.

10.7(a) -- Form of Executive Employment Agreement between BMC Software,
Inc. and Dan Barnea, Darroll Buytenhuys, Jeffrey Hawn and
Robert H. Whilden, Jr.; incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.

*10.7(b) -- Form of Amendment No. 1 to Executive Employment Agreement
between BMC Software, Inc. and Dan Barnea, Darroll Buytenhuys,
Jeffrey Hawn and Robert H. Whilden, Jr.

*10.8 -- Schedule to Form of Executive Employment Agreement, as
amended.

*21.1 -- Subsidiaries of the Company.

*23.1 -- Consent of Ernst & Young LLP.

*23.2 -- Consent of Arthur Andersen LLP.

* Filed herewith.

(b) Reports on Form 8-K

The Company filed a Report on Form 8-K on March 22, 2002 to report an event
under Item 4.

31

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders of BMC Software, Inc.

We have audited the accompanying consolidated balance sheet of BMC Software,
Inc. and subsidiaries as of March 31, 2002, and the related consolidated
statements of operations and comprehensive income (loss), stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BMC Software, Inc.
and subsidiaries at March 31, 2002, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.

Ernst & Young LLP

Houston, Texas
May 3, 2002

32

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To BMC Software, Inc.

We have audited the accompanying consolidated balance sheet of BMC Software,
Inc. (a Delaware corporation) and subsidiaries as of March 31, 2001, and the
related consolidated statements of operations and comprehensive income (loss),
stockholders' equity and cash flows for each of the two years in the period
ended March 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BMC Software, Inc. and
subsidiaries as of March 31, 2001, and the results of their operations and their
cash flows for each of the two years in the period ended March 31, 2001, in
conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Houston, Texas
June 8, 2001

33

BMC SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

34

BMC SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

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

35

BMC SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000, 2001 AND 2002
(IN MILLIONS)

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

36

BMC SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

37

BMC SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Nature of Operations

BMC Software, Inc. and its majority-owned subsidiaries (collectively, the
Company or BMC) develop software that provides systems management solutions for
large enterprises. BMC markets, sells and supports its solutions primarily
through its sales offices around the world, as well as through its relationships
with independent partners. The Company also performs software implementation,
integration and education services for its customers. Numerous factors affect
the Company's operating results, including general economic conditions, market
acceptance and demand for its products, its ability to develop new products,
rapidly changing technologies and competition. For a discussion of certain of
these important factors, see the discussion in Management's Discussion and
Analysis of Results of Operations and Financial Condition under the heading
"Certain Risks and Uncertainties."

(b) Use of Estimates

The Company's management makes estimates and assumptions in the preparation
of its consolidated financial statements in conformity with generally accepted
accounting principles. These estimates and assumptions may affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the respective reporting
periods. Actual results could differ from those results implicit in the
estimates and assumptions.

(c) Basis of Presentation

The accompanying consolidated financial statements include the accounts of
BMC Software, Inc. and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

Certain amounts previously reported have been reclassified in order to
ensure comparability among the years reported. Beginning in fiscal 2002,
reimbursements of out-of-pocket expenses are presented as professional services
revenues, rather than as a reduction of the cost of professional services. All
periods presented have been reclassified for consistency.

(d) Cash and Cash Equivalents

The Company considers investments with an original maturity of three months
or less when purchased to be cash equivalents. As of March 31, 2001 and 2002,
the Company's cash equivalents were comprised primarily of money market funds.
The Company's cash equivalents are subject to potential credit risk. The
Company's cash management and investment policies restrict investments to
investment quality, highly liquid securities. The carrying value of cash and
cash equivalents approximates fair value.

(e) Long Lived Assets

Property and Equipment --

Property and equipment are stated at cost. Depreciation on all property and
equipment, with the exception of buildings and leasehold improvements, is
calculated using the straight-line method over the estimated useful lives of the
assets, which range from three to ten years. Depreciation on buildings is
calculated using the straight-line method over the useful lives of the
components of the buildings, which range from 20 to 40 years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful lives of the assets, which range from two
to eight years. Interest is capitalized in connection with the construction of
major facilities. The capitalized interest is recorded as part of the asset to
which it relates and is amortized over the asset's estimated useful life. In
fiscal 2000 and 2001, $0.4 million and $5.6 million of interest cost was
capitalized. No interest was capitalized in fiscal 2002.

38

Internal-use software is accounted for under the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This standard requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. This SOP also requires that
costs related to the preliminary project stage, data conversion and the
post-implementation/operation stage of an internal-use software development
project be expensed as incurred.

A summary of property and equipment is as follows:

Depreciation expense recorded during the years ended March 31, 2000, 2001
and 2002, was $56.4 million, $67.5 million and $73.2 million, respectively.

The Company assesses impairment of property and equipment under Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of." The Company
reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows from the use of the
asset and its eventual disposition is less than the carrying amount of the
asset, an impairment loss is recognized based on the fair value of the asset.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143
requires the recognition of a liability for the fair value of an asset
retirement obligation in the period in which the obligation is incurred, if a
reasonable estimate of fair value can be made. If a reasonable estimate of fair
value cannot be made in the period the obligation is incurred, the liability
must be recognized when a reasonable estimate of fair value can be made. Upon
initial recognition of such a liability, an equal amount must be capitalized
into the carrying amount of the related long-lived asset and subsequently
expensed over its useful life. The provisions of SFAS No. 143 are required to be
applied for fiscal years beginning after June 15, 2002. SFAS No. 144 supercedes
SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30
for the disposal of a segment of a business. This statement establishes a single
accounting model, based on the framework in SFAS No. 121, for long-lived assets
to be disposed of by sale and resolves significant implementation issues related
to Statement 121. The provisions of SFAS No. 144 are required to be applied for
fiscal years beginning after December 15, 2001. The Company believes that
adoption of SFAS No. 143 and SFAS No. 144 will not have a material effect on its
financial position or results of operations.

