SERENA SOFTWARE INC - 10-Q Quarterly Report

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No ¨

The number of shares of the registrant’s Common Stock, par value $0.001, outstanding as of May 31, 2005 was 41,313,475.

SERENA Software, Inc. (“SERENA” or the “Company”) is the largest company solely focused on managing change in the IT environment. SERENA’s products and services automate process and control change for teams managing development, web content, and IT infrastructure. The Company’s solutions take a cross-platform and cross-organizational view of enterprise applications, allowing customers to define, enforce and automate application lifecycle processes. SERENA is the largest company solely focused on managing change in the IT environment. The Company’s products and services automate process and control change for teams managing development, web content, and IT infrastructure. Based on 25 years of innovation in process and configuration management, SERENA’s SAFE^™ (SERENA’s Application Framework for Enterprises) solutions enable customers at more than 15,000 sites worldwide, including 98 of the Fortune 100, to improve IT governance, mitigate risks, support regulatory compliance, and boost productivity and quality. Its principal markets are North America and Europe.

The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements, and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, except as otherwise noted, necessary for their fair presentation. These unaudited condensed consolidated financial statements and the notes thereto have been prepared in accordance with the Instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America and Regulation S-X for annual financial statements. For these additional disclosures, readers should refer to the Company’s annual report on Form 10-K for the fiscal year ended January 31, 2005 which was filed on April 8, 2005. The interim results presented are not necessarily indicative of results for any subsequent quarter or for the fiscal year ending January 31, 2006.

Certain reclassifications have been made to the balances for the three months ended April 30, 2004 in order to conform to the April 30, 2005 presentations.

In the current fiscal quarter ended April 30, 2005, due to a single large transaction with an international customer, this single customer accounted for 10% of total revenues in the quarter. No other single customer accounted for 10% or more of total revenues in the current fiscal quarter ended April 30, 2005, and no single customer accounted for 10% or more of total revenues in the same quarter a year ago.

On April 23, 2004, the Company completed its acquisition of Merant plc. (“Merant”). Merant designs, develops and markets software products and services for Enterprise Change Management (“ECM”), software configuration management and web content management. Its solutions help companies improve their ability to manage change of software applications, code and web content. Prior to the completion of the Offer, Merant’s ordinary shares were traded on the London Stock Exchange and its ADSs were traded on the NASDAQ National Market.

The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of Merant have been included in the Company’s consolidated financial statements from April 23, 2004.

In connection with the acquisition, the Company recorded $281.0 million in goodwill. The goodwill is not expected to be fully deductible for tax purposes. The primary reasons for the acquisition and the factors that contributed to a purchase price that resulted in recognition of a significant amount of goodwill included the large installed base that provided the combined companies with distribution leverage to cross sell products, expand into new geographies, create new opportunities in channel development and generate a profitable and steady maintenance stream.

The Company acquired 100% of Merant’s outstanding common stock and thereby acquired all of its assets and assumed all of its liabilities. The total purchase price was $415.6 million and consisted of a combination of cash and stock as follows (in thousands):

The fair value of the Company’s common stock issued was determined using an average price of $20.62, which was the average trading price from March 1, 2004 through March 5, 2004, the five trading days surrounding the date the Offer was announced. The fair value of Merant’s stock options assumed was determined using the Black-Scholes option pricing model and the following assumptions: estimated contractual life of 4.5 years, risk-free interest rate of 3.7%, expected volatility of 100% and no expected dividend yield. The fair value of stock options assumed is net of $1.8 million which represents the portion of the intrinsic value of Merant’s unvested options applicable to the remaining vesting period.

In June 2004, the Company acquired the technology, assets, associated expertise and customer base for Integrated Chipware’s RTM (“Requirements and Traceability Management”) product, one of the industry’s leading requirements management solutions, for $3.8 million. In connection with the acquisition, which has been accounted for as an acquisition of a business, the Company has capitalized $4.3 million of acquired technology

associated with the RTM product and has recorded an accrual of $0.2 million for restructuring and acquisition-related charges. There was no goodwill recorded in the business acquisition. The acquired technology will be amortized over its economic useful life of three years. Also in connection with the acquisition, the Company acquired certain selected assets and assumed certain liabilities including selected trade receivables and deferred maintenance contracts; all of which have been recorded at their fair values.

