BMC SOFTWARE INC - 10-K Annual Report

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UNITED STATES
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, 2003

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 001-16393

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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)

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:

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. [ ]

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

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 September 30, 2002 was $3,074,051,021.

As of June 11, 2003, there were outstanding 228,625,980 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:

Definitive Proxy Statement filed in connection with the registrant's Annual
Meeting of Stockholders currently scheduled to be held on August 21, 2003 (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. Information contained on our website is not part of
this Annual Report.

PART I

ITEM 1. BUSINESS

OVERVIEW

BMC Software is one of the world's largest independent systems software
vendors, delivering comprehensive enterprise management. Delivering Business
Service Management, we provide software solutions that empower companies to
manage their information technology (IT) infrastructure from a business
perspective. Our extensive portfolio of software solutions spans enterprise
systems, applications, databases and service management. We were organized as a
Texas corporation in 1980 and were reincorporated in Delaware in July 1988. On
November 20, 2002, we acquired the assets and assumed certain liabilities of
Remedy(R). On March 20, 2003, we acquired all the outstanding shares of IT
Masters International S.A. (IT Masters). Our principal corporate offices are
located at 2101 CityWest Boulevard, Houston, Texas 77042-2827. Our telephone
number is (713) 918-8800, and our primary internet address is
http://www.bmc.com.

We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (SEC). These filings and
all related amendments are available free of charge at our website at
http://www.bmc.com/investors/sec_filings.html. Beginning with this Annual
Report, we will post all of our SEC documents to our website as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the SEC.

STRATEGY

In April 2003, we introduced a new strategic direction focused on Business
Service Management (BSM), the direct linkage of IT resources, management and
solutions with the goals of the overall business. The objective of our BSM
strategy is to enable companies to move beyond traditional IT management and
manage their business-critical services from both an IT and business
perspective. The intent of the BSM strategy is to provide solutions that will
enable customers to link their IT resources tightly to business objectives and
manage these resources based on business priorities by providing a "whole view"
of their business and IT operations. Three important components of BSM are: 1)
IT Operations and Infrastructure Management, 2) IT Service and Applications
Management and 3) Service Impact Management.

Our long-standing heritage of providing enterprise management solutions for
data, infrastructure, application, performance and service management are key to
the IT Operations and Infrastructure Management component of the BSM strategy.
We provide our customers with the ability to monitor and control the key
components in their IT infrastructure, including systems, databases,
applications, storage and networks, enabling them to tie service-level
agreements to business needs, rather than technology metrics.

We added an important element to our portfolio when we completed our
acquisition of Remedy in November 2002. Integration of Remedy's industry-leading
service desk, change management and asset management capabilities with our broad
application and component management solutions enables us to deliver end-to-end,
closed-loop service management to customers. Together, these solutions build a
solid foundation for the IT Service and Applications Management component of the
BSM strategy by offering both the delivery and support components of service
management designed to be proactive, effective and focused on customer business
requirements.

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An important component of BSM is to directly link business services to the
underlying technology. The acquisition of IT Masters in March 2003 enables us to
deliver the Service Impact Management component of the BSM strategy and enhances
our competitive position in the service management market. IT Masters'
MasterCell(R) technology, renamed PATROL(R) for Service Impact Management,
combines powerful event automation and service modeling capabilities to
transform availability and performance data into detailed knowledge about the
status of business services and service level agreements. Our comprehensive
enterprise and service management solutions, combined with PATROL for Service
Impact Management's IT service modeling and management capabilities, enable
customers to manage their business using a truly integrated service impact
management approach.

Although we believe that we have the most complete BSM offering in the
market today, our BSM strategy will continue to evolve over the next several
years. In addition to adding new solutions that support this strategy, we expect
that we will continue to expand partnerships to deliver on the BSM strategy.

PRODUCTS

Our software products are designed to help our customers proactively and
automatically manage their businesses through comprehensive systems management
solutions. These solutions span enterprise systems, applications, databases and
service management. During fiscal 2003, we managed our business along the
following broad categories: Enterprise Data Management, Enterprise Systems
Management, Service Management and Other Software Solutions. For financial
information related to these product categories, see Note 10 to the accompanying
Consolidated Financial Statements.

Enterprise Data Management

Our Enterprise Data Management solutions provide intelligent, automated
data management tools across all major databases, including IBM's IMS and DB2
for the mainframe environment and Microsoft's SQL Server, IBM's DB2 UDB and
Informix databases and databases from Oracle and Sybase for distributed
computing environments. This segment includes our SmartDBA family of database
management tools which offer highly automated monitoring and diagnostics,
automation of day-to-day management tasks, and fast, reliable database backup
and recovery. These solutions assist customers in lowering their operating
costs and increasing their IT staff productivity by optimizing database
availability as well as ensuring faster rollout of business applications. The
software products in this segment address the following data management needs
of businesses: application performance, database performance, space management,
SQL development, SQL tuning, system performance, database administration,
high-speed utilities and backup and recovery across mainframe and distributed
computing environments. Our Enterprise Data Management solutions contributed
approximately 50%, 45% and 44% of our license revenues in fiscal 2001, 2002
and 2003, respectively.

Enterprise Systems Management

Our Enterprise Systems Management solutions provide software tools for
businesses to proactively and centrally manage their IT infrastructure. A solid
infrastructure connected by a reliable network is the foundation of any
successful business. It is vital to know that a problem exists before it impacts
critical business applications. Accurate infrastructure management ensures that
all components required to deliver quality service to users are under control
and performing at optimal levels. Our solutions in this segment include our
PATROL product line for distributed computing environments, our MAINVIEW(R)
product line for mainframe computing environments and our enterprise job
scheduling and output management solutions. Within this product group, we
provide the following systems management solutions: server management for Unix,
Windows, Linux and mainframe environments, applications management, network
management, enterprise job scheduling, output management, service modeling and
performance and capacity planning. Our Enterprise Systems Management solutions
contributed approximately 43%, 46% and 42% of our license revenues in fiscal
2001, 2002 and 2003, respectively.

Service Management (Remedy)

Remedy, acquired in November 2002, delivers Service Management software
solutions that enable organizations to automate and manage internal and external
service and support processes. Remedy delivers out-of-the-box applications that
help customers align service and support with business objectives, improve
service levels, manage assets and lower costs. All Remedy applications,
including the help desk, asset management, change management, service level
agreement and customer support applications, are built on the highly flexible
Action Request System(R), empowering customers to easily adapt their Service
Management solution to unique and changing requirements. Our Remedy software
solutions contributed approximately 6% of our license revenues in fiscal 2003,
including approximately 12% of license revenues in our fourth fiscal quarter,
its first full quarter of results after the acquisition.

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Other Software Solutions

Our Other Software Solutions primarily include our storage management,
security, enterprise application management, subscription services and Linux
management solutions. Our storage management solutions extend our enterprise
systems management approach to computer storage environments. Our security
administration solutions facilitate user registration and password
administration and thereby enhance and strengthen the overall security of our
customers' information systems. Our enterprise application management solutions
include a comprehensive set of tools and utilities for SAP as well as other ERP
applications. Our subscription services provide remote monitoring of internet
sites and servers on a subscription basis. Our mainframe management tools for
the Linux operating system are also included in this product group. Our Other
Software Solutions contributed approximately 7%, 9% and 8% of our license
revenues in fiscal 2001, 2002 and 2003, respectively.

SALES AND MARKETING

We market and sell our products in most major world markets directly
through our sales force and indirectly through channel partners, including
resellers, distributors and systems integrators. We also have an inside sales
division which provides us a lower-cost channel for additional sales into
existing customers and expands our customer base. In addition, we market certain
of our products online through our webstore located at http://www.bmc.com.

INTERNATIONAL OPERATIONS

Approximately 43%, 42% and 44% of our total revenues in fiscal 2001, 2002
and 2003, respectively, were derived from business outside North America. For
additional financial information regarding our North America and international
operations, see "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Revenues" and Note 10 to the accompanying
Consolidated Financial Statements. Our international operations primarily
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 Israel for our scheduling, security,
output management and ERP products, in France for our network management
products and in Belgium for our service modeling 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 internal IT support, new product
development, maintenance and quality assurance for certain products as an
extension of our primary development offices, and we contract with third-party
developers in India. As a global company, we plan to continue to look for
opportunities to efficiently expand our operations in international locations
that offer highly-talented resources as a way to maximize our global
competitiveness.

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 the product development and IT operations in India. 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 --
Risks Related to International Operations."

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 gains
or losses. For a discussion of our currency hedging program and the impact of
currency fluctuations on international license revenues in fiscal 2002 and 2003,
see "Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Product License Revenue" and Note 1(g) to the accompanying
Consolidated Financial Statements. 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.

RESEARCH AND PRODUCT DEVELOPMENT

In fiscal 2001, 2002 and 2003, research, development and support spending,
net of capitalized amounts, represented 29%, 37% and 37% of our 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,

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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, Development and Support."

We conduct research and development activities in Houston and Austin,
Texas, Waltham, Massachusetts, San Jose and Mountain View, California, Israel,
France and Belgium, as well as in small offices in other locations around the
world. Product manufacturing and distribution for the Americas are based in
Houston, Texas, and Pleasanton, California, with European manufacturing and
distribution based in Dublin, Ireland, and Asia Pacific manufacturing and
distribution based in Singapore.

MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES

Revenues from providing maintenance, enhancement and support services
comprised 35%, 45% and 48% of our total revenues in fiscal 2001, 2002 and 2003,
respectively. Payment of maintenance, enhancement and support fees generally
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 products 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 products. 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 and enhanced product features
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. Professional services contributed
approximately 6%, 7% and 6% of our revenues for fiscal 2001, 2002 and 2003,
respectively.

PRODUCT PRICING AND LICENSING

Our software solutions are licensed under a variety of license types,
including single tiered computer licenses, enterprise capacity licenses and per
user licenses. 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
product across its enterprise, subject to capacity limits such as the aggregate
processing power of all its 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. Many of our largest customers have entered into enterprise
license agreements. Under a per user license, the customer is licensed to use
the product for a certain number of named users or seats. 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, additional license fees are 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. In addition to perpetual licenses, our software solutions are also
licensed, to a lesser degree, under term licenses whereby customers are granted
license rights to a given software product for a defined period of time. Under
both tiered and enterprise licenses, and both perpetual and term 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 recognize revenues from license 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 or determinable, collection is deemed probable and there are no
remaining material obligations on our part. Based on licensing trends and
increased customer requests for contractual terms that result in deferral of
revenue, we expect that our base of deferred license revenue will continue to
grow in the near future. The contract terms and conditions that result in
deferral of revenue recognition for a given transaction result from arm's length
negotiations between us and our customers. During these negotiations, the
contract terms and conditions that result in deferral may be requested by a
customer, while in some cases we may suggest inclusion of these terms and
conditions where it makes business sense to do so. In either case, the resulting
contract must be acceptable to both parties. Once it is determined that license
revenue for a particular contract must be deferred, based on the contractual
terms and application of revenue recognition policies to those terms, the
Company recognizes such license revenue either ratably over the term of the
contract or when

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the revenue recognition criteria are met. For the year ended March 31, 2003,
gross additions to deferred license revenue were $134.6 million. We again expect
a portion of our license revenue in fiscal 2004 to be either deferred until
contingencies are satisfied or recognized ratably due to certain terms and
conditions included in agreements. We recognize maintenance, enhancement and
support 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(j) to the accompanying Consolidated Financial Statements.

We make extended payment terms for our products and services available 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."

SEASONALITY

As is typical in the software industry, we tend to experience a higher
volume of license transactions and associated revenue in our third and fourth
fiscal quarters as a result of our customers' spending patterns and our internal
sales compensation plans. As a result of this seasonality for license
transactions, we tend to have greater operating cash flow in our first and
fourth fiscal quarters.

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 Microsystems and Hewlett Packard, 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 70 firms to be
directly competitive with one or more of our enterprise software solutions.
Certain of these companies have substantially larger operations than ours in
these specific niches.

Certain of our solutions in the Enterprise Data Management product group
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 continues to invest 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 would be
materially adversely affected. To date, our solutions have competed well against
IBM's because we have developed advanced automation and artificial intelligence
features and our utilities have maintained a speed advantage. In addition, we
believe that because we provide enterprise management solutions across multiple
platforms we are better positioned to provide customers with comprehensive
management solutions for their complex multi-vendor IT environments than
integrated hardware and software companies like IBM.

We believe that the key criteria considered by potential purchasers of our
products are as follows: operational advantages and cost savings provided;
expected return on investment; 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,
educational institutions, retailers, distributors, hospitals, service providers,
government agencies and value-added resellers.

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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 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.