Software Development Costs and Related Assets --

Costs of internally developed software for resale are expensed until the
technological feasibility of the software product has been established.
Thereafter, software development costs are capitalized and subsequently reported
at the lower of unamortized cost or net realizable value. Purchased software and
related assets are recorded at cost. The capitalized software costs are
amortized over the products' estimated useful lives, which is typically five
years, beginning upon the declaration of the underlying products as generally
available for sale. Each quarter, the Company analyzes the realizability of its
recorded software assets under the provisions of SFAS No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." This
process can result in accelerated amortization charges. During the years ended
March 31, 2000, 2001 and 2002, $102.7 million, $112.2 million and $104.2
million, respectively, of software costs were capitalized. Amortization for the
years ended March 31, 2000, 2001 and 2002 was $40.2 million, $60.2 million and
$115.7 million, respectively, including $8.2 million, $16.5 million and $57.2
million, respectively, of accelerated amortization for software products that
were not expected to generate sufficient future revenues necessary for the
Company to realize the carrying value of these assets. As a result of the
changes in market conditions and research and development headcount reductions
during the year ended March 31, 2002, the Company began focusing more on its
core and high-potential growth businesses. As part of this effort, the Company
reviewed its product portfolio during fiscal 2002 and discontinued certain
products throughout the portfolio. To the extent that there were any capitalized
software development costs remaining on the balance sheet related to these
products, amortization was accelerated to write these balances off. This caused
the increase in accelerated

39

amortization from fiscal 2001 to fiscal 2002 above. The net effect of software
development cost capitalization and amortization is included in research and
development expenses in the accompanying consolidated statements of operations
and comprehensive income (loss).

During the year ended March 31 2002, the Company also wrote off software
assets totaling $14.9 million associated with certain business information
integration products that were discontinued during the year as a result of the
dissolution of that business unit as part of the Company's restructuring plan.
This charge is included in restructuring and severance costs in the accompanying
consolidated statement of operations and comprehensive income (loss) for the
year ended March 31, 2002 and is discussed further in Note 12 - Restructuring
and Severance Costs.

Acquired Technology, Goodwill and Other Intangibles --

Acquired technology, representing developed technology of acquired
businesses, is stated at cost and is amortized on a straight line basis over the
products' estimated useful lives, which are typically three to five years. The
portion of a purchase which pertains to in-process research and development is
expensed in the period of the acquisition. Each quarter, the Company analyzes
the realizability of its acquired technology assets under the provisions of SFAS
No. 86.

Goodwill, representing the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses, and other intangibles are
stated at cost and are amortized on a straight-line basis over the estimated
future periods to be benefited, which is typically three to four years.
Enterprise-level goodwill is evaluated for impairment under the provisions of
Accounting Principles Board Opinion No. 17, "Intangible Assets," and other
intangibles are evaluated under the provisions of SFAS No. 121 when events or
circumstances indicate that the carrying amount of these assets may not be
recoverable.

During the year ended March 31, 2002, the Company performed an assessment of
the carrying values of its acquired technology, goodwill and intangibles
recorded in connection with various acquisitions. The assessment was performed
because sustained negative economic conditions impacted BMC's operations and
expected future revenues. Current economic indicators suggest that these
conditions may continue for the foreseeable future. As a result, the Company
recorded impairment charges of $15.5 million related to acquired technology to
reflect these assets at their current estimated net realizable values and $47.8
million related to goodwill to reflect these assets at their current estimated
fair values. These charges are reflected together with amortization expense in
the accompanying consolidated statements of operations and comprehensive income
(loss) for the year ended March 31, 2002, as amortization and impairment of
acquired technology, goodwill and intangibles.

The impairment charges for acquired technology reflect the amounts by which
the carrying values exceeded the estimated net realizable values of the
products. The net realizable values for acquired technology were estimated as
the future gross revenues from the products reduced by the estimated future
costs of completing and disposing of the products, including the costs of
performing maintenance and customer support required to satisfy our
responsibilities set forth at the time of sale. The impairment charges for
goodwill reflect the amounts by which the carrying values exceeded the estimated
fair values of these assets. Fair value was determined by discounting estimated
future net cash flows related to these assets. No impairment was identified for
other intangible assets. Impairment charges by asset category were as follows:

As of March 31, 2002, acquired technology of $50.2 million and goodwill and
intangibles of $133.6 million remained. As of April 1, 2002, the Company will
adopt SFAS No. 142, "Goodwill and Other Intangible Assets." Under this
pronouncement, goodwill and those intangible assets with indefinite lives will
no longer be amortized, but rather will be tested for impairment annually and
when events or circumstances indicate that their fair value has been reduced
below carrying value. As such, adoption of this Statement will eliminate a
portion of the amortization expense from the Company's consolidated statement of
operations and comprehensive income (loss), which for the year ended March 31,
2002 totaled $130.0 million. Acquired technology and intangible assets with
finite lives will continue to be amortized under SFAS No. 86 and SFAS No. 142,
respectively. Goodwill and intangibles of $124.9 million will

40

remain at April 1, 2002, that will no longer be amortized. Intangible assets of
$8.7 million with finite lives will continue to be amortized over those useful
lives. We are in the process of determining the impairment charge, if any, that
will be required upon adoption of this Statement. If such a charge is required,
it will be reflected as the effect of a change in accounting principle in the
consolidated statement of operations and comprehensive income (loss) for the
quarter ending June 30, 2002.

(f) Foreign Currency Translation and Risk Management

The Company operates globally and the functional currency for most of its
non-U.S. enterprises is the local currency. Financial statements of these
foreign operations are translated into U.S. dollars using the current rate
method in accordance with SFAS No. 52, "Foreign Currency Translation." As a
result, the Company's U.S. dollar net cash flows from international operations
may be adversely affected by changes in foreign currency exchange rates. To
minimize the Company's risk from changes in foreign currency exchange rates, the
Company utilizes certain derivative financial instruments.

The Company accounts for derivative financial instruments under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." These statements establish accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability, depending on the rights or obligations under the
contracts, at its fair value, and also require that changes in a derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. For a qualifying cash flow hedge, the effective portion of
changes in fair value of the derivative instrument are initially recognized in
other comprehensive income and then are reclassified into earnings in the period
that the hedged transaction affects earnings. Such accounting for qualifying
hedges allows a derivative's gains and losses to offset related results of the
hedged item in earnings, and requires the Company to formally document,
designate and continuously assess the effectiveness of transactions that receive
hedge accounting.