EMPLOYEES

As of March 31, 2003, we had 6,861 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 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

On January 29, 2003, we filed a complaint against NetIQ Corporation (NetIQ)
in the United States District Court of the Southern District of Texas, Houston
Division, alleging that one or more of NetIQ's software products and their use
infringe a valid U.S. patent and that Net IQ infringed one or more trademarks
held by us. BMC Software seeks to enjoin NetIQ's current and future infringement
of our patent and trademarks and to recover compensatory damages and punitive
damages, interest, costs and fees.

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

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

Not Applicable.

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PART II

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

Our common stock is listed on the New York Stock Exchange and trades under
the symbol BMC. At June 11, 2003, there were 1,560 holders of record of our
common stock.

The following table sets forth the high and low intra-day sales prices per
share of common stock for the periods indicated.

We have never declared or paid dividends to BMC Software stockholders. 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."

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, 2003, are
derived from the Consolidated Financial Statements of BMC Software, Inc. and its
subsidiaries. The following acquisitions during the five-year period ended March
31, 2003 were accounted for under the purchase method and, accordingly, the
financial results of these acquired companies have been included in our
financial results below from the indicated acquisition dates: New Dimension
Software Ltd. in April 1999, Evity, Inc. (Evity) in April 2000, OptiSystems
Solutions Ltd. (OptiSystems) in August 2000, Remedy in November 2002 and IT
Masters in March 2003.

Prior to April 1, 2002, we were amortizing our acquired goodwill and
intangible assets over three to five-year periods, which reflected the estimated
useful lives of the respective assets. As of April 1, 2002, we adopted Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." In accordance with this Statement, goodwill and those intangible assets
with indefinite lives are no longer amortized, but rather are tested for
impairment annually and when events or circumstances indicate that their fair
value has been reduced below carrying value. Note 5 to the accompanying
Consolidated Financial Statements includes a reconciliation of our reported net
earnings (loss) and earnings (loss) per share for the years ended March 31, 2001
and 2002 to those amounts that would have resulted had there been no
amortization of goodwill and intangible assets with indefinite lives for those
periods. Note 5 to the accompanying Consolidated Financial Statements also
discusses impairment charges recorded during the year ended March 31, 2002
related to goodwill and acquired technology which materially impacted the
results for that year below.

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The consolidated financial statements for fiscal 1999 through fiscal 2001
have been audited by Arthur Andersen LLP, independent public accountants. The
consolidated financial statements for fiscal 2002 and fiscal 2003 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, 2002 and 2003, and for each of the three years in the
period ended March 31, 2003, the accompanying notes and the reports of
independent public accountants and independent auditors thereon, which are
included elsewhere in this Form 10-K.

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 make and evaluate estimates and
judgments, including those related to revenue recognition, capitalized software
development costs, in-process research and development of acquired businesses,
acquired technology, goodwill and intangible assets, deferred tax assets and
marketable securities. We base our estimates on historical experience and on
various other assumptions that 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."

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ACQUISITIONS

In April 2000, we acquired 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 for cash of $70.2 million. In November 2002, we acquired the assets
of Remedy from Peregrine Systems, Inc. (Peregrine) for cash of $355.0 million
plus the assumption of certain liabilities of Remedy. In accordance with the
purchase agreement, the cash purchase price was adjusted to $347.3 million
subsequent to March 31, 2003. In March 2003, we acquired IT Masters for cash of
$42.5 million. 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 consolidated 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 accompanying Consolidated Statements of
Operations and Comprehensive Income (Loss) bear to total revenues.

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 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 or determinable, and determination that collection of the
software license fees is probable. In instances when any one of the four
criteria is 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,

9

distributors and resellers are recorded either at the gross amount charged the
customer or net of commissions payable, based on the economic risks and ongoing
product support responsibilities we assume. On occasion, we have purchased goods
or services for our operations from customers at or about the same time that we
licensed our software to these customers. License revenues from such
transactions represent less than one percent of our total license revenues in
any period. Revenues from professional services are typically recognized as the
services are performed for time-and-materials contracts, or on a
percentage-of-completion basis. Our professional services revenues also include
sales of third-party software products which typically support our product
lines. These revenues are recorded net of amounts payable to the third-party
software vendors.

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, 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. 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.

Total revenues declined 15% in fiscal 2002. Continued absorption of prepaid
capacity and difficult economic conditions in domestic and international markets
throughout fiscal 2002 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. Difficult economic conditions have
persisted and information technology spending remains depressed. We have
experienced a decline in the size of transactions with our largest customers,
which historically have accounted for a significant portion of our revenues.
As discussed in Note 2 to the accompanying Consolidated Financial Statements,
we acquired Remedy in November 2002. Excluding the impact of Remedy revenues
subsequent to the acquisition date, total revenues declined 3% in fiscal 2003
primarily as a result of the economic conditions described above and reduced
revenues for our PATROL solutions during the first half of fiscal 2003, as
discussed below under Product Line Revenues. License revenue deferrals for
fiscal 2003 were consistent with fiscal 2002 and therefore did not have an
impact on the revenue change from year to year. Including Remedy revenues
subsequent to the acquisition date, total revenues increased 3%. Product revenue
growth was not materially impacted by inflation in fiscal 2002 and 2003.

10

PRODUCT LICENSE REVENUES

Our product license revenues primarily consist of fees related to products
licensed to customers on a perpetual basis. Product license fees can be
associated with a customer's licensing of a given software product for the first
time or with a customer's purchase of the right to run a previously licensed
product on additional computing capacity or by additional users. In addition to
perpetual-based product license fees, our product 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 defined period of time.

For the year ended March 31, 2003, gross additions to deferred license
revenue were $134.6 million. Based on licensing trends and increased customer
requests for contractual terms that result in deferral of revenue, we expect
that our base of deferred license revenue will continue to grow in the near
future. The contract terms and conditions that result in deferral of revenue
recognition for a given transaction result from arm's length negotiations
between us and our customers. During these negotiations, the contract terms and
conditions that result in deferral may be requested by a customer, while in some
cases we may suggest inclusion of these terms and conditions where it makes
business sense to do so. In either case, the resulting contract must be
acceptable to both parties. Once it is determined that license revenue for a
particular contract must be deferred, based on the contractual terms and
application of revenue recognition policies to those terms, the Company
recognizes such license revenue either ratably over the term of the contract or
when the revenue recognition criteria are met. Because of this, we generally
know the timing of the subsequent recognition of license revenue at the time of
deferral. Therefore, the amount of license revenue to be recognized out of the
deferred revenue balance in each future quarter is predictable, and our total
license revenues to be recognized each quarter become more predictable as a
larger percentage of those revenues come from the deferred balance. As of March
31, 2002 and 2003, our total deferred license revenue balance was $168.9 million
and $218.1 million, respectively.

Our North American operations generated 54%, 56% and 54% of total license
revenues in fiscal 2001, 2002 and 2003, respectively. North American license
revenues decreased 27% from fiscal 2001 to fiscal 2002 and 7% from fiscal 2002
to fiscal 2003. Excluding the impact of Remedy revenues subsequent to the
acquisition date, North American license revenues declined 13% in fiscal 2003.
While license revenues were down across most product groups in fiscal 2002 and
fiscal 2003, the largest contributor to the revenue declines in both years was
decreased license revenues for our mainframe data management products. In fiscal
2003, decreased PATROL license revenues also had a significant impact.

International license revenues represented 46%, 44% and 46% of total
license revenues in fiscal 2001, 2002 and 2003, respectively. International
license revenues decreased 33% from fiscal 2001 to fiscal 2002 and increased 2%
from fiscal 2002 to fiscal 2003. While license revenues were down across most
product groups from fiscal 2001 to fiscal 2002, decreased license revenues for
our mainframe data management products were the largest contributor to the
revenue decline for the year. Excluding the impact of Remedy revenues subsequent
to the acquisition date, international license revenues declined 4% in fiscal
2003. Increases in license revenue for our mainframe data management and
MAINVIEW products were more than offset by declines for our PATROL, distributed
systems data management and scheduling and output management products. The
international license revenue decline for fiscal 2002 included a decrease of 2%
and the decline in fiscal 2003 was net of an increase of 6% 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
generally entitles customers to product enhancements, technical support services
and ongoing compatibility with third-party operating systems, database
management systems, networks, storage systems and applications. Excluding
Remedy, these fees are generally charged annually and such fees have equaled 15%
to 20% of the discounted price of the product prior to the program change in the
fourth quarter of fiscal 2002 discussed below, and have equaled 20% subsequent
to the program change. 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. Maintenance revenues also include the ratable recognition
of the bundled fees for any initial maintenance services covered by the related
perpetual license agreement. Remedy's maintenance fees are generally charged
annually and equal 15% to 22% of the list price of the product. In addition,
customers may be entitled to reduced maintenance percentages on Remedy products
for entering into long-term maintenance contracts that include prepayment of the
maintenance fees.

11

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 has been a negative
short-term revenue impact. As discussed above, this maintenance program does not
apply to Remedy products.

Maintenance revenues increased 10% in both fiscal 2002 and 2003 primarily
as a result of the continuing growth in the base of installed products and the
processing capacity on which they run and the additional maintenance revenue
associated with Remedy. Excluding the impact of Remedy revenues subsequent to
the acquisition date, maintenance revenues increased 5% in fiscal 2003.
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. These discounts, combined
with the reduced maintenance percentages for long-term contracts discussed above
and the recent decline in our license revenues, have led to lower growth rates
for our maintenance revenue excluding Remedy. Further declines in our license
revenue and/or increased discounting could lead to declines in our maintenance
revenues excluding Remedy. Historically, our maintenance renewal rates have been
high, but economic pressures could cause customers to reduce their licensed
capacity and therefore the capacity upon which our maintenance, enhancement and
support fees are charged.

We expect Remedy maintenance revenues to increase over the next fiscal
year. As required by purchase accounting for the acquisition, the Remedy
deferred maintenance revenue at the acquisition date was written down to fair
value, as defined by U.S. generally accepted accounting principles. As such, the
amounts recognized as maintenance revenue out of that acquisition-date deferred
revenue balance will reflect this write-down. The vast majority of the
acquisition-date deferred revenue will be recognized during the 12 months
following the acquisition. All maintenance fees generated subsequent to the
acquisition date will be deferred and recognized over the maintenance period at
full contractual amounts.

PRODUCT LINE REVENUES

We market 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. Our recent acquisition of Remedy extends our solutions to include
products that automate service-related business processes through a complete
suite of service management applications. In fiscal 2003, our solutions were
broadly divided into three core business units and a fourth business unit geared
towards solution areas in markets that appear to offer high growth
opportunities. The Enterprise Data

12

Management group includes products designed for managing database management
systems on mainframe and distributed computing platforms. The Enterprise Systems
Management group includes our systems management and monitoring, scheduling and
output management solutions. The Remedy group includes our service management
solutions. The High Potential product lines encompass storage management,
security management, enterprise applications management, subscription services
and Linux management. We evaluate our investments in these product lines on an
ongoing basis and increase or decrease such investments as necessary, based on
our expectations of the products' future growth.

Our Enterprise Data Management solutions combined represented 53%, 48% and
45% of total software revenues for fiscal 2001, 2002 and 2003, respectively.
Total software revenues for this group declined 23% from fiscal 2001 to fiscal
2002 and 4% from fiscal 2002 to fiscal 2003. Because this product group includes
a high proportion of mainframe solutions, the continued absorption of prepaid
capacity and the external market factors discussed above were the primary cause
of the decline in license revenues in fiscal 2002, more than offsetting an
increase in maintenance revenue for that year. In fiscal 2003, the economic
conditions discussed above caused both license and maintenance revenues for our
mainframe data management products to decline, more than offsetting an increase
in maintenance revenue for our distributed systems data management products. The
maintenance revenue decline was primarily a result of lower discounted prices
and slowing capacity growth, which was not sufficient to offset these reduced
prices.

Our Enterprise Systems Management solutions combined contributed 41%, 44%
and 42% of total software revenues for fiscal 2001, 2002 and 2003, respectively.
Total software revenues for this group declined 9% from fiscal 2001 to fiscal
2002 and 1% from fiscal 2002 to fiscal 2003. In fiscal 2002, license revenue
decreases for this product group, due to the economic factors discussed above,
more than offset maintenance revenue increases. License revenues decreased in
fiscal 2003 primarily due to the continued weakness in IT spending and a
reduction in Unix shipments from hardware manufacturers. These external factors,
coupled with delays in customer purchase decisions resulting from delays in our
release of significant enhancements to components of the PATROL product line
during the first half of the year, had a direct negative impact on PATROL
license revenues, more than offsetting license revenue increases for the
MAINVIEW and Scheduling & Output Management product lines and maintenance
revenue increases for the PATROL and Scheduling & Output Management solutions.
The remaining key PATROL enhancements were delivered at the end of the third
quarter of fiscal 2003. Though PATROL license revenues were down for the second
half of the year compared to the same period in fiscal 2002, such revenues for
the third and fourth quarters increased sequentially over the immediately
preceding quarters. These increases were due, in part, to sales from the
newly-introduced agentless monitoring product, PATROL Express(R).

Our High Potential product lines contributed 5%, 7% and 7% of total
software revenues for fiscal 2001, 2002 and 2003, respectively. Total software
revenues for this group increased 16% from fiscal 2001 to fiscal 2002 and 3%
from fiscal 2002 to fiscal 2003. Fiscal 2002 growth includes revenue increases
across all product lines. However, license revenue for our High Potential
products declined in fiscal 2003. We evaluate our investments in these product
lines on an ongoing basis and will increase or decrease such investments as
necessary, based on our expectations of the products' future growth. As of April
1, 2003, we have decided from an organizational perspective to eliminate the
High Potential product lines as standalone units and to combine the storage
management, enterprise application management, subscription services and Linux
management product lines into the core Enterprise Systems Management business
unit. The security product group will continue to operate as an independent
business unit and currently has a dedicated sales force in North America. We
have also made changes related to the storage management product line, from a
go-to-market perspective. Our mainframe storage management and storage device
knowledge modules remain key components of our systems management solutions;
however, we have decided to limit our future research and development investment
in one product, PATROL Storage Manager, to supporting the existing version of
this product. This decision is based on our focus on improving profit margins
and allocating resources to more attractive opportunities.

Revenues from our Remedy products for the period from the acquisition date
of November 20, 2002 through March 31, 2003, contributed 6% of total software
revenues for fiscal 2003, including 13% of total software revenues in our fourth
fiscal quarter, its first full quarter of results after the acquisition,
including the impact of the write-down of the acquisition date deferred
maintenance revenue discussed above.

PROFESSIONAL SERVICES REVENUES

Professional services revenues, representing fees from implementation,
integration and education services performed during the periods and sales of
third-party software products, represented 6%, 7% and 6% of total revenues,
respectively, for fiscal 2001, 2002 and 2003. Professional services revenues
declined 6% from fiscal 2001 to fiscal 2002 and 3% from fiscal 2002 to fiscal
2003. Excluding the impact of Remedy revenues subsequent to the acquisition
date, professional services revenues declined 7%. The declines in both years are
the result of our decreased license revenues, as this results in less demand for
our implementation and integration services. Our professional services headcount
has decreased due to the lower license revenue levels.

13

EXPENSES

Beginning in fiscal 2002, we increased our focus on expense control to
better align our cost structure with the realities of a more difficult revenue
environment. This initiative included headcount reductions across all divisions
and geographies, office consolidations, elimination of certain product lines and
reductions in discretionary spending on items such as travel, consulting fees
and equipment. We were able to reduce these costs significantly while
maintaining our industry-leading product quality, customer support and sales
relationships. This initiative has continued throughout fiscal 2003 and will
continue into the future, as necessary.

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 40%, 42% and 38% of total revenues in fiscal
2001, 2002 and 2003, respectively. Selling and marketing expenses decreased 10%
from fiscal 2001 to fiscal 2002 and 7% from fiscal 2002 to fiscal 2003.
Excluding the impact of Remedy expenses subsequent to the acquisition date,
selling and marketing expenses declined 12%. Personnel costs were the largest
contributor to the expense declines in fiscal 2002 and 2003 as a result of
headcount reductions during those years. Consulting fees and travel costs also
declined in fiscal 2002 and advertising, marketing and travel costs decreased in
fiscal 2003.

RESEARCH, DEVELOPMENT AND SUPPORT

Research, development and support 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, development and support costs were reduced in all three fiscal
years by amounts capitalized in accordance with 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 economic lives, which historically have been
five years. As discussed below, we revised the estimated economic lives for
certain of our software products as of January 1, 2003, such that the
capitalized costs for the majority of our products will be amortized over an
estimated life of three years. Total capitalized software development costs, net
of amortization, at March 31, 2003, were $192.7 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 make estimates and
use judgment in quantifying the appropriate amount to write off, if any. Actual
amounts realized from the software products could differ from our estimates.
Also, any future changes to our product portfolio could result in significant
research, development and support expenses related to software asset write-offs.

14

The following table summarizes the amounts capitalized and amortized during
fiscal 2001, 2002 and 2003. Amortization for these periods includes amounts
accelerated for certain software products that 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 and fiscal 2003, we focused
more on our core and high-potential growth businesses. As part of this effort,
we reviewed our product portfolio during fiscal 2002 and fiscal 2003 and
discontinued certain products. 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 was
the primary reason for the increase in accelerated amortization in fiscal 2002
and 2003 as compared to fiscal 2001. The continued need to accelerate
amortization to maintain our capitalized software costs at net realizable value,
the results of the valuation performed for the Remedy acquisition that indicated
a three-year life was appropriate for that acquired technology and changes in
the average life cycles for certain of our software products caused us to
evaluate the estimated economic lives for our internally developed software
products. As a result of this evaluation, we revised the estimated economic
lives of certain products as of January 1, 2003, such that most products will be
amortized over an estimated life of three years. These changes in estimated
economic lives resulted in an additional $12.4 million of amortization expense
in the fourth quarter of fiscal 2003, and reduced basic and diluted earnings per
share for the year ended March 31, 2003 by $0.03 per share.

Research, development and support expenses increased 8% from fiscal 2001 to
fiscal 2002 primarily due to the net effect of software cost 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. Research,
development and support expenses increased 2% from fiscal 2002 to fiscal 2003.
Excluding the impact of Remedy expenses subsequent to the acquisition date,
research, development and support expenses decreased 2% primarily as a result of
reductions in personnel, professional fees and royalty costs which more than
offset the net effect of software cost capitalization and amortization detailed
above.

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 costs in the accompanying Consolidated Statement of Operations and
Comprehensive Income (Loss) for fiscal 2002 and is discussed further below under
the heading "-- Restructuring Costs."

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. Cost of professional services decreased 6% from fiscal 2001 to fiscal
2002 and 9% from fiscal 2002 to fiscal 2003. Excluding the impact of Remedy
expenses subsequent to the acquisition date, cost of professional services
declined 13%. The declines in both years resulted primarily from headcount
reductions during these periods as a result of the declines in professional
services revenues.

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. The 8% decline in general and administrative expenses in
fiscal 2002 was primarily related to decreased personnel costs, travel costs and
bad debt expense. General and administrative expenses declined 1% from fiscal
2002 to fiscal 2003. Excluding the impact of Remedy expenses subsequent to the
acquisition date, general and administrative expenses decreased 8% primarily as
a result of reduced bad debt expense, legal fees and shipping costs, which more
than offset increases in personnel, insurance and travel costs.

15

ACQUIRED RESEARCH AND DEVELOPMENT

In executing our product strategies, we employ both internal research and
development and the acquisition of emerging technologies and 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 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 2001, 2002 and 2003.

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 (IPR&D). 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 were 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

16

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 represented next-generation technologies that were
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 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.

On November 20, 2002, we acquired the assets of Remedy from Peregrine for
$355.0 million in cash plus the assumption of certain liabilities of Remedy. In
accordance with the purchase agreement, the cash purchase price was adjusted to
$347.3 million subsequent to March 31, 2003. The aggregate purchase price was
$356.8 million, including the adjusted cash consideration and direct costs of
the transaction. The allocation of the purchase price to specific assets and
liabilities was based, in part, upon outside appraisals of the fair value of
certain assets of Remedy. The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the date of
acquisition.

Of the $176.0 million of acquired intangible assets, we allocated $12.0
million (3% of the purchase price) to in-process research and development
projects. The amount allocated represents the estimated fair value, based on
risk-adjusted cash flows and historical costs expended, related to Remedy's
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 December 31, 2002.

At the acquisition date, Remedy was conducting design, development,
engineering and testing activities associated with the completion of
next-generation core and application technologies that are expected to address
emerging market demands in the service management market. At the acquisition
date, the technologies under development were approximately 25%-35% complete
based on engineering man-month data and technological progress. Remedy had
incurred nearly $6 million on the in-process projects, and expected to spend
approximately $16 million to complete all phases of the research and
development. Anticipated completion dates ranged from 3 to 12 months, at which
times we expect to begin benefiting from the developed technologies.

On March 20, 2003, we acquired all of the outstanding shares of IT Masters
in a transaction accounted for as a purchase. The aggregate purchase price
totaled $43.3 million in cash, including transaction costs, and was allocated as
follows: $11.2 million to acquired technology, $34.8 million to goodwill and
other intangibles, and $2.7 million to liabilities assumed, net of tangible
assets acquired. At the acquisition date, there were no projects that had
progressed to a degree that would enable the fair value of the in-process
research and development to be estimated with reasonable reliability and
therefore no value was allocated to IPR&D.

In making the purchase price allocations to IPR&D, 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.

17

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 Evity,
OptiSystems and Remedy developed, in-process and future products were estimated
to grow at compounded annual growth rates of approximately 155%, 43% and 15%,
respectively, for the five years following acquisition, 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 25% to
45% were used to value the acquired IPR&D for the various acquisitions during
fiscal 2001, 2002 and 2003. Specifically, discount rates of 30%, 25% and 40% to
45% were used to value the acquired IPR&D for Evity, OptiSystems and Remedy,
respectively. These discount rates were commensurate with the respective stage
of development and the uncertainties in the economic estimates described above.

The assumptions used in valuing IPR&D were based upon assumptions believed
to be reasonable but which are inherently uncertain and unpredictable.
Assumptions may be incomplete or inaccurate, and unanticipated events and
circumstances may occur. Accordingly, actual results may differ from the
projected results used to determine fair value.

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, software and other
intangible assets. Prior to April 1, 2002, we were amortizing all of these
intangibles over three to five-year periods, which reflected the estimated
useful lives of the respective assets. As of April 1, 2002, we adopted SFAS No.
142, "Goodwill and Other Intangible Assets." In accordance with this Statement,
goodwill and those intangible assets with indefinite lives are no longer
amortized, but rather are tested for impairment annually and when events or
circumstances indicate that their fair value has been reduced below carrying
value. Acquired technology continues to be amortized under SFAS No. 86. See Note
5 to the accompanying Consolidated Financial Statements for a reconciliation of
our reported net earnings (loss) and earnings (loss) per share to those amounts
that would have resulted had there been no amortization of goodwill and
intangible assets with indefinite lives for all periods presented. We assigned
our goodwill to the applicable reporting units and tested it for impairment upon
adoption of SFAS No. 142 as of April 1, 2002, and as of January 1, 2003 for the
required annual testing. The fair value of each of our reporting units with
goodwill assigned exceeded the respective carrying value of the reporting unit's
allocated net assets, including goodwill, and therefore no goodwill was
considered impaired as of either date.

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.
Economic indicators at that time suggested that such conditions could 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 then
current estimated net realizable values and $47.8 million related to goodwill to
reflect these assets at their then 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.

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

18

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:

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 could be material.

RESTRUCTURING 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 following four years. As these products were part of the
discontinued business information integration products, the proceeds will be
recorded as a reduction of restructuring 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 estimated,
they will be recorded in the periods received as a reduction of restructuring
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:

The $0.1 million credit to restructuring costs recorded during fiscal 2003
is primarily related to the net effect of adjustments to facilities and
severance accruals initially recorded during fiscal 2002. As of March 31, 2003,
substantially all disbursements related to the fiscal 2002 restructuring plan
have been paid.

MERGER-RELATED COSTS AND COMPENSATION CHARGES

During fiscal 2001, 2002 and 2003, we recorded merger-related compensation
charges of $11.4 million, $13.2 million and $0.6 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. Vesting was complete during the first quarter of
fiscal 2003.

19

Also during fiscal 2001 and 2002, $2.8 million and $0.4 million,
respectively, of previously accrued merger costs related to the Boole merger
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.

OTHER INCOME, NET

Other income, net consists primarily of interest earned on cash, cash
equivalents, marketable securities and finance receivables, gains and losses on
marketable securities and other investments and interest expense on short-term
borrowings. Other income, net decreased 23% from fiscal 2001 to fiscal 2002 and
decreased 9% from fiscal 2002 to fiscal 2003. 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. 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. In fiscal 2003, the decrease in other income, net
primarily relates to increased write-downs of marketable securities as a result
of fair value declines determined to be other than temporary totaling $13.4
million. Fiscal 2003 other income, net also included $4.5 million of impairment
charges related to other equity investments.

INCOME TAXES

We recorded income tax expense of $18.0 million in fiscal 2001, an income
tax benefit of $46.4 million in fiscal 2002, and income tax expense of $21.3
million in fiscal 2003. Our effective tax rates were 30%, 20%, and 31% for
fiscal 2001, 2002 and 2003, respectively. The reduced effective tax rate in
fiscal 2002 is a result of the impact of non-deductible amortization expense in
a year with a net pre-tax loss. For an analysis of the differences between the
statutory and effective income tax rates, see Note 6 to the accompanying
Consolidated Financial Statements.