The Company primarily utilizes two types of derivative financial instruments
in managing its foreign currency exchange risk: forward exchange contracts and
purchased option contracts. Forward exchange contracts are used to reduce
currency exposure associated with the Company's rights and obligations
denominated in foreign currencies that subject the Company to transaction risk.
Such rights and obligations include accounts receivable, intercompany
receivables/payables, cash balances and certain liabilities of foreign
operations. The terms of these forward exchange contracts are generally one
month or less and are entered into at the prevailing market rate at the end of
each month. The fair value associated with these forward exchange contracts at
March 31, 2001 and 2002 is not material.

Forward exchange contracts and purchased option contracts are used by the
Company to hedge anticipated, but not firmly committed, sales transactions, and
qualify as cash flow hedges. The Company believes that the anticipated sales
transactions are probable and highly correlated with the derivative instruments.
Probability weightings are applied to the forecasted quarterly sales amounts up
to one year into the future and contracts are purchased to hedge the foreign
currency exchange risk on these weighted amounts with specified revenues being
designated as the hedged item. The Company excludes the change in the time value
of the contracts from its assessment of hedge effectiveness. In the event a
hedge ceases to be highly effective, the derivative is subsequently sold, or the
Company discontinues hedging operations, any unrecognized premium costs or
deferred gains will be recognized in earnings in that period. During fiscal
2000, 2001 and 2002, the Company did not recognize any amounts in earnings due
to hedge ineffectiveness, nor did the Company discontinue any cash flow hedges.
The terms of the Company's forward exchange contracts and purchased option
contracts are typically one year or less. The fair value of these forward
exchange contracts, determined based upon market forward exchange rates, and
purchased option contracts, estimated using the Black Scholes option pricing
model, at March 31, 2001 and 2002 was $5.6 million and $1.2 million,
respectively, and is included in other current assets in the consolidated
balance sheets. Changes in the intrinsic value of forward exchange contracts and
purchased option contracts are reported as a component of other comprehensive
income (loss).

The balances in other comprehensive income (loss) related to derivative
instruments as of March 31, 2002 are expected to be recognized in earnings over
the next twelve months. During the years ended March 31, 2000, 2001 and 2002,
general and administrative expenses included $0.3 million, $0.1 million and $2.0
million, respectively, related to premium, discount and time value realization
from derivative financial instruments and unhedged immaterial foreign exchange
exposures. The gains and losses from the Company's foreign currency financial
instruments are netted with the currency gains and losses of the hedged item in
the Company's consolidated statements of operations and comprehensive income
(loss).

41

The Company is exposed to credit-related losses in the event of
non-performance by counterparties to derivative financial instruments, but it
does not expect any counterparties to fail to meet their obligations, given
their high credit ratings. In addition, the Company diversifies this risk across
several counterparties and utilizes master netting agreements to mitigate the
credit risk of derivative financial instruments.

(g) Deferred Revenue

Deferred revenue is comprised of deferred maintenance, license, professional
services and other revenues. Deferred maintenance revenue is not recorded until
it has been collected or is supported by a formal, financing arrangement, and is
recognized in the statement of operations over the term of the arrangement,
which terms primarily range from one to five years. The principal components of
deferred revenue as of March 31, 2001 and 2002 are as follows:

(h) Revenue Recognition

The Company generates revenues from licensing software, providing
maintenance, enhancement and support for previously licensed products and
providing professional services. The Company utilizes written contracts as the
means to establish the terms and conditions by which the Company's products,
support and services are sold to its customers.

The Company recognizes revenue in accordance with the AICPA SOP 97-2,
"Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions." These statements
provide guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. In applying these statements, the
Company recognizes software license fees upon meeting the following four
criteria: execution of the signed contract, delivery of the underlying products
to the customer and the acceptance of such products by the customer,
determination that the software license fees are fixed and determinable, and
determination that collection of the software license fees is probable. In
instances when any one of the four criteria are not met, the Company will either
defer recognition of the software license revenue until the criteria are met or
will recognize the software license revenue on a ratable basis, as required by
SOPs 97-2 and 98-9. Maintenance, enhancement and support revenues are recognized
ratably over the term of the arrangement on a straight-line basis. Revenues from
license and maintenance transactions that are financed are generally recognized
in the same manner as those requiring current payment. The Company has an
established business practice of offering installment contracts to customers and
has a history of successfully enforcing original payment terms without making
concessions. Further, the payment obligations are unrelated to product
implementation or any other post-transaction activity. Revenues from sales
through agents, distributors and resellers are recorded either at the gross
amount charged the customer or net of commissions paid, based on the economic
risks and ongoing product support responsibilities assumed by the Company.
Revenues from professional services are typically recognized as the services are
performed for time-and-materials contracts, or on a percentage-of-completion
basis.

42

When several elements, including software licenses, maintenance,
enhancement and support and professional services, are sold to a customer
through a single contract, the revenues from such multiple-element arrangements
are allocated to each element based upon the residual method, whereby the fair
value of the undelivered elements of the contract is deferred. The Company has
established vendor-specific objective evidence of fair value for maintenance,
enhancement and support and professional services. Accordingly, software license
fees are recognized under the residual method for arrangements in which the
software is licensed with maintenance, enhancement and support and/or
professional services, and where the maintenance, enhancement and support and/or
professional services are not essential to the functionality of the delivered
software. In those instances where professional services are essential to the
functionality of the software licenses, contract accounting is applied to both
the software license and services elements of the arrangement. In the event a
contract contains terms which are inconsistent with the Company's
vendor-specific objective evidence, all revenues from the contract are deferred
until such evidence is established or are recognized on a ratable basis.

(i) Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net earnings (loss)
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. For purposes of this calculation, outstanding stock options and unearned
restricted stock are considered potential common shares using the treasury stock
method. For the years ended March 31, 2000, 2001 and 2002, the treasury stock
method effect of 1.5 million, 19.1 million and 38.4 million weighted options,
respectively, and --, 0.9 million and 0.5 million weighted unearned restricted
shares, respectively, has been excluded from the calculation of diluted EPS as
it is anti-dilutive. The following table summarizes the basic and diluted EPS
computations for the years ended March 31, 2000, 2001 and 2002:

(j) Treasury Stock

On April 24, 2000, the Company's board of directors authorized the Company
to repurchase up to $500.0 million in common stock. During the years ended March
31, 2001 and 2002, 7.2 million and 9.0 million shares, respectively, were
purchased for $155.1 million and $156.1 million, respectively, under this
authorization. No shares were repurchased during the year ended March 31, 2000.