As previously disclosed in our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2002, we received a Revenue Agent's Report ("RAR")
from the Internal Revenue Service (IRS) for the tax years ended March 31, 1998
and 1999. The RAR is not a statutory notice of deficiency, and we are protesting
the findings in the RAR. The RAR proposes tax increases resulting from
adjustments to the transfer pricing arrangement we have with one of our foreign
subsidiaries. The IRS claims in the RAR that our U.S. operations have not been
adequately compensated by the foreign subsidiary for the right to distribute our
technology in a specific territory. The case has been transferred to the IRS
Appeals division, and we are working with the IRS Appeals division to resolve
the issues. We believe that we have meritorious defenses to the proposed
adjustments, and that adequate provisions for income taxes have been made, and
therefore we believe that the ultimate resolution of the issues will not have a
material adverse impact on our consolidated financial position or results of
operations.

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, 2003, 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, 2003, 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 accompanying Consolidated Financial
Statements.

20

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - An Amendment of FASB Statement No. 123." This Statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and requires
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. We have elected not to adopt the recognition
and measurement provisions of SFAS No. 123 and continue to account for our
stock-based employee compensation plans under Accounting Principles Board (APB)
Opinion No. 25 and related interpretations and therefore the transition
provisions will not have an impact on our consolidated financial position or
results of operations. We have provided the required expanded disclosures in
Note 1(k) to the accompanying Consolidated Financial Statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. This Statement is effective for contracts
entered into or modified after June 30, 2003, except for the provisions that
relate to SFAS No. 133 Implementation Issues that have been effective for
quarters that began prior to June 15, 2003 and for hedging relationships
designated after June 30, 2003. We believe that adoption of SFAS No. 149 will
not have a material effect on our consolidated financial position or results of
operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement requires an issuer to classify specified financial instruments with
characteristics of both liabilities and equity as liabilities that were
previously classified either entirely as equity or between the liabilities
section and the equity section of the statement of financial position. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. We believe that adoption of SFAS No. 150
will not have a material effect on our consolidated financial position or
results of operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires certain
guarantees to be recorded at fair value and requires a guarantor to make
disclosures, even when the likelihood of making any payments under the guarantee
is remote. The initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, and the disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. We
believe that adoption of FIN 45 will not have a material effect on our
consolidated financial position or results of operations. We have provided the
required disclosures in Note 9 to the accompanying Consolidated Financial
Statements.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" (FIN 46). FIN 46 requires the consolidation of entities in which an
enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other interests in the entity. Currently, entities are
generally consolidated by an enterprise when it has a controlling financial
interest through ownership of a majority voting interest in the entity. We are
in the process of evaluating the implications of FIN 46 to all variable interest
entities with which we have involvement, but have determined that we will not be
required to consolidate the conduit entities discussed under the heading
"Liquidity and Capital Resources" under FIN 46 because the arrangements do not
result in us having variable interests in the conduit entities. The
consolidation requirements of FIN 46 apply to variable interest entities created
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003. We
believe that adoption of FIN 46 will not have a material effect on our
consolidated 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, 2002 and 2003. This information has been
prepared on the same basis as the accompanying 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 accompanying Consolidated Financial Statements and notes thereto.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2003, our cash, cash equivalents and marketable securities
were $1,015.3 million, a decrease of $88.4 million from the March 31, 2002
balance. As discussed in more detail below, this decline is primarily due to
cash funding for the Remedy and IT Masters acquisitions and treasury stock
purchases which more than offset positive operating cash flow. Approximately
two-thirds of the $1,015.3 million of cash, cash equivalents and marketable
securities at March 31, 2003 is held in international locations and was largely
generated from our international operations. Our international operations have
generated $717.2 million of earnings for which U.S. income taxes have not been
recorded. These earnings would be subject to U.S. income tax if repatriated to
the United States. The potential deferred tax liability for these earnings is
approximately $251 million; however, we have not provided a deferred tax
liability on any portion of the $717.2 million as we plan to utilize our cash in
international locations for foreign investment purposes. During fiscal 2003, we
utilized cash held in international locations to fund a portion of the Remedy
purchase price, based upon the valuation of the foreign assets of Remedy
acquired, and the IT Masters purchase price.

Our working capital as of March 31, 2003, was $259.4 million, reflecting a
decrease from the March 31, 2002 balance of $316.2 million due primarily to cash
funding for the Remedy and IT Masters acquisitions and treasury stock purchases
which more than offset positive operating cash flow. A significant dollar
portion of our marketable securities is invested in securities with maturities
beyond one year, and while typically yielding greater returns, investing in such
securities reduces reported working capital. Our marketable securities are
primarily investment grade and highly liquid. Because of current economic
trends, we have begun investing in securities with shorter original maturities.
On December 31, 2002, we reclassified our held-to-maturity portfolio to the
available-for-sale portfolio. The amortized cost recorded on the balance sheet
for the transferred securities was $396.1 million at the date of
reclassification. When the securities were transferred to the available-for-sale
portfolio, a net unrealized gain of $15.8 million was recorded as a component of
accumulated other comprehensive income (loss). The transfer of securities from
the held-to-maturity portfolio was made to increase our flexibility to react to
the unprecedented volatility in the debt securities markets that developed over
the quarters preceding the date of transfer. Stockholders' equity as of March
31, 2003, was $1.4 billion.

As discussed above, all of our marketable securities are classified as
available-for-sale under SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." 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.

22

We continue to finance our operations primarily through funds generated
from operations. For the year ended March 31, 2003, net cash provided by
operating activities was $605.6 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. Our practice of providing
financing at reasonable interest rates enhances our competitive position. We
participate in established programs with third-party financial institutions to
securitize or sell a significant portion of our finance receivables, enabling us
to collect cash sooner and remove credit risk. We utilize a consolidated
financial subsidiary and various wholly-owned, fully consolidated
special-purpose entities in these transfers. 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 multi-seller conduits with access to
commercial paper markets (the conduit entities) that purchase interests in
similar receivables from numerous other companies unrelated to us. In a
securitization transaction, we sell a pool of finance receivables to a
wholly-owned special-purpose entity. This special-purpose entity then sells a
senior interest in the receivables at a discount to a conduit entity in exchange
for cash. Though wholly-owned and consolidated by us, the special-purpose
entity's assets are legally isolated from the Company's general creditors and
the conduit entity's investors have no recourse to our other assets for the
failure of our customers to pay when due. We have no ownership in either of the
conduit entities and have no voting influence over the conduit entities'
operating and financial decisions. As a result, we do not consolidate the
conduit entities. When we sell receivables in securitizations, we retain a
beneficial interest in the securitized receivables, which is subordinate to the
interests of the investors in the conduit entities. The retained 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 subordinate
interests. The value of our retained subordinate interests is subject to credit
and interest rate risks on the transferred financial assets. At March 31, 2002
and 2003, the fair value of our retained subordinate interests was $14.9 million
and $14.2 million, respectively, and is included in long-term finance
receivables in the accompanying Consolidated Balance Sheets. Our maximum
exposure to loss at March 31, 2003, as a result of our involvement with the
conduit entities is limited to the carrying value of the retained subordinate
interest. 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 financial 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 years ended March
31, 2001, 2002 and 2003, we transferred $272.6 million, $263.0 million and
$376.8 million, respectively, 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. Recent shifts
in various market factors have made the transfer of certain of our finance
receivables more difficult and/or less cost effective, including changes in the
overall capacity of the market for such receivables, in customers' credit
quality, in the credit risk that third-party financial institutions are willing
to accept and in the documentation requirements of the third-party financial
institutions. These factors may impact our ability to transfer finance
receivables in the future.

Beginning in the quarter ended December 31, 2002, the change in long-term
finance receivables has been reported as a component of cash flows from
operating activities, whereas this was previously reported as a component of
cash flows from investing activities. All periods presented have been
reclassified for consistency. The change in long-term finance receivables
decreased net cash provided by operating activities by $13.7 million in fiscal
2001, and increased net cash provided by operating activities by $60.0 million
and $0.5 million for fiscal 2002 and 2003, respectively.

Net cash used in investing activities for the year ended March 31, 2003 was
$249.5 million, primarily related to the Remedy and IT Masters acquisitions, as
discussed in Note 2 to the accompanying Consolidated Financial Statements,
partially offset by proceeds from maturities of marketable securities during the
period. Net cash used in financing activities for the year ended March 31, 2003
was $186.7 million, which primarily related to purchases of our common stock. On
April 24, 2000, our board of directors authorized the purchase of up to $500.0
million in common stock, and on July 30, 2002, they authorized the purchase of
an additional $500.0 million. During the year ended March 31, 2003, we purchased
13.5 million shares for $211.6 million. From the inception of the repurchase
plan through March 31, 2003, we have purchased 29.7 million shares for $521.8
million. We plan to continue to buy our common stock and intend to purchase
between $200 million and $300 million of common stock during fiscal 2004,
subject to market conditions 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 $72.6
million in fiscal 2004, $63.5 million in fiscal 2005, $53.8 million in fiscal
2006, $44.7 million in fiscal 2007, $31.0 million in fiscal 2008 and $58.9
million in fiscal 2009 and beyond.

23

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

We operate in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The following section describes some, but not
all, of these risks and uncertainties that we believe may adversely affect our
business, financial condition or results of operations.

WE MAY EXPERIENCE A SHORTFALL IN REVENUE IN ANY GIVEN QUARTER OR MAY ANNOUNCE
LOWER FORECASTED REVENUE OR EARNINGS, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE.

Our revenue is difficult to forecast and is likely to fluctuate from
quarter to quarter due to many factors outside of our control. In addition, 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, earnings, cash flows and/or changes to the deferred license revenue
balances will have met expectations until the first few days of the following
quarter. Any significant revenue shortfall or lowered forecasts could cause our
stock price to decline substantially. Factors that could affect our financial
results include, but are not limited to:

o the possibility that our customers may defer or limit purchases as a
result of reduced information technology budgets, reduced data
processing capacity demand or the current weak and uncertain economic
and industry conditions;

o the possibility that our 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;

o the possibility that our customers may defer purchases of our products
in anticipation of new products or product updates from us or our
competitors;

o the unpredictability of the timing and magnitude of our sales through
direct sales channels, value-added resellers and distributors, which
tend to occur late in each quarter;

o an unexpected increase in license transactions that require revenues
to be deferred or recognized ratably over time rather than upfront;

o the timing of new product introductions by us and the market
acceptance of new products, which may be delayed as a result of weak
and uncertain economic and industry conditions;

o changes in our pricing and distribution terms or those of our
competitors; and

o the possibility that our business will be adversely affected as a
result of the threat of significant external events that increase
global economic uncertainty.

Investors should not rely on the results of prior periods as an indication
of our future performance. Our operating expense levels are based, in
significant part, on our expectations of future revenue. If we have a shortfall
in revenue in any given quarter, we will not be able to reduce our operating
expenses proportionally in response. Therefore, any significant shortfall in
revenue will likely have an immediate adverse effect on our operating results
for that quarter.

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 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. In the past, customers tended to renew their
enterprise license agreements prior to their expiration. Recent experience
indicates that some customers renew early while other customers continue to
operate under their existing capacity. Sustained sluggishness in IT and capital
spending can result in customers engaging in contract renewal discussions later
than we anticipate. These factors make it difficult to anticipate the size and
timing of renewals of enterprise licenses. If our

24

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.

WE MAY HAVE DIFFICULTY ACHIEVING OUR CASH FLOW FROM OPERATIONS GOAL.

Our quarterly cash flow is and has been volatile. If our cash generated
from operations proved in some future period to be materially less than the
market expects, the market price of our common stock could decline. Factors that
could adversely affect our cash flow from operations in the future include:
reduced net earnings; increased time required for the collection of accounts
receivable; an increase in uncollectible accounts receivable; a significant
shift from multi-year committed contracts to short-term contracts; a reduced
ability to transfer finance receivables to third parties; reduced renewal rates
for maintenance; and a reduced yield from marketable securities and cash and
cash equivalents balances.

MAINTENANCE REVENUE COULD DECLINE.

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. These discounts, combined with reduced maintenance
percentages for long-term contracts and the recent decline in our license
revenues, have led to lower growth rates for our maintenance revenue, excluding
the impact of Remedy revenues subsequent to the acquisition date. Further
declines in our license revenue and/or increased discounting would lead to
declines in our maintenance revenues. Although renewal rates remain high, should
customers migrate from their mainframe applications or find alternatives to our
products, increased cancellations could lead to declines in our maintenance
revenue.

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, earnings and cash flows.
Any failure to meet anticipated revenue, earnings and cash flow 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.

INTENSE COMPETITION AND PRICING PRESSURES COULD ADVERSELY AFFECT OUR EARNINGS.

The market for systems management software is highly competitive. We
compete with a variety of software vendors including IBM, Hewlett Packard (HP),
Computer Associates (CA) and a number of smaller software vendors. We derived
approximately half of our total revenues in fiscal 2003 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 continues to invest 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 would be materially adversely
affected. As a large hardware vendor and outsourcer of IT services, IBM has the
ability to bundle its other goods and services with its software and offer
packaged solutions to customers which could result in increased pricing
pressure. To date, our solutions have competed well against IBM's because we
have developed advanced automation and artificial intelligence features and our
utilities have maintained a speed advantage. In addition, we believe that
because we provide enterprise management solutions across multiple platforms we
are better positioned to provide customers with comprehensive management
solutions for their complex multi-vendor IT environments than integrated
hardware and software companies like IBM. 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.
Although to date we have not experienced significant competition from Microsoft,
their dominant position in the operating system market makes them capable of
exerting competitive pressure in the systems management market as well. We also
face competition from several niche software vendors, particularly for our
distributed systems product lines. In addition, the software industry is
experiencing continued consolidation. There is a risk that some of our
competitors may combine and consolidate market positions or combine technology,
making them stronger competitors.

25

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 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 BMC 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 ensure 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 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 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.

26

FAILURE TO MAINTAIN OUR EXISTING DISTRIBUTION CHANNELS AND DEVELOP ADDITIONAL
CHANNELS IN THE FUTURE COULD ADVERSELY AFFECT REVENUES AND EARNINGS.

With the acquisition of Remedy, the percentage of our revenue from sales of
our products and services through distribution channels such as systems
integrators and value-added resellers is increasing. Conducting business through
indirect distribution channels presents a number of risks, including:

o each of our systems integrators and value-added resellers can cease
marketing our products and services with limited or no notice and
with little or no penalty;

o our existing systems integrators and value-added resellers may not be
able to effectively sell new products and services that we may
introduce;

o we do not have direct control over the business practices adopted by
our systems integrators and value-added resellers;

o our systems integrators and value-added resellers may also offer
competitive products and services;

o we may face conflicts between the activities of our indirect channels
and our direct sales and marketing activities; and

o our systems integrators and value-added resellers may not give
priority to the marketing of our products and services as compared
to our competitors' products.

CHANGES IN PRICING PRACTICES COULD ADVERSELY AFFECT REVENUES AND EARNINGS.

We may choose to make changes to our product packaging, pricing or
licensing programs in response to customer demands or as a means to
differentiate our product offerings. If made, such changes may have a material
adverse impact on revenues or earnings.

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. Our BSM strategy
requires us to integrate multiple software products so that they work together
to provide comprehensive systems management solutions. 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. We may also adopt different
sales strategies for marketing our products, and there can be no assurance that
our strategies for selling solutions will be successful.

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, sales and managerial personnel; the inability of management to
maximize our financial and strategic position through the successful integration
of acquired businesses; the risk that revenues from acquired companies, products
and technologies do not meet expectations; and decreases in reported earnings as
a result of charges for in-process research and development and amortization of
acquired intangible assets.

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.

27

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 of acquired companies; 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 grows and the
functionality of products overlaps. 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 infrastructure. Operating costs in many
countries, including many of those in which we operate, are higher than in the
United States. To increase international sales in fiscal 2004 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.

We maintain a software development and information technology operations
office in India which operates as an extension of our primary development and
information technology operations and we contract with third-party developers in
India. As other software companies have done and are continuing to do, we plan
to continue to allocate more development and IT resources to India with the
expectation of achieving significant efficiencies, including reducing
operational costs and permitting an around-the-clock development cycle. To date,
the dispute between India and Pakistan involving the Kashmir region has not
adversely affected our operations in India. Should we be unable to conduct
operations in India in the future, we believe that our business could be
temporarily adversely affected.

We conduct substantial development and marketing operations 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. 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.

28

ACCOUNTING PRONOUNCEMENTS UNDER CONSIDERATION RELATED TO STOCK-BASED
COMPENSATION WOULD REDUCE OUR REPORTED EARNINGS AND COULD ADVERSELY AFFECT OUR
ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL BY REDUCING THE STOCK-BASED
COMPENSATION WE ARE ABLE TO PROVIDE.

We have used stock options and other long-term equity incentives as a
fundamental component of our employee compensation packages. We believe that
stock options and other long-term equity incentives directly motivate our
employees to maximize long-term stockholder value and, through the use of
vesting, encourage employees to remain with BMC Software. In accounting for our
stock option grants using the intrinsic value method under the provisions of
Accounting Principles Board Opinion No. 25, we recognize no compensation cost
because the exercise price of options granted is equal to the market value of
our common stock on the date of grant. The Financial Accounting Standards Board
(FASB) is currently considering changes to US generally accepted accounting
principles that, if implemented, would require us to record charges to earnings
for employee stock option grants, which would negatively impact our earnings.
For example, as disclosed in Note 1(k) to the accompanying Consolidated
Financial Statements, recording charges for employee stock options using the
fair value method under SFAS No. 123, "Accounting for Stock-Based Compensation"
would have reduced net earnings by $83.0 million, $84.0 million and $62.4
million for fiscal years 2001, 2002 and 2003, respectively. In addition, new
regulations proposed by The New York Stock Exchange requiring stockholder
approval for all stock option plans as well as new regulations prohibiting NYSE
member organizations from giving a proxy to vote on equity-compensation plans
unless the beneficial owner of the shares has given voting instructions could
make it more difficult for us to grant options to employees in the future. To
the extent that new regulations make it more difficult or costly to grant
options to employees, we may incur increased cash compensation costs or find it
difficult to attract, retain and motivate employees, either of which could
materially adversely affect our business.

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. 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 2001, 2002 and 2003, approximately
43%, 42% and 44% 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 2001, 2002 or 2003.

29

Based on our foreign currency exchange instruments outstanding at March 31,
2003, we estimate a one-day maximum potential loss on our foreign currency
exchange instruments of $3.9 million based on a value-at-risk ("VAR") model
utilizing Monte Carlo simulation. The comparable estimate based on our foreign
currency exchange instruments outstanding at March 31, 2002 was $2.4 million
utilizing the same model. The VAR model estimates were made assuming normal
market conditions and a 95% confidence level. The average VAR for the period was
$3.1 million for fiscal 2003 and $4.1 million for fiscal 2002. 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.

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 $1.0
billion at March 31, 2003, and were primarily invested in different types of
investment-grade debt securities. 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 consolidated financial position, results of operations and net
cash flows for the year ended March 31, 2003, we estimate that a near-term
change in interest rates would not have a material effect on our future
consolidated results of operations or cash flows or the fair values of the
investments. We used a VAR variance-covariance 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 15.

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 by reference.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item will be
included in our definitive Proxy Statement in connection with our 2003 Annual
Meeting of Stockholders (the "2003 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, 2003, under the headings "ELECTION OF DIRECTORS"
and "EXECUTIVE OFFICERS" and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be set forth in the
2003 Proxy Statement under the headings "COMPENSATION OF DIRECTORS" and
"EXECUTIVE COMPENSATION" and is incorporated herein by reference.

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

The information required by this item will be set
forth in the 2003 Proxy Statement under the headings "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "EQUITY COMPENSATION PLANS" and
is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be set forth in the 2003 Proxy
Statement under the heading "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
and is incorporated herein by reference.

30

ITEM 14. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Within 90 days before the filing of this report, the Company's principal
executive officer and principal financial officer evaluated the effectiveness of
the Company's disclosure controls and procedures. Based on the evaluation, the
Company's principal executive officer and principal financial officer believe
that:

o the Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in the
reports it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms; and

o the Company's disclosure controls and procedures were effective to
ensure such information was accumulated and communicated to the
Company's management, including the Company's principal executive
officer and the principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROLS

There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the Company' internal
controls subsequent to their evaluation, nor have there been any corrective
actions with regard to significant deficiencies or material weaknesses.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)Documents filed as a part of this Report

1. The following consolidated 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:

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 consolidated financial statements.

31

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; incorporated by reference
to Exhibit 3.3 to the Company's Annual Report on Form 10-K for
the year ended March 31, 2002 (the 2002 10-K).

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) -- 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).

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) -- 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;
incorporated by reference to Exhibit 10.4(b) to the 2002 10-K.

10.4(c) -- Second Amendment to 2000 Employee Stock Incentive Plan;
incorporated by reference to Exhibit 10.4(c) to the 2002 10-K.

10.4(d) -- Form of Stock Option Agreement employed under 2000 Employee
Stock Incentive Plan; incorporated by reference to Exhibit
10.4(d) to the 2002 10-K.

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.

32

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; incorporated by
reference to Exhibit 10.6(b) to the 2002 10-K.

*10.6(c) -- Amendment No. 2 to Executive Employment Agreement between
BMC Software, Inc. and Robert Beauchamp.

10.7(a) -- Form of Executive Employment Agreement between BMC
Software, Inc. and each of 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 each of Dan Barnea, Darroll
Buytenhuys, Jeffrey Hawn and Robert H. Whilden, Jr.; incorporated
by reference to Exhibit 10.7(b) to the 2002 10-K.

*10.7(c) -- Form of Amendment No. 2 to Executive Employment Agreement
between BMC Software, Inc. and each of Dan Barnea, Darroll
Buytenhuys, Jeffrey Hawn and Robert H. Whilden, Jr.

10.7(d) -- Schedule to Form of Executive Employment Agreement, as
amended; incorporated by reference to Exhibit 10.8 to the 2002
10-K.

10.8(a) -- BMC Software, Inc. 2002 Nonemployee Director Stock Option
Plan; incorporated by reference to Appendix B to the Company's
2002 proxy statement filed with the SEC on Schedule 14A (the 2002
Proxy Statement).

*10.8(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 2002 Nonemployee Director Stock Option Plan.

10.9(a) -- BMC Software, Inc. 2002 Employee Incentive Plan;
incorporated by reference to Appendix C to the 2002 Proxy
Statement.

*10.9(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 2002 Employee Incentive Plan.

*10.10 -- BMC Software, Inc. Short-term Incentive Performance Award
Program.

*10.11 -- BMC Software, Inc. Long-term Incentive Performance Award
Program.

*21.1 -- Subsidiaries of the Company.

*23.1 -- Consent of Independent Auditors.

*23.2 -- Notice Regarding Consent of Arthur Andersen LLP.

*99.1 -- Certification of Chief Executive Officer of BMC Software,
Inc. pursuant to 18 U.S.C. Section 1350.

*99.2 -- Certification of Chief Financial Officer of BMC Software,
Inc. pursuant to 18 U.S.C. Section 1350.

* Filed herewith.

(b) Reports on Form 8-K

On January 7, 2003, BMC Software filed a Current Report on Form 8-K, dated
January 7, 2003, reporting under Item 9 a presentation by our CEO, Bob
Beauchamp, at the Morgan Stanley Software, Services, Internet and Networking
Conference.

Under the regulations of the Securities Act of 1933, as amended, our
acquisition of the assets of Remedy may constitute the acquisition of a business
requiring the filing of separate financial statements for such business. On
February 14, 2003, we filed a Current Report on Form 8-K/A, dated November 20,
2002, providing under Item 7 the historical financial statements of Remedy and
pro forma financial information of BMC Software after giving effect to the
acquisition of Remedy. We have decided not to seek a no action letter from the
SEC with respect to the filing of such historical financial statements of
Remedy.

33

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of BMC
Software, Inc. and subsidiaries as of March 31, 2002 and 2003, 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, 2003. 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 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 2003, and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended March 31, 2003, in conformity with accounting principles generally
accepted in the United States.

As discussed in Note 1 and Note 5 to the consolidated financial statements,
BMC Software, Inc. and subsidiaries changed its method of accounting for
goodwill and other purchased intangible assets during the year ended March 31,
2003.

/s/ Ernst & Young LLP

Houston, Texas
April 23, 2003

34

THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH BMC SOFTWARE, INC.'S FILING ON FORM 10-K FOR THE YEAR ENDED
MARCH 31, 2002. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP
IN CONNECTION WITH THIS FILING ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2003.
SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION. THE CONSOLIDATED BALANCE SHEET AS OF
MARCH 31, 2001, AND THE CONSOLIDATED STATEMENTS OF OPERATIONS, STOCKHOLDERS'
EQUITY AND CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2000 REFERRED TO IN THIS
REPORT HAVE NOT BEEN INCLUDED IN THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS.

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

35

BMC SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

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

36

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.

37

BMC SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2001, 2002 AND 2003
(IN MILLIONS)

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

38

BMC SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

39

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 -- 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 to provide
comparability among the years reported. Beginning in fiscal 2003, changes in
long-term finance receivables have been reported as a component of cash flows
from operating activities in the consolidated statements of cash flows, whereas
these were previously reported as a component of cash flows from investing
activities. 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, 2002 and 2003,
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 grade, highly liquid securities. The carrying value of cash and
cash equivalents approximates fair value.