(k) Comprehensive Income (Loss)

SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and displaying comprehensive income and its components. Comprehensive
income (loss) is the total of net earnings (loss) and all other non-owner
changes in equity, which for the Company include foreign currency translation
adjustments and unrealized gains and losses on securities available for sale and
the effective portion of unrealized gains and losses on derivative financial
instruments that qualify as cash flow hedges. A reconciliation of reported net
earnings (loss) to comprehensive income (loss) is included in the consolidated
statements of operations and comprehensive income (loss).

43

(2) TECHNOLOGY ACQUISITIONS

On April 14, 1999, the Company acquired, through a public tender offer, in
excess of 95% of the outstanding ordinary shares of New Dimension Software, Ltd.
(New Dimension). Total consideration paid approximated $673.0 million, including
the cost of the remaining 5% of outstanding shares acquired during fiscal 2000
and the Company's historical cost of approximately $2.0 million for shares of
New Dimension previously owned by Boole & Babbage, Inc. (Boole). Unrealized
gains of approximately $21.2 million related to these New Dimension shares
included in long-term marketable securities and accumulated other comprehensive
income at March 31, 1999, were eliminated when the acquisition was recorded. The
acquisition was accounted for as a purchase transaction, and the purchase price
was allocated as follows: $126.3 million to acquired technology, $435.9 million
to goodwill and other intangibles and $30.0 million to equipment, receivables
and other non-software assets, net of liabilities assumed. All intangible assets
are being amortized on a straight-line basis over four years, which represents
the estimated future periods to be benefited. Additionally, the Company
allocated $80.8 million, or 12% of the purchase price, to in-process research
and development (IPR&D), which represents the present value of the estimated
after-tax cash flows expected to be generated by the purchased technology,
which, at the acquisition date, had not yet reached technological feasibility
nor had an alternative future use.

At the acquisition date, New Dimension was conducting design, development,
engineering and testing activities in the following areas:

o Integrated Operations Architecture for the Enterprise, which was to be
the supporting infrastructure for all of the distributed systems
products from New Dimension. This project, as originally intended, was
cancelled as the Company determined it was more appropriate to
gradually extend the existing distributed systems infrastructure
rather than replace it.

o Expansion of the Output Management product family to include products
for distributed systems.

o E-business enablement, the development of the infrastructure necessary
to "Internet-ize" the entire New Dimension product family.

o Security, including additional features and add-on applications for
existing security applications.

o Enhancements to the CONTROL-M, CONTROL-D, CONTROL-SA and Enterprise
Controlstation products.

As of the date of the New Dimension acquisition, the Company concluded that
the in-process technology had no alternative future use after taking into
consideration the potential use of the technology in different products, the
stage of development and life cycle of each project, resale of the software and
internal use. As such, the value of the purchased IPR&D was expensed at the time
of the acquisition. As of March 31, 2002, the Integrated Operations Architecture
for the Enterprise project has been cancelled and the remaining projects have
been completed and the related products were made generally available.

On April 25, 2000, the Company acquired all of the outstanding shares of
Evity, Inc. (Evity) in a transaction accounted for as a purchase. The aggregate
purchase price totaled $67.3 million, including cash consideration of $10.0
million, 1.0 million shares of common stock, 0.4 million common stock options
and transaction costs, and was allocated as follows: $2.5 million to acquired
technology, $57.8 million to goodwill and other intangibles and $7.0 million, or
10% of the purchase price, to IPR&D. Net tangible assets acquired were
insignificant. All intangible assets are being amortized on a straight-line
basis over three years, which represents the estimated future periods to be
benefited. The amount allocated to purchased IPR&D represents the estimated fair
value, based on risk-adjusted cash flows, related to Evity's research and
development projects not yet completed. At the date of acquisition, the
development of these projects had not yet reached technological feasibility, and
the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date, during the
quarter ended June 30, 2000.

At the acquisition date, Evity was conducting design, development,
engineering and testing activities associated with the completion of SiteAngel
2.0, an enhanced version of Evity's SiteAngel website performance monitoring
product, as well as new technologies in the areas of load testing and network
infrastructure. The projects under development at the valuation date represented
next-generation technologies that are expected to address emerging market
demands for the web performance market.

At the acquisition date, the technologies under development were
approximately 45% complete based on engineering man-month data and technological
progress. Evity had incurred nearly $1.0 million on the in-process projects and
expected to spend approximately $1.3 million to complete all phases of the
research and development. Anticipated completion dates ranged from 4 to 18
months, at which times the Company expected to begin benefiting from the
developed technologies. The Company completed SiteAngel 2.0 during the year
ended March 31, 2001 and project costs were materially consistent with
management's estimates at the acquisition date. Also during fiscal 2001, the
remaining projects in-process at the acquisition date were suspended
indefinitely.

44

On August 8, 2000, the Company acquired all of the outstanding shares of
OptiSystems Solutions, Ltd. (OptiSystems) in a transaction accounted for as a
purchase. The aggregate purchase price totaled $71.5 million in cash, including
transaction costs, and was allocated as follows: $6.3 million to acquired
technology, $55.2 million to goodwill and other intangibles, $4.0 million to
equipment, receivables and other non-software assets, net of liabilities
assumed, and $6.0 million, or 8% of the purchase price, to purchased in-process
research and development. All intangible assets are being amortized on a
straight-line basis over three years, which represents the estimated future
periods to be benefited. The amount allocated to purchased IPR&D represents the
estimated fair value, based on risk-adjusted cash flows, related to OptiSystems'
incomplete research and development projects. At the date of acquisition, the
development of these projects had not yet reached technological feasibility, and
the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date, during the
quarter ended September 30, 2000.

At the acquisition date, OptiSystems was conducting design, development,
engineering and testing activities associated with the completion of several
components of its Energizer for R/3 product. The projects under development at
the valuation date represented next-generation technologies that are expected to
address emerging market demands for the enterprise application performance
market.

At the acquisition date, the technologies under development were
approximately 50% complete based on engineering man-month data and technological
progress. OptiSystems had incurred approximately $1.0 million on the in-process
projects, and expected to spend approximately $1.2 million to complete all
phases of the research and development. Anticipated completion dates ranged from
2 to 11 months, at which times the Company expected to begin benefiting from the
developed technologies. The projects have been completed and project costs were
materially consistent with management's estimates at the acquisition date.

The following unaudited pro forma results of operations for the years ended
March 31, 2000 and 2001, assume the acquisitions of Evity and OptiSystems
occurred at the beginning of each period presented. The pro forma consolidated
results do not purport to be indicative of results that would have occurred had
the acquisitions been in effect for the periods presented, nor do they purport
to be indicative of the results that will be obtained in the future. The pro
forma net earnings exclude the effect of the $7.0 million and $6.0 million
write-offs of IPR&D associated with the acquisitions, respectively, in
accordance with generally accepted accounting principles.

In connection with the Evity acquisition, 0.6 million restricted shares of
common stock were issued to certain employee shareholders of Evity. These shares
vest monthly over a two-year period based on continued employment with the
Company. The $25.1 million fair value of these shares was recorded as unearned
restricted stock compensation, a component of stockholders' equity, at the
acquisition date, and is being charged to expense as merger-related costs and
compensation charges over the service period.

The Company completed other immaterial acquisitions during the years ended
March 31, 2001 and 2002, which were accounted for under the purchase method. The
aggregate purchase price for these transactions in fiscal 2001 totaled $36.1
million in cash and $0.3 million in common stock options, and was allocated as
follows: $14.5 million to acquired technology, $18.2 million to goodwill and
other intangibles and $3.7 million, or 10% of the aggregate purchase price, to
purchased in-process research and development. Net tangible assets acquired were
insignificant. The aggregate purchase price for these transactions in fiscal
2002 totaled $12.2 million in cash, and was allocated as follows: $10.5 million
to acquired technology, $3.0 million to goodwill, and $1.3 million to assumed
liabilities, net of tangible assets acquired. All intangible assets are being
amortized on a straight-line basis over three years, which represents the
estimated future periods to be benefited.

In making its purchase price allocations for all acquisitions accounted for
under the purchase method, the Company considered present value calculations of
income, analyses of project accomplishments and remaining outstanding items,
assessments of overall contributions, as well as project risks. The values
assigned to purchased in-process technology were determined by estimating the
costs to develop the acquired technology into commercially viable products,
estimating the resulting net cash flows from the projects, and discounting the
net cash flows to their present value. The revenue projections used to value the
in-process research and development were based on estimates of relevant market
sizes and growth factors, expected trends in technology, and the nature and

45

expected timing of new product introductions by BMC and its competitors. The
resulting net cash flows from such projects are based on the Company's estimates
of cost of sales, operating expenses, and income taxes from such projects.

In the present value calculations, aggregate revenues for the New
Dimension, Evity and OptiSystems developed, in-process and future products were
estimated to grow at compounded annual growth rates of approximately 38%, 155%
and 43%, respectively, for the four years, five years and five years following
acquisition, respectively, assuming the successful completion and market
acceptance of the major current and future research and development programs.
The estimated revenues for the in-process projects were expected to peak within
three years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market.

The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations and venture capital rates of return.
Due to the nature of the forecasts and risks associated with the projected
growth and profitability of the developmental projects, discount rates of 20% to
30% were used to value the acquired IPR&D for the various acquisitions during
fiscal 2000, 2001 and 2002. Specifically, discount rates of 20%, 30% and 25%
were used to value the acquired IPR&D for New Dimension, Evity and OptiSystems,
respectively. Rates of 15%, 20% and 20% were used in discounting the cash flows
associated with the respective developed technologies. These discount rates were
commensurate with the respective stage of development and the uncertainties in
the economic estimates described above.

The IPR&D charge for fiscal 2001 also includes the write-off of assets
totaling $4.7 million related to a technology agreement with Envive Corporation
that was terminated during the first quarter of fiscal 2001.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," which addresses financial accounting and reporting for
business combinations and requires that all such transactions be accounted for
using one method, the purchase method. The Statement carries forward without
reconsideration the guidance in APB Opinion No. 16, "Business Combinations," and
certain of its amendments and interpretations related to the application of the
purchase method of accounting, including the principles of historical-cost
accounting, determination of the cost of an acquired entity, allocation of the
cost of an acquired entity to assets acquired and liabilities assumed and
determination of the acquisition date. The Company has adopted SFAS No. 141 for
all business combinations initiated after June 30, 2001.

(3) MARKETABLE SECURITIES

Management determines the appropriate classification of investments in
marketable debt and equity securities at the time of purchase and re-evaluates
such designation as of each subsequent balance sheet date. The Company has the
ability and intent to hold most of its debt securities to maturity and thus has
classified these securities as "held to maturity" pursuant to SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." These
securities have been recorded at amortized cost in the Company's consolidated
balance sheets. Securities classified as "available for sale" are recorded at
fair value. The resulting net unrealized gains or losses are recorded as a
component of accumulated other comprehensive income (loss). The Company holds no
securities classified as "trading securities." Gains and losses, realized and
unrealized, are calculated using the specific identification method. The tables
below summarize the Company's total marketable securities portfolio as of March
31, 2001 and 2002.

HELD-TO-MATURITY SECURITIES

46

AVAILABLE-FOR-SALE SECURITIES

The Company's mortgage securities are classified according to the stated
maturities of the securities.

47

Sales of available-for-sale securities for the years ended March 31, 2000,
2001 and 2002 were as follows:

Also during the year ended March 31, 2002, the Company determined that an
available-for-sale equity security had experienced a decline in its fair value
below its cost that was other than temporary. This security was written down to
fair value and the $6.4 million loss was included in gain (loss) on marketable
securities in the accompanying statement of operations and comprehensive income
(loss) for the year ended March 31, 2002.

During the year ended March 31, 2002, a held-to-maturity security was sold
due to significant deterioration in the issuer's creditworthiness. The amortized
cost of the security at the time of sale was $8.0 million and the related
realized loss was $5.9 million. No held-to-maturity securities were sold during
the years ended March 31, 2000 and 2001.

(4) TRADE FINANCE RECEIVABLES AND SECURITIZATIONS

Trade finance receivables arise in the ordinary course of business to
accommodate customers' cash flow objectives. Most of the trade finance
receivables entered into by the Company are transferred to financing
institutions. Such transfers are executed on a non-recourse basis either through
individual transfers or securitizations. BMC utilizes seven wholly-owned
special-purpose entities in these transfers. These wholly-owned entities are
fully consolidated in the Company's financial position and results of
operations. The Company records such transfers as sales of the related accounts
receivable when the Company is considered to have surrendered control of such
receivables under the provisions of SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities."