40

(e) Trade and Finance Receivables

In the ordinary course of business, the Company extends credit to its
customers. Trade receivables and those finance receivables that the Company has
the intent and ability to hold until maturity are recorded at their outstanding
principal balances, adjusted for interest receivable to date, if applicable, and
adjusted by the allowance for doubtful accounts. Interest income on finance
receivables is recognized using the effective interest method and is recorded as
interest and other income, net in the accompanying consolidated statements of
operations and comprehensive income (loss). In estimating the allowance for
doubtful accounts, the Company considers the length of time receivable balances
have been outstanding, historical write-off experience, current economic
conditions and customer-specific information. When the Company ultimately
concludes that a receivable is uncollectible, the balance is charged against
the allowance for doubtful accounts. As of March 31, 2002 and 2003, the
allowance for doubtful trade accounts receivable was $24.2 million and $18.9
million, respectively, and the allowance for doubtful trade finance receivables
was $0.0 and $3.3 million, respectively. Bad debt expense for the years ended
March 31, 2001, 2002 and 2003 was $17.6 million, $10.4 million and $4.0
million, respectively.

Most of the Company's finance receivables are transferred to financial
institutions. Such transfers are executed on a non-recourse basis either through
individual transfers or securitizations, as discussed further in Note 4 -- Trade
Finance Receivables and Securitizations. Finance receivables to be transferred
are recorded at the lower of outstanding principal balance, adjusted for
interest receivable to date, or fair value, as determined on an individual
receivable basis. As such finance receivables are typically transferred less
than three months after origination, the outstanding principal balance typically
approximates fair value. Finance receivables to be transferred as of March 31,
2002 and 2003 have been aggregated with current and long-term finance
receivables in the accompanying consolidated balance sheets at those dates.

(f) Long Lived Assets

Property and Equipment --

Property and equipment are stated at cost. Depreciation on property and
equipment, with the exception of buildings and leasehold improvements, is
recorded using the straight-line method over the estimated useful lives of the
assets, which range from three to ten years. Depreciation on buildings is
recorded 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 eleven 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. During the year ended
March 31, 2001, $5.6 million of interest cost was capitalized. No interest was
capitalized during the years ended March 31, 2002 and 2003.

Internal-use software is accounted for under 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 SOP 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, 2001, 2002
and 2003, was $67.5 million, $73.2 million and $69.3 million, respectively.

41

The Company assesses impairment of property and equipment under Statement
of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." 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 (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." 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. The Company adopted SFAS No. 143 as
of April 1, 2003 and such adoption did not have a material effect on its
consolidated 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 economic lives, which historically have
typically been five years, beginning upon the declaration of the underlying
products as generally available for sale. As discussed below, the Company
revised the estimated economic lives for certain software products as of January
1, 2003, such that the capitalized costs for the majority of products will be
amortized over an estimated life of three years. 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." The net effect of software development cost
capitalization and amortization is included in research, development and support
expenses in the accompanying consolidated statements of operations and
comprehensive income (loss). The following table summarizes the amounts
capitalized and amortized during the years ended March 31, 2001, 2002 and 2003.
Amortization for these periods includes amounts accelerated for certain software
products that 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 the years ended March 31, 2002 and 2003,
the Company focused more on its core and high-potential growth businesses. As
part of this effort, the Company reviewed its product portfolio during the years
ended March 31, 2002 and 2003 and discontinued certain products. To the extent
that there were any capitalized software development costs remaining on the
balance sheet related to these products, the Company accelerated the
amortization to write these balances off. This was the primary reason for the
increase in accelerated amortization in fiscal 2002 and 2003 as compared to
fiscal 2001. The continued need to accelerate amortization to maintain the
Company's capitalized software costs at net realizable value, the results of the
valuation performed for the Remedy acquisition that indicated a three-year life
was appropriate for that acquired technology and changes in the average life
cycles for certain of our software products caused the Company to evaluate the
estimated economic lives for its internally developed software products. As a
result of this evaluation, the Company revised the estimated economic lives of
certain products as of January 1, 2003, such that most products will be
amortized over an estimated life of three years. These changes in estimated
economic lives resulted in an additional $12.4 million of amortization expense
in the fourth quarter of the year ended March 31, 2003, and reduced basic and
diluted earnings per share for the year ended March 31, 2003 by $0.03 per share.

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 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 11 - Restructuring Costs.

42

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 economic lives, which are typically three years.
Amortization expense for the years ended March 31, 2001, 2002 and 2003 was $37.7
million, $39.7 million and $54.0 million, respectively. 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. As discussed in Note 5 -- Goodwill and Intangible Assets, certain acquired
technology assets were written down to net realizable value during the year
ended March 31, 2002.

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. Prior to April 1, 2002, goodwill and intangible assets were
amortized on a straight-line basis over the estimated future periods to be
benefited, which was typically three to four years. Enterprise-level goodwill
was evaluated for impairment under the provisions of Accounting Principles Board
Opinion No. 17, "Intangible Assets," and other intangibles were evaluated under
the provisions of SFAS No. 121 when events or circumstances indicated that the
carrying amount of these assets may not be recoverable. As of April 1, 2002, the
Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." 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 SFAS No. 142, all goodwill and those intangible assets with
indefinite useful lives are not amortized, but rather are tested for impairment
annually and when events and circumstances indicate that their fair value has
been reduced below carrying value. Intangible assets with finite useful lives
are amortized over those useful lives. Note 5 -- Goodwill and Intangible Assets
includes a reconciliation of the Company's reported net earnings (loss) and
earnings (loss) per share to those amounts that would have resulted had there
been no amortization of goodwill and intangible assets with indefinite lives for
all periods presented.

(g) 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 requiring 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 is initially recognized in
other comprehensive income and then is 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, 2002 and 2003 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

43

contracts from its assessment of hedge effectiveness. In the event a hedge
ceases to be highly effective, the derivative is subsequently sold, it becomes
likely the anticipated transaction will not occur or the Company discontinues
hedging operations, any unrecognized premium costs or deferred gains or losses
will be recognized in earnings in that period. During the years ended March 31,
2001, 2002 and 2003, the Company did not recognize any amounts in earnings due
to hedge ineffectiveness other than time value, 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, 2002 and 2003 was an asset of $1.2 million and a
liability of $0.4 million, respectively, and is included in other current assets
in the consolidated balance sheets. Changes in the fair value of forward
exchange contracts and purchased option contracts are reported as a component of
other comprehensive income (loss).

The balances in accumulated other comprehensive income (loss) related to
derivative instruments as of March 31, 2003 are expected to be recognized in
earnings over the next twelve months. During the years ended March 31, 2001,
2002 and 2003, general and administrative expenses included $0.1 million, $2.0
million and $2.2 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). The Company classifies all of its qualifying
hedging derivative instruments' cash flows as cash flows from operating
activities, which is the same category as the cash flows from the hedged items.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. This Statement is effective for contracts
entered into or modified after June 30, 2003, except for the provisions that
relate to SFAS No. 133 Implementation Issues that have been effective for
quarters that began prior to June 15, 2003 and for hedging relationships
designated after June 30, 2003. The Company believes that adoption of SFAS No.
149 will not have a material effect on its consolidated financial position or
results of operations.

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.

(h) Deferred Revenue

Deferred revenue is comprised of deferred maintenance, license and
professional services 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 consolidated 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, 2002 and 2003 are as
follows:

44

(i) Treasury Stock

On April 24, 2000, the Company's board of directors authorized the purchase
of up to $500.0 million in common stock, and on July 30, 2002, the board of
directors authorized the purchase of an additional $500.0 million. During the
years ended March 31, 2001, 2002 and 2003, 7.2 million, 9.0 million and 13.5
million shares, respectively, were purchased for $155.1, $156.1 million and
$211.6 million, respectively, under these authorizations.

(j) 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 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 or determinable, and determination that
collection of the software license fees is probable. In instances when any one
of the four criteria is 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 payable, based on the economic
risks and ongoing product support responsibilities assumed by the Company. On
occasion, the Company has purchased goods or services for its operations from
customers at or about the same time that the Company licensed software to these
customers. License revenues from such transactions represent less than one
percent of total license revenues in any period. Revenues from professional
services are typically recognized as the services are performed for
time-and-materials contracts, or on a percentage-of-completion basis.
Professional services revenues also include sales of third-party software
products which typically support the Company's product lines. These revenues are
recorded net of amounts payable to the third-party software vendors.

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, 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.

(k) Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123." This Statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. As discussed
below, the Company has elected not to adopt the recognition and measurement
provisions of SFAS No. 123 and continues to account for its stock-based employee
compensation plans under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations and
therefore the transition provisions will not have an impact on the Company's
financial position or results of operations. The required expanded disclosures
are provided below.

45

The Company has adopted numerous stock plans that provide for the grant of
options and restricted stock to employees and directors of the Company, which
are described more fully in Note 7 -- Stock Incentive Plans. The Company
accounts for stock-based employee compensation using the intrinsic value method
in accordance with APB Opinion No. 25 and related interpretations, which
generally requires that the amount of compensation cost that must be recognized,
if any, is the quoted market price of the stock at the measurement date, which
is generally the grant date, less the amount the grantee is required to pay to
acquire the stock. Alternatively, SFAS No. 123, "Accounting for Stock-Based
Compensation," employs fair value based measurement and generally results in the
recognition of compensation expense for all stock-based awards to employees.
SFAS No. 123 does not require an entity to adopt those provisions, but rather,
permits continued application of APB Opinion No. 25. The Company has elected not
to adopt the recognition and measurement provisions of SFAS No. 123 and
continues to account for its stock-based employee compensation plans under APB
Opinion No. 25 and related interpretations. In accordance with APB Opinion No.
25, deferred compensation is generally recorded for stock-based employee
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
employee compensation granted. Awards granted with graded vesting are accounted
for as one award and accordingly, the total expense measured for the grant is
taken evenly over the entire vesting period. If the exercise price of the
stock-based compensation is equal to or exceeds the market price of the
Company's common stock on the date of grant, no compensation expense is
recorded.

For the years ended March 31, 2001, 2002 and 2003, the Company recorded
compensation expense of $19.8 million, $16.1 million and $3.2 million,
respectively, for restricted stock grants. The expense for the years ended March
31, 2001, 2002 and 2003, includes $11.4 million, $13.0 million and $0.6 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 $38.31 and $20.51 for the
years ended March 31, 2001 and 2002, respectively. The Company did not grant
restricted stock during the year ended March 31, 2003. The Company was not
required to record compensation expense for stock option grants and stock issued
under the employee stock purchase plan (ESPP) during the same periods, except
for the year ended March 31, 2001 which included a charge of $3.3 million
related to the ESPP.

The compensation expense recorded for restricted stock grants under the
intrinsic value method is consistent with the expense that would be recorded
under the fair value based method. Had the compensation cost for the Company's
employee stock option grants and stock issued under the ESPP been determined
based on the grant date fair values of awards estimated using the Black-Scholes
option pricing model, which is consistent with the method described in SFAS No.
123, the Company's reported 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 employee stock purchase plan are
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants during the years ended March 31,
2001, 2002 and 2003, respectively: risk-free interest rate of 4.75%, 4.55% and
3.11%, expected life of 5 years for options and 6 months for employee stock
purchase plan shares, expected volatility of 70%, 75%, and 77% and no expected
dividend yields. The weighted average grant date fair value per share of options
granted during the years ended March 31, 2001, 2002 and 2003 was $15.37, $11.45
and $10.74, respectively. The weighted average grant date fair value per share
of purchase rights granted under the employee stock purchase plan during the
years ended March 31, 2001, 2002 and 2003 was $11.50, $5.77 and $5.08,
respectively.

46

(l) 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, 2001, 2002 and 2003, the treasury stock
method effect of 19.1 million, 38.4 million and 30.6 million weighted options,
respectively, and 0.9 million, 0.5 million and 0.0 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, 2001, 2002 and 2003:

(m) 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, 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).

(2) BUSINESS COMBINATIONS

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 acquired in-process research and development
(IPR&D). Net tangible assets acquired were insignificant. Prior to the Company's
adoption of SFAS No. 142 on April 1, 2002, the goodwill and intangible assets
were being amortized on a straight-line basis over three years, which
represented 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 acquisition date. 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.

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 were expected to address emerging market
demands for the web performance market.

In connection with the Evity acquisition, 0.6 million restricted shares of
common stock were issued to certain employee shareholders of Evity. These shares
vested 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 has been charged to expense as merger-related costs and
compensation charges over the service period.

47

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. Prior to the Company's adoption of SFAS No. 142 on
April 1, 2002, the goodwill and intangible assets were being amortized on a
straight-line basis over three years, which represented 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 acquisition date. 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.