During the years ended March 31, 2000, 2001 and 2002, the Company
transferred finance receivables of $464.9 million, $272.6 million and $263.0
million, respectively, which approximated fair value, to financing institutions
on a non-recourse basis. Trade finance receivables that have not been
transferred are classified as trade finance receivables in the accompanying
consolidated balance sheets, are recorded at carrying value which approximates
fair value.

Of the amounts the Company transferred during the years ended March 31,
2001 and 2002, $154.0 million and $106.5 million, respectively, of software
installment contracts were sold in securitization transactions. The Company
securitizes finance receivables from customers with investment-grade credit
ratings through two special-purpose entities sponsored by third-party financial
institutions. The entities sponsored by third-party financial institutions are
multi-seller conduits with access to commercial paper markets, that purchase
interests in similar receivables from numerous other companies unrelated to BMC.
BMC has no ownership in either of the third-party financial institution
sponsored entities and has no voting influence over these entities' operating
and financial decisions. As a result, BMC does not consolidate these entities.
When the Company sells receivables in securitizations of software installment
contracts, it retains a beneficial interest in the securitized receivables,
which is subordinate to the interests of the entities sponsored by third-party
financial institutions. Gain or loss on sale of the receivables depends in part
on the previous carrying amount of the receivables involved in the transfer,
allocated between the assets sold and the retained interests based on their
relative fair value at the date of transfer. The subordinate interests are
measured and recorded at fair value based on the present value of future
expected cash flows estimated using management's best estimates of the key
assumptions, including expected credit losses and discount rates commensurate
with the risks involved. The Company periodically reviews the key assumptions
and estimates used in determining the fair value of the retained interests. The
financing institutions have no recourse to the Company's other assets for
failure of debtors to pay when due. The Company's retained interests are
subordinate to the investors' interests and the value of the retained interests
is subject to credit and interest rate risks on the transferred financial
assets. BMC utilizes interest rate swaps with the objective of minimizing such
interest rate exposure on the retained interests to immaterial levels. BMC also
retains servicing responsibility for the sold receivables. The fair value of the
servicing responsibility approximates adequate compensation for the servicing
costs incurred.

48

In the years ended March 31, 2001 and 2002, the Company recognized pretax
gains of $5.5 million and $4.4 million, respectively, on such securitizations
and received $148.3 million and $101.0 million, respectively, in proceeds from
the entities sponsored by the third-party financial institutions. As of March
31, 2001 and 2002, the total principal amount outstanding for all securitized
receivables was $319.0 million and $316.1 million, respectively. As of March 31,
2001 and 2002, the Company had retained interests with a fair value of $25.0
million and $14.9 million, respectively, which was determined utilizing the
following assumptions: no prepayments, expected credit losses of 0% and 3.5%,
respectively, weighted average life of 1.7 and 1.5 years, respectively, and an
average discount rate of 8.4% and 8%, respectively.

(5) SHORT-TERM BORROWINGS

During the year ended March 31, 2001, the Company converted the balance of
its revolving loans outstanding into a $115.0 million one-year term loan with an
interest rate of 5.9%. As of March 31, 2001, the term loan remained outstanding
and the Company had other short-term borrowings of $35.0 million. The Company's
total short-term borrowings of $150.0 million as of March 31, 2001, at a
weighted average interest rate of 5.9%, approximated fair value.

During the year ended March 31, 2002, the term loan matured and the Company
paid the balance outstanding. The Company entered a new 364-day $100.0 million
revolving credit facility, which was secured by certain of the Company's
financial assets whose market value was required to equal or exceed 115% of the
commitment under the facility. Interest on the borrowings under this facility
was payable monthly and accrued at a margin above LIBOR. On March 27, 2002, the
revolving credit facility was terminated. As of March 31, 2002, there were no
short-term borrowings outstanding.

(6) INCOME TAXES

Deferred income taxes are recognized for the temporary differences between
the recorded amounts of assets and liabilities for financial reporting purposes
and such amounts for income tax purposes. Research and development tax credits
are accounted for as a reduction of income tax expense in the year realized. The
income tax benefit from nonqualified stock options exercised, wherein the fair
market value at date of issuance is less than that at date of exercise, is
credited to additional paid-in capital. The tax effects of unrealized gains and
losses on available-for-sale securities and derivative financial instruments are
recorded through other comprehensive income within stockholders' equity.

The income tax provision (benefit) for the years ended March 31, 2000, 2001
and 2002, consisted of the following:

The foreign provision for income taxes is based on foreign pre-tax earnings
of $129.8 million, $94.0 million and $114.2 million for the years ended March
31, 2000, 2001 and 2002, respectively.

49

The income tax provisions (benefit) for the years ended March 31, 2000,
2001 and 2002 differ from the amounts computed by applying the statutory federal
income tax rate of 35% to consolidated earnings (loss) before income taxes as
follows:

Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for income tax purposes. The tax effects of
the temporary differences as of March 31, 2001 and 2002 are as follows:

Aggregate unremitted earnings of foreign subsidiaries for which U.S.
federal income taxes have not been provided, totaled approximately $511.1
million and $656.7 million at March 31, 2001 and 2002, respectively. Deferred
income taxes have not been provided on these earnings because the Company
considers them to be indefinitely reinvested.

At March 31, 2002, the Company had federal net operating loss carryforwards
of $41.4 million that will expire between 2005 and 2021.

During the year ended March 31, 2002, the Company and the Appeals Division
of the U.S. Internal Revenue Service (IRS) resolved substantially all of the
outstanding issues for fiscal 1997. Pending final resolution, this settlement
will not have a material effect on the Company's consolidated results of
operations or financial position.

The IRS is in the final stages of examining the Company's fiscal 1998 and
1999 federal income tax returns. The IRS has proposed various adjustments
relating to the Company's transfer pricing arrangements with one of its foreign
subsidiaries. The adjustments relate primarily to additional buy-in payments for
acquired technology and stock option compensation that allegedly must be
included in the Company's cost sharing agreement with its foreign affiliate. The
Company disagrees with the IRS position and intends to vigorously contest these
proposed adjustments. Although the ultimate resolution of these issues cannot be
predicted, it is not expected to have a material impact on the Company's
consolidated results of operations or financial position.

50

(7) STOCK INCENTIVE PLANS

The Company has adopted numerous stock plans that provide for the grant of
options and restricted stock to employees and directors of the Company. Under
the option plans, all options granted during the years ended March 31, 2000,
2001 and 2002 have been granted at fair market value as of the date of grant and
have a ten-year term, except for the 0.4 million replacement stock options
issued below fair market value in fiscal 2001 as consideration in the Evity
acquisition. The $15.4 million fair value of the Evity replacement options was
included in the purchase price for this acquisition. All options under these
plans vest over terms of three to five years. The restricted stock is subject to
transfer restrictions that lapse over one to four years. Under these plans, the
Company was authorized to grant an additional 12.1 million shares as of March
31, 2002.

The following is a summary of the stock option activity for the years ended
March 31, 2000, 2001 and 2002 (shares in millions):

The Company's outstanding options as of March 31, 2002, are as follows
(shares in millions):

The following is a summary of the restricted stock activity for the years
ended March 31, 2000, 2001 and 2002:

In fiscal 1997, the Company adopted the BMC Software, Inc. 1996 Employee
Stock Purchase Plan (the Purchase Plan). A total of 3.0 million shares of common
stock may be issued under the Purchase Plan to participating employees,
including 2.0 million additional shares approved by the stockholders during
fiscal 2001. Purchase rights under the Purchase Plan are granted at 85% of the
lesser of the market value of the common stock at the offering date or on the
exercise date. During fiscal 2000, 2001 and 2002, approximately 243,300, 654,400
and 906,700 shares of stock, respectively, were purchased pursuant to this plan.
The Purchase Plan terminates in 2006.

51

SFAS No. 123, "Accounting for Stock-Based Compensation," allows the Company
to account for its employee stock-based compensation plans under APB Opinion No.
25 and the related interpretations. In accordance with APB Opinion No. 25,
deferred compensation is recorded for stock-based compensation grants based on
the excess of the market value of the common stock on the measurement date over
the exercise price. The deferred compensation is amortized to expense over the
vesting period of each unit of stock-based compensation granted. If the exercise
price of the stock-based compensation is equal to or exceeds the market price of
the Company's stock on the date of grant, no compensation expense is recorded.

For the years ended March 31, 2000, 2001 and 2002, the Company recorded
compensation expense of $2.7 million, $19.8 million and $16.1 million,
respectively, for restricted stock grants. The expense for the years ended March
31, 2001 and 2002, includes $11.4 million and $13.0 million, respectively, of
merger-related compensation charges related to restricted shares issued as part
of the Evity acquisition. The weighted average grant date fair value per share
of restricted stock grants was $46.40, $38.31 and $20.51 for fiscal 2000, 2001
and 2002, respectively. The Company was not required to record compensation
expense for stock option grants and stock issued under the Purchase Plan during
the same periods, except for fiscal 2001 which included a charge of $3.3 million
related to the Purchase Plan.

Had the compensation cost for these plans been determined pursuant to the
alternative method permitted under SFAS No. 123, the Company's net earnings
(loss) and earnings (loss) per share would have been reduced to the following
pro forma amounts:

In computing the above pro forma amounts, the fair values of each option
grant and each purchase right under the Purchase Plan are estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 2000, 2001 and 2002, respectively:
risk-free interest rate of 6.7%, 4.75% and 4.55%, expected life of 5 years for
options and 6 months for Purchase Plan shares, expected volatility of 50%, 70%
and 75% and no expected dividend yields. The weighted average grant date fair
value per share of options granted in fiscal 2000, 2001 and 2002 was $23.56,
$15.37 and $11.45, respectively. The weighted average grant date fair value per
share of purchase rights granted under the Purchase Plan in fiscal 2000, 2001
and 2002 was $17.55, $11.50 and $5.77, respectively.

(8) RETIREMENT PLANS

The Company maintains a salary reduction profit sharing plan, or 401(k)
plan, available to all domestic employees. The 401(k) plan is based on a
calendar year and allows employees to contribute up to 15% of their annual
compensation with a maximum contribution of $10,000 in calendar year 1999 and
$10,500 in calendar years 2000 and 2001. In each of the calendar years 1999,
2000 and 2001, the board of directors authorized contributions to the 401(k)
plan that would match each employee's contribution up to a maximum of $5,000.
The costs of these contributions amounted to $16.5 million, $16.4 million and
$13.3 million for the years ended March 31, 2000, 2001 and 2002, respectively.
The Company contributions vest to the employee in increments of 25% per year
beginning with the second year of employment and ending with the fifth.

In addition to the Company's 401(k) plan, the Company maintains a deferred
compensation plan for certain employees. At March 31, 2001 and 2002, a total of
approximately $20.8 million and $20.9 million, respectively, is included in
long-term marketable securities, with a corresponding amount included in accrued
liabilities for the obligations under this plan. Employees participating in this
plan receive their respective balances based on predetermined payout schedules
or upon termination or death.

52

(9) COMMITMENTS AND CONTINGENCIES

Leases --

The Company is a party to non-cancelable operating leases for office space,
computer equipment and software. Rent is recognized equally over the lease term.
Total expenses incurred under these leases during the years ended March 31,
2000, 2001 and 2002, were approximately $48.5 million, $60.9 million and $58.2
million, respectively.

Future minimum lease payments to be made under non-cancelable operating
leases and minimum sublease payments to be received under non-cancelable
subleases as of March 31, 2002 are:

Litigation --

The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on the Company's financial position or results of
operations.

In October 1999, the Company settled all claims in a lawsuit styled BMC
Software, Inc., plaintiff, vs. Peregrine/Bridge Transfer Corp., Skunkware, Inc.,
Neon Systems, Inc., Peregrine Systems, Inc., Wayne E. Fisher and John J. Moores,
defendants, vs. BMC Software, Inc. and Max P. Watson, counter-defendants. The
settlement comprised a $30.0 million payment by the Company to certain
defendants and an $8.6 million payment to Neon Systems, Inc. under a software
distribution agreement entered into in connection with the settlement. The $55.4
million charge for legal settlement in the consolidated statement of operations
and comprehensive income (loss) for the year ended March 31, 2000 includes the
payments above and legal fees and other litigation expenses of $16.8 million.