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 were expected
to address emerging market demands for the enterprise application performance
market.

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 the year ended March 31, 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 the year ended March 31, 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. Prior to the Company's adoption of SFAS No. 142 on April 1, 2002, the
goodwill and intangible assets were being amortized on a straight-line basis
over three years, which represented the estimated future periods to be
benefited.

In June 2001, the FASB 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.

On November 20, 2002, the Company acquired the assets of Remedy from
Peregrine Systems, Inc. (Peregrine) for $355.0 million in cash plus the
assumption of certain liabilities of Remedy. In accordance with the purchase
agreement, the cash purchase price was adjusted to $347.3 million subsequent to
March 31, 2003. Remedy focuses on automating service-related business processes
through a complete suite of service management applications. Remedy's products
will extend BMC's core market-leading data and systems management solutions to
deliver comprehensive and integrated business service management solutions. In
connection with the acquisition, the Company provided $53.8 million of
debtor-in-possession financing to Peregrine which was repaid to the Company in
conjunction with the close of the acquisition.

The aggregate purchase price was $356.8 million, including the adjusted
cash consideration of $347.3 million and direct costs of the transaction. The
allocation of the purchase price to specific assets and liabilities was based,
in part, upon outside appraisals of the fair value of certain assets of Remedy.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.

48

Of the $176.0 million of acquired intangible assets, $20.0 million was
assigned to tradenames that are not subject to amortization and $12.0 million,
or 3% of the purchase price, was assigned to research and development assets
that were written off at the date of the acquisition in accordance with FASB
Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method," as discussed below. Those
write-offs are reflected as acquired research and development in the
accompanying consolidated statements of operations and comprehensive income
(loss) for the year ended March 31, 2003. The amount allocated to tradenames
consists primarily of the estimated fair value of the Remedy and Action Request
System names. Tradenames will not be amortized because the assets have
indefinite remaining useful lives, but will be reviewed periodically for
impairment.

The remaining $144.0 million of acquired intangible assets have an
estimated weighted-average useful life of three years, and include $109.0
million of acquired technology with an estimated weighted-average economic life
of three years and $35.0 million of customer relationships with an estimated
weighted-average useful life of three years. Acquired technology, which consists
of products that have reached technological feasibility, primarily relates to
Remedy's Action Request System (AR System) multi-tier architecture and developed
out-of-the-box application solutions that sit on top of the AR System. Customer
relationships represent existing contracts with customers to provide maintenance
related to Remedy's installed base.

The $199.0 million of goodwill was assigned to the Remedy segment and all
of that amount is expected to be deductible for tax purposes. Goodwill recorded
in the United States is deducted at the federal statutory rate of 35%. Goodwill
recorded in international locations is also deductible, but the deduction will
not be material because of low tax rates in these jurisdictions. Factors that
contributed to a purchase price that results in goodwill include, but are not
limited to, the retention of research and development personnel with the skills
to develop future Remedy technology, support personnel to provide the
maintenance services related to Remedy products and a trained sales force
capable of selling current and future Remedy products, the opportunity to
cross-sell Remedy and BMC products to existing customers and the positive
reputation that Remedy has in the market.

As discussed above, the Company allocated $12.0 million of the purchase
price to in-process research and development projects. The amount allocated
represents the estimated fair value, based on risk-adjusted cash flows and
historical costs expended, related to Remedy's 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. At the acquisition date, Remedy was
conducting design, development, engineering and testing activities associated
with the completion of next-generation core and application technologies that
are expected to address emerging market demands in the service management
market.

The following unaudited pro forma results of operations for the years ended
March 31, 2002 and 2003, are as if the acquisition of Remedy had occurred at the
beginning of each period presented. The unaudited pro forma financial
information includes the following material non-recurring charges: impairment of
acquired technology and goodwill of $63.3 million, restructuring costs of $52.9
million and merger-related costs and compensation charges of $12.8 million
during the year ended March 31, 2002, and acquired technology charges of $12.0
million related to the Remedy acquisition during the year ended March 31, 2003.
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisition been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future.

On March 20, 2003, the Company acquired all of the outstanding shares of IT
Masters International S.A. (IT Masters) for $42.5 million in cash plus the
assumption of certain liabilities of IT Masters. IT Masters focuses on service
management technology that allows customers to model and visualize information
technology infrastructure components correlated with the ultimate services they
deliver. IT Masters products will strengthen BMC's service level management
solutions by adding adaptive service management capabilities to BMC's offerings.
The aggregate purchase price was $43.3 million, including cash consideration of
$42.5 million and direct costs of the transaction. The allocation of the
purchase price to specific assets and liabilities was based, in part, upon
outside appraisals of the fair value of certain assets of IT Masters. The
following table summarizes the estimated fair values of the assets

49

acquired and liabilities assumed at the date of acquisition. The Company is in
the process of determining the fair values of certain assets and liabilities;
thus, the allocation of the purchase price is subject to refinement.

The $14.4 million of acquired intangible assets have an estimated
weighted-average useful life of three years, and include $11.2 million of
acquired technology with an estimated weighted-average useful life of three
years, $2.8 million of customer relationships with an estimated weighted-average
useful life of three years and $0.4 million of non-compete agreements with a
weighted average useful life of two years. Acquired technology, which consists
of products that have reached technological feasibility, primarily relates to IT
Masters' MasterCell and MasterAR Suite products. Customer relationships
represent existing contracts with customers to provide maintenance related to IT
Masters' installed base. At the acquisition date, there were no projects that
had progressed to a degree that would enable the fair value of the in-process
research and development to be estimated with reasonable reliability and
therefore no value was allocated to IPR&D.

The $31.6 million of goodwill was assigned to the PATROL segment and all of
that amount is expected to be deductible for tax purposes. The goodwill is
recorded in international locations and the deduction will not be material
because of low tax rates in these jurisdictions. Factors that contributed to a
purchase price that results in goodwill include, but are not limited to, the
retention of research and development personnel with the skills to develop
future technology, support personnel to provide the maintenance services related
to IT Masters products and a trained sales force capable of selling current and
future products, and the positive reputation that IT Masters has in the market.

In making its purchase price allocations to IPR&D 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 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.

The estimates used in valuing all intangible assets, including IPR&D, were
based upon assumptions believed to be reasonable but which are inherently
uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and
unanticipated events and circumstances may occur. Accordingly, actual results
may differ from the projected results used to determine fair value.

The IPR&D charge for the year ended March 31, 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 that year.

The results of the acquired companies above have been included in the
Company's consolidated financial statements since each of the companies'
respective acquisition dates.

50

(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. Prior to December 31,
2002, the Company had the ability and positive intent to hold most of its debt
securities to maturity and thus had classified these securities as "held to
maturity" pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." These securities were recorded at amortized cost in the
Company's consolidated balance sheet as of March 31, 2002. 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.

On December 31, 2002, the Company reclassified its held-to-maturity
portfolio to the available-for-sale portfolio. The amortized cost of the
transferred securities was $396.1 million at the date of the reclassification.
When the securities were transferred to the available-for-sale portfolio, a net
unrealized gain of $15.8 million was recorded as a component of accumulated
other comprehensive income (loss). The transfer of securities from the
held-to-maturity portfolio was made to increase the Company's flexibility to
react to the unprecedented volatility in the debt securities markets that
developed over the quarters preceding the date of the transfer.

The tables below summarize the Company's total marketable securities
portfolio as of March 31, 2002 and 2003.

HELD-TO-MATURITY SECURITIES

AVAILABLE-FOR-SALE SECURITIES

51

AVAILABLE-FOR-SALE SECURITIES

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

Sales of available-for-sale securities for the years ended March 31, 2001, 2002
and 2003 were as follows:

Also during the years ended March 31, 2002 and 2003, the Company determined
that certain marketable securities had experienced declines in their fair value
below their cost that were other than temporary. These securities were written
down to fair value and the resulting losses of $6.4 million and $13.4 million,
respectively, were included in gain (loss) on marketable securities and other
investments in the accompanying consolidated statements of operations and
comprehensive income (loss) for the years ended March 31, 2002 and 2003.

During the years ended March 31, 2002 and 2003, certain held-to-maturity
securities were sold due to significant deterioration in the issuers'
creditworthiness. The amortized cost of the securities at the time of sale was
$8.0 million and $5.0 million, respectively, and the related realized losses of
$5.9 million and $0.3 million, respectively, were included in gain (loss) on
marketable securities and other investments in the accompanying consolidated
statements of operations and comprehensive income (loss) for the years ended
March 31, 2002 and 2003. No held-to-maturity securities were sold during the
year ended March 31, 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 financial
institutions. Such transfers are executed on a non-recourse basis either through
individual transfers or securitizations. BMC utilizes a financial subsidiary and
various wholly-owned special-purpose entities in these transfers. These 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, 2001, 2002 and 2003, the Company
transferred finance receivables of $272.6 million, $263.0 million and $376.8
million, respectively, which approximated fair value, to financial institutions
on a non-recourse basis. Of the amounts the Company transferred during the years
ended March 31, 2001, 2002 and 2003, $154.0 million, $106.5 million and $96.9
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

52

paper markets (the conduit entities) that purchase interests in similar
receivables from numerous other companies unrelated to BMC. In a securitization
transaction, the Company sells a pool of finance receivables to a wholly-owned
special-purpose entity. This special purpose entity then sells a senior interest
in the receivables at a discount to a conduit entity in exchange for cash.
Though wholly-owned and consolidated by the Company, the special-purpose
entity's assets are legally isolated from the Company's general creditors and
the conduit entity's investors have no recourse to the Company's other assets
for the failure of the Company's customers to pay when due. BMC has no ownership
in either of the conduit entities and has no voting influence over the conduit
entities' operating and financial decisions. As a result, BMC does not
consolidate the conduit entities. When the Company sells receivables in
securitizations, it retains a beneficial interest in the securitized
receivables, which is subordinate to the interests of the investors in the
conduit entities. The 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 subordinate interests based
on their relative fair value at the date of transfer. The retained 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
subordinate interests. The value of the Company's retained subordinate 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 subordinate interests to immaterial
levels. BMC also retains servicing responsibility for the sold receivables.

In the years ended March 31, 2001, 2002 and 2003, the Company recognized
pretax gains of $5.5 million, $4.4 million and $2.3 million, respectively, on
such securitizations and received $148.3 million, $101.0 million and $99.2
million, respectively, in proceeds from the conduit entities. As of March 31,
2002 and 2003, the total principal amount outstanding for all securitized
receivables was $316.1 million and $289.7 million, respectively. As of March 31,
2002 and 2003, the Company had retained subordinate interests with a fair value
of $14.9 million and $14.2 million, respectively, which was determined utilizing
the following assumptions: no prepayments, expected credit losses of 3.5% and
2.5%, respectively, weighted average life of 1.5 years and an average discount
rate of 8.0% and 7.4%, respectively. The retained subordinate interests are
included in long-term finance receivables in the accompanying consolidated
balance sheets. The Company's maximum exposure to loss at March 31, 2003, as a
result of its involvement with the conduit entities is limited to the carrying
value of the retained subordinate interests.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" (FIN 46). FIN 46 requires the consolidation of entities in which an
enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other interests in the entity. Currently, entities are
generally consolidated by an enterprise when it has a controlling financial
interest through ownership of a majority voting interest in the entity. The
Company is in the process of evaluating the implications of FIN 46 to all
variable interest entities with which it has involvement, but has determined
that it will not be required to consolidate the conduit entities under FIN 46
because the arrangements do no result in the Company having variable interests
in the conduit entities.

(5) GOODWILL AND INTANGIBLE ASSETS

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 had impacted BMC's operations and
expected future revenues. Economic indicators at that time suggested that these
conditions could 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 estimated net realizable values and $47.8 million
related to goodwill to reflect these assets at their estimated fair values.
These charges are reflected together with amortization expense in the
accompanying consolidated statement of operations and comprehensive income
(loss) for the year ended March 31, 2002, as amortization and impairment of
acquired technology, goodwill and intangibles.

53

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 April 1, 2002, the Company adopted SFAS No. 142, assigned its
goodwill to the Company's applicable reporting units and tested goodwill for
impairment in accordance with SFAS No. 142. The fair value of each of the
Company's reporting units with goodwill assigned exceeded the respective
carrying value of the reporting unit's allocated net assets, including goodwill,
and therefore no goodwill was considered impaired as of April 1, 2002. The
Company performed its annual goodwill impairment test as of January 1, 2003, and
no goodwill was considered impaired as of that date.

The following reconciles the Company's reported net earnings (loss) and
earnings (loss) per share to those amounts that would have resulted had there
been no amortization of goodwill and intangibles with indefinite lives for all
periods presented:

Intangible assets as of March 31, 2002 and 2003 were as follows:

54

Aggregate amortization expense for intangible assets for the year ended
March 31, 2003 was $12.9 million. Estimated amortization expense for the next
five years, for acquisitions completed through March 31, 2003, is as follows:

Changes in the carrying amount of goodwill for the year ended March 31,
2003 by operating segment were as follows:

(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 accumulated other comprehensive income (loss) within
stockholders' equity.