(10) SEGMENT REPORTING

As of March 31, 2002, BMC's management reviewed the results of the
Company's software business by the following product categories: Enterprise
Server Management, Business Integrated Scheduling, Application & Database
Performance Management, Recovery & Storage Management and other software. The
Application & Database Performance Management product category includes multiple
operating segments that meet the aggregation criteria under SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." In
addition to these software segments, the professional services business is also
considered a separate segment. Through June 30, 2001, the results of the
business information integration product group were included as part of the
other software segment. Subsequent to June 30, 2001, management began including
a portion of this product group in the Application & Database Performance
Management segment and the remainder in the Recovery & Storage Management
segment. Certain of the business information integration products were
discontinued at the time of this change. Also during the year ended March 31,
2002, certain other products were moved within the product categories. The
amounts reported below for the years ended March 31, 2000, 2001 and 2002 reflect
these changes in the composition of the segments.

Segment performance is measured based on contribution margins, which
reflect only the direct controllable expenses of the segments and do not include
allocation of indirect research and development (R&D) expenses, the effect of
software development cost capitalization and amortization, selling and marketing
expenses, general and administrative expenses, amortization and impairment of
acquired technology, goodwill and intangibles, one-time charges, other income,
net, and income taxes. Assets and liabilities are not accounted for by segment.

53

Subsequent to March 31, 2002, the Company's management reorganized the
product categories for purposes of reviewing the results of the software
business for the year ending March 31, 2003. Future segment information will be
reported under this new structure and all previous periods presented will
reflect these changes in the composition of the segments.

54

Revenues from external customers and long-lived assets (excluding financial
instruments and deferred tax assets) attributed to the United States, the
Company's country of domicile, and all other countries are as follows.

(12) RESTRUCTURING AND SEVERANCE COSTS

During the year ended March 31, 2002, BMC implemented a restructuring plan
to better align the Company's cost structure with existing market conditions.
This plan included the involuntary termination of 1,260 employees during the
year. These actions were across all divisions and geographies and the affected
employees received cash severance packages. During fiscal 2002, the Company also
discontinued certain business information integration products as a result of
the dissolution of that business unit, and announced the closure of certain
locations throughout the world. A charge of $52.9 million was recorded for the
year ended March 31, 2002 for employee severance, the write-off of software
assets related to discontinued products, net of proceeds from the sale of a
portion of the related technology, and office closures.

During the year ended March 31, 2002, the Company sold its enterprise data
propagation (EDP) technology for a minority equity investment in the purchaser
and future cash payments to be made based on the purchaser's quarterly sales to
BMC's former EDP customers over the next four years. As these products were part
of the discontinued business information integration products, the proceeds will
be recorded as a reduction of restructuring and severance costs, as a recovery
of the amount previously written off for these products. For fiscal 2002,
proceeds of $0.2 million were recorded, reflecting the estimated fair value of
the equity investment received. As the future cash payments, if any, cannot be
currently estimated, they will be recorded in the periods received as a
reduction of restructuring and severance costs up to the amount previously
written off. Any receipts in excess of the related asset write-off will be
reflected as other income.

As of March 31, 2002, $2.6 million of severance and facilities costs
related to actions completed under the restructuring plan remained accrued for
payment in future periods, as follows:

(13) MERGER-RELATED COSTS

In conjunction with BMC's merger with Boole in March 1999, management
approved a formal plan of restructuring which included steps to be taken to
integrate the operations of the two companies, consolidate duplicate facilities
and streamline operations to achieve reductions in overhead expenses in future
periods. During the year ended March 31, 2000, $14.1 million was incurred
related to the plan, primarily for termination benefits. The restructuring plan
was substantially complete as of March 31, 2000. During the years ended March
31, 2001 and 2002, $2.8 million and $0.4 million, respectively, of previously
accrued merger costs were reversed, as certain lease and severance obligations
were satisfied at amounts below the amounts originally estimated. These
reversals are reflected as a reduction of merger-related costs and compensation
charges in the accompanying consolidated statements of operations and
comprehensive income (loss) for those years. As of March 31, 2002, minimal
facilities costs remain accrued.

55

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders of BMC Software, Inc.

We have audited the consolidated financial statements of BMC Software, Inc. and
subsidiaries as of March 31, 2002 and for the year then ended and have issued
our report thereon dated May 3, 2002 (included elsewhere in this Annual Report
on Form 10-K). Our audit also included the financial statement schedule as of
March 31, 2002 and for the year then ended listed in Item 14(a) of this Annual
Report on Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

Ernst & Young LLP

Houston, Texas
May 3, 2002

56

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of BMC Software, Inc.
and subsidiaries as of March 31, 2001, and for each of the two years in the
period ended March 31, 2001 included in this Form 10-K and have issued our
report thereon dated June 8, 2001. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. This Schedule is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This Schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

Houston, Texas
June 8, 2001

57

SCHEDULE II

BMC SOFTWARE, INC. AND SUBSIDIARIES

VALUATION ACCOUNT
YEARS ENDED MARCH 31, 2000, 2001 AND 2002
(IN MILLIONS)

58

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on June 12, 2002.

BMC SOFTWARE, INC.

By: /s/ ROBERT E. BEAUCHAMP
----------------------------------
Robert E. Beauchamp
President, Chief Executive Officer
and Director

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

59

EXHIBIT INDEX

60

10.5(c) -- Form of BMC Software, Inc. 1994 Deferred Compensation
Plan Trust Agreement; incorporated by reference to
Exhibit 4.3 to the Company's Registration
Statement on Form S-8 dated April 2, 1999.

10.6(a) -- Executive Employment Agreement between BMC Software, Inc.
and Robert Beauchamp; incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K
for the year ended March 31, 2001.

*10.6(b) -- Amendment No. 1 to Executive Employment Agreement
between BMC Software, Inc. and Robert Beauchamp.

10.7(a) -- Form of Executive Employment Agreement between
BMC Software, Inc. and Dan Barnea, Darroll Buytenhuys,
Jeffrey Hawn and Robert H. Whilden, Jr.; incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000.

*10.7(b) -- Form of Amendment No. 1 to Executive Employment Agreement
between BMC Software, Inc. and Dan Barnea, Darroll Buytenhuys,
Jeffrey Hawn and Robert H. Whilden, Jr.

*10.8 -- Schedule to Form of Executive Employment Agreement, as
amended.

*21.1 -- Subsidiaries of the Company.

*23.1 -- Consent of Ernst & Young LLP.

*23.2 -- Consent of Arthur Andersen LLP.

- ----------

* Filed herewith.

61