The income tax provision (benefit) for the years ended March 31, 2001, 2002
and 2003, consisted of the following:

The foreign provision for income taxes is based on foreign pre-tax earnings
of $94.0 million, $114.2 million and $184.6 million for the years ended March
31, 2001, 2002 and 2003, respectively.

55

The income tax provisions (benefits) for the years ended March 31, 2001,
2002 and 2003 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, 2002 and 2003 are as follows:

Realization of the Company's net deferred tax asset is dependent upon the
Company generating sufficient taxable income in future years in appropriate tax
jurisdictions to obtain benefit from the reversal of temporary differences and
from net operating loss and tax credit carryforwards. The amount of deferred tax
assets considered realizable is subject to adjustment in future periods if
estimates of future taxable income are reduced.

Aggregate unremitted earnings of foreign subsidiaries for which U.S.
federal income taxes have not been provided, totaled approximately $656.7
million and $717.2 million at March 31, 2002 and 2003, respectively. Deferred
income taxes have not been provided on these earnings because the Company
considers them to be indefinitely reinvested.

At March 31, 2003, the Company had federal net operating loss carryforwards
of $41.4 million that will expire between 2005 and 2020, foreign tax credit
carryforwards of $15.0 million that will expire between 2005 and 2007 and
research and development tax credit carryforwards of $4.5 million that will
expire in 2021. A $7.7 million valuation allowance is recorded against the
deferred tax asset related to foreign tax credit carryforwards.

In January 2003, the Company reached a settlement with the Internal Revenue
Service (IRS) Appeals division for the tax year ended March 31, 1997. The IRS
and the Company executed a closing agreement, thus settling all tax years
through 1997. This settlement did not have a material effect on the Company's
consolidated results of operations or financial position. The Company has
received a Revenue Agent's Report (RAR) from the IRS for the tax years ended
March 31, 1998 and 1999. The RAR is not a statutory

56

notice of deficiency, and the Company is protesting the findings in the RAR. The
report proposes tax increases resulting from adjustments to the transfer pricing
arrangement the Company has with one of its foreign subsidiaries. The IRS claims
in the report that the Company's U.S. operations have not been adequately
compensated by the foreign subsidiary for the right to distribute the Company's
technology in a specific territory. The case has been transferred to the IRS
Appeals division, and the Company is working with the IRS Appeals division to
resolve the issues. The Company believes that it has meritorious defenses to the
proposed adjustments and that adequate provisions for income taxes have been
made, and therefore that the ultimate resolution of the issues will not have a
material adverse impact on the Company's consolidated financial position or
results of operations. The IRS commenced examination of the Company's tax
returns filed for the tax years ended March 31, 2000 and 2001. The examination
is in the preliminary stages and the Company has no indications regarding
possible adjustments to taxable income at this time.

(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, 2001,
2002 and 2003 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 during the year ended March 31, 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 22.1 million shares as of March 31, 2003.

On September 10, 2002, pursuant to an Offer to Exchange, the Company
offered to certain U.S. employees the right to exchange outstanding stock
options with an exercise price of $30.00 or more per share granted under certain
of the Company's stock incentive plans for new options that cover a lesser
number of shares to be granted under those stock incentive plans at least six
months and one day following the cancellation of the options. The Company's
senior officers and board of directors were ineligible to participate in the
exchange offer. Amendments to the stock incentive plans to permit the offer were
approved by the Company's stockholders at the Company's Annual Meeting held on
August 29, 2002. The offer expired on October 9, 2002. The Company accepted for
exchange options to purchase an aggregate of 6.5 million shares of Company
common stock, representing approximately 88% of the options that were eligible
for the exchange. These options have been cancelled and are no longer
outstanding. On April 10, 2003, subject to the terms and conditions of the Offer
to Exchange, the Company issued new options at fair market value as of such date
to purchase an aggregate of 2.4 million shares of Company common stock in
exchange for such exchanged options.

The following is a summary of the stock option activity for the years ended
March 31, 2001, 2002 and 2003 (shares in millions):

The Company's outstanding options as of March 31, 2003, are as follows
(shares in millions):

57

The following is a summary of the restricted stock activity for the years
ended March 31, 2001, 2002 and 2003:

In fiscal 1997, the Company adopted the BMC Software, Inc. 1996 Employee
Stock Purchase Plan (the Purchase Plan). A total of 6.0 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 the
year ended March 31, 2001 and 3.0 million additional shares approved by the
stockholders during the year ended March 31, 2003. 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 the years ended March
31, 2001, 2002 and 2003, approximately 654,400, 906,700 and 721,200 shares of
common stock, respectively, were purchased pursuant to this plan. The Purchase
Plan terminates in 2006.

(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 $10,500 in calendar years 2000 and
2001, and $11,000 in 2002. In each of the calendar years 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. In calendar year 2002,
employee contributions were matched up to a maximum of $4,000. The costs of
these contributions amounted to $16.4 million, $13.3 million, and $12.2 million
for the years ended March 31, 2001, 2002 and 2003, 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, 2002 and 2003, a total of
approximately $20.9 million and $18.1 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 of employment or death.

58

(9) COMMITMENTS AND CONTINGENCIES

Guarantees --

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires certain
guarantees to be recorded at fair value and requires a guarantor to make
disclosures, even when the likelihood of making any payments under the guarantee
is remote. For those guarantees and indemnifications that do not fall within
initial recognition and measurement requirements of FIN 45, the Company must
continue to monitor the conditions that are subject to the guarantees and
indemnifications, as required under existing generally accepted accounting
principles, to identify if a loss has been incurred. If the Company determines
that it is probable that a loss has been incurred, any such estimable loss would
be recognized. The initial recognition and measurement requirements do not apply
to the Company's product warranties or to the provisions contained in the
majority of the Company's software license agreements that indemnify licensees
of the Company's software from damages and costs resulting from claims alleging
that the Company's software infringes the intellectual property rights of a
third party. The Company has historically received only a limited number of
requests for payment under these provisions and has not been required to make
material payments pursuant to these provisions. The Company has not identified
any losses that are probable under these provisions and, accordingly, the
Company has not recorded a liability related to these indemnification
provisions.

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,
2001, 2002 and 2003, were approximately $60.9 million, $58.2 million and $63.1
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, 2003 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 consolidated financial position
or results of operations.

(10) SEGMENT REPORTING

In the quarter ended June 30, 2002, BMC's management began reviewing the
results of the Company's software business by the following product categories:
Enterprise Data Management Software, which includes the Mainframe Data
Management and Distributed Systems Data Management product lines, Enterprise
Systems Management Software, which includes the PATROL, MAINVIEW and Scheduling
& Output Management product lines, and Other Software, which includes the High
Potential product lines of Storage Management, Security Management, Enterprise
Applications Management, Subscription Services and Linux Management, and other.
In addition to these software segments, the professional services business is
also considered a separate segment. Through March 31, 2002, BMC's management
reviewed the results of the Company's software business by different product
categories. The amounts reported below for the years ended March 31, 2001, 2002
and 2003 reflect this change in the composition of the segments. Upon the
acquisition of Remedy during the year ended March 31, 2003 as discussed in Note
2 -- Business Combinations, BMC's management began reviewing Remedy's results as
a separate segment.

59

Excluding Remedy, segment performance is measured based on contribution
margin, which reflects only the direct controllable expenses of the segments and
does not include allocation of indirect research and development (R&D) and
support 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. Remedy is
operated as a separate business unit and therefore its performance is measured
based on operating margin and does not include amortization of acquired
technology and intangibles, one-time charges, other income, net, and income
taxes. Assets and liabilities are not accounted for by segment, other than for
Remedy. Remedy's assets include the identifiable intangibles and goodwill
recorded at the acquisition date, but as discussed above, the performance of the
Remedy business unit is measured based on operating margin, excluding the
amortization of these assets and any impairment charges that may be incurred.

61

Subsequent to March 31, 2003, the Company's management reorganized certain
of the product categories for purposes of reviewing the results of the software
business for the year ending March 31, 2004. 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.

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.

(11) RESTRUCTURING 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 the year ended March 31,
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 following four years. As these products were
part of the discontinued business information integration products, the proceeds
will be recorded as a reduction of restructuring costs, as a recovery of the
amount previously written off for these products. For the year ended March 31,
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 estimated, they will be recorded in the periods received as a
reduction of restructuring 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:

The $0.1 million credit to restructuring costs recorded during the year
ended March 31, 2003 is primarily related to the net effect of adjustments to
facilities and severance accruals initially recorded during the year ended March
31, 2002. As of March 31, 2003, substantially all disbursements related to the
fiscal 2002 restructuring plan have been paid.

62

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 2003, and for each of the two years in
the period ended March 31, 2003, and have issued our report thereon dated April
23, 2003 (included elsewhere in this Annual Report on Form 10-K). Our audits
also included the financial statement schedule as of March 31, 2002 and 2003 and
for each of the two years in the period ended March 31, 2003 listed in Item
15(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 audits.

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.

/s/ Ernst & Young LLP

Houston, Texas
April 23, 2003

63

THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH BMC SOFTWARE, INC.'S FILING ON FORM 10-K FOR THE YEAR ENDED
MARCH 31, 2002. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP
IN CONNECTION WITH THIS FILING ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2003.
SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION. THE SCHEDULE FOR THE YEAR ENDED MARCH
31, 2000 REFERRED TO IN THIS REPORT HAS NOT BEEN INCLUDED IN THE ACCOMPANYING
SCHEDULE II.

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

64

SCHEDULE II

BMC SOFTWARE, INC. AND SUBSIDIARIES

VALUATION ACCOUNTS
YEARS ENDED MARCH 31, 2001, 2002 AND 2003
(IN MILLIONS)

65

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 18, 2003.

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.

66

CERTIFICATIONS

I, Robert E. Beauchamp, certify that:

1. I have reviewed this annual report on Form 10-K of BMC Software, Inc.
(the "registrant");

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

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

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and

b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: June 18, 2003

By: /s/ ROBERT E. BEAUCHAMP
--------------------------------
Robert E. Beauchamp
Chief Executive Officer

67

I, John W. Cox, certify that:

1. I have reviewed this annual report on Form 10-K of BMC Software, Inc.
(the "registrant");

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

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

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and

b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: June 18, 2003

By: /s/ JOHN W. COX
---------------------------------
John W. Cox
Chief Financial Officer

68

EXHIBIT INDEX

69

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;
incorporated by reference to Exhibit 10.6(b) to the
2002 10-K.

*10.6(c) -- Amendment No. 2 to Executive Employment Agreement
between BMC Software, Inc. and Robert Beauchamp.

10.7(a) -- Form of Executive Employment Agreement between BMC
Software, Inc. and each of 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 each of Dan
Barnea, Darroll Buytenhuys, Jeffrey Hawn and Robert H.
Whilden, Jr.; incorporated by reference to Exhibit
10.7(b) to the 2002 10-K.

*10.7(c) -- Form of Amendment No. 2 to Executive Employment
Agreement between BMC Software, Inc. and each of Dan
Barnea, Darroll Buytenhuys, Jeffrey Hawn and Robert H.
Whilden, Jr.

10.7(d) -- Schedule to Form of Executive Employment Agreement, as
amended; incorporated by reference to Exhibit 10.8 to
the 2002 10-K.

10.8(a) -- BMC Software, Inc. 2002 Nonemployee Director Stock
Option Plan; incorporated by reference to Appendix B to
the Company's 2002 proxy statement filed with the SEC
on Schedule 14A (the 2002 Proxy Statement).

*10.8(b) -- Form of Stock Option Agreement employed under
BMCSoftware, Inc. 2002 Nonemployee Director Stock
Option Plan.

10.9(a) -- BMC Software, Inc. 2002 Employee Incentive Plan;
incorporated by reference to Appendix C to the 2002
Proxy Statement.

*10.9(b) -- Form of Stock Option Agreement employed under BMC
Software, Inc. 2002 Employee Incentive Plan.

*10.10 -- BMC Software, Inc. Short-term Incentive Performance
Award Program.

*10.11 -- BMC Software, Inc. Long-term Incentive Performance
Award Program.

*21.1 -- Subsidiaries of the Company.

*23.1 -- Consent of Independent Auditors.

*23.2 -- Notice Regarding Consent of Arthur Andersen LLP.

*99.1 -- Certification of Chief Executive Officer of BMC
Software, Inc. pursuant to 18 U.S.C. Section 1350.

*99.2 -- Certification of Chief Financial Officer of BMC
Software, Inc. pursuant to 18 U.S.C. Section 1350.

- ----------
* Filed herewith.

70