In March 2005, the Company acquired business application planning technology for approximately $4.1 million. In connection with the acquisition, which has been accounted for as an asset purchase, the Company has capitalized $7.0 million of acquired technology associated with the business application planning technology. The acquired technology will be amortized over its economic useful life of five years. Also in connection with the asset purchase, the Company has recorded a deferred tax liability of approximately $2.8 million for the difference between the assigned values and the tax bases of the acquired technology.

As a result of the Company’s acquisition of Merant on April 23, 2004, the Company recorded acquired in-process research and development totaling $10.4 million. For this transaction, the premise of value was fair market value in continued use.

Among the assets that were valued by the Company were Professional version 8.1, Professional version 8.2, Dimension version 9.0 and Formula 1, all of which were under development at the acquisition date. These technologies currently under development were valued on the premise of fair market value in continued use employing a version of the income approach referred to as the discounted cash flow approach. This methodology is based on discounting to present value, at an appropriate risk-adjusted discount rate, both the expenditures to be made to complete the development efforts (excluding the efforts to be completed on the development efforts underway) and the operating cash flows which the applications are projected to generate, less a return on the assets necessary to generate the operating cash flows.

From these projected revenues, the Company deducted costs of sales, operating costs (excluding costs associated with the efforts to be completed on the development efforts underway), royalties and taxes to determine net cash flows. The Company estimated the percentage of completion of the development efforts for each application by comparing the estimated costs incurred and portions of the development accomplished through the acquisition date by the total estimated cost and total development effort of developing these same applications. This percentage was calculated for each application and was then applied to the net cash flows for which each application was projected to generate. These net cash flows were then discounted to present values using appropriate risk-adjusted discount rates in order to arrive at discounted fair values for each application.

The percentage complete and the appropriate risk-adjusted discount rate for each application were as follows:

The rates used to discount the net cash flows to present value were initially based on the weighted average cost of capital (“WACC”). The Company used discount rates of 18% and 23% for valuing the acquired in-process research and development and 13% for the core technologies. These discount rates are higher than the implied WACC due to the inherent uncertainties surrounding the successful development of the acquired in-process research and development, the useful life of such in-process research and development, the profitability levels of such in-process research and development, and the uncertainty of technological advances that were unknown at the time.

The Company uses the intrinsic value method to account for stock-based compensation. The Company amortizes deferred stock-based compensation on an accelerated basis in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”

The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Since the exercise price of options granted under such plans is equal to the market value on the date of grant, no compensation cost has been recognized for grants under its stock option plans and stock purchase plans. In accordance with APB No. 25, the Company does not recognize compensation cost related to its employee stock purchase plan. If compensation cost for the Company’s stock-based compensation plans had been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” the Company’s net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):

For the pro forma amounts determined under SFAS No. 123, as set forth above, the fair value of each stock option grant under the stock option plans and the fair value of the employees’ purchase rights under the employee stock purchase plan (“ESPP”) are estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the three months ended April 30, 2005 and 2004.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility. We used historical volatility rates. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our options.

Basic net income per share is computed using the weighted-average number of shares of common stock outstanding. Diluted net income per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, potentially dilutive shares from restricted stock, options and warrants to purchase common stock using the treasury stock method.

In October 2004, the FASB ratified the consensus reached by the EITF with respect to EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share.” In accordance with EITF Issue 04-8, potential shares issuable under contingently convertible securities with a market price trigger should be accounted for the same way as other convertible securities and included in the diluted earnings per share computation, regardless of whether the market price trigger has been met. Upon our adoption of EITF Issue No. 04-8 in the fourth quarter of fiscal 2005, 9,912,694 shares issuable from the conversion of the Company’s Subordinated Convertible Notes due December 15, 2023 (the “Notes”) have been included in the diluted earnings per share calculation for the current fiscal quarter ended April 30, 2005, using the “if converted” method. The 9,912,964 shares issuable from the conversion of the Notes have not been included in the diluted earnings per share calculation for the fiscal quarter ended April 30, 2004, since their inclusion would have been anti-dilutive. Accordingly, we have not restated our diluted earnings per share calculation for the fiscal quarter ended April 30, 2004. The original instrument was issued in the fourth quarter of fiscal 2004. These common shares will continue to be considered in our diluted earnings per share calculation until the Notes are redeemed, retired or, under certain circumstances, amended. See Note 9 of Notes to Condensed Consolidated Financial Statements for a further discussion on the Company’s Subordinated Notes.

The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per share (in thousands, except per share amounts):

Options to purchase shares of common stock with an exercise price which is greater than the average fair market value of SERENA’s common stock for the period are not included in the computation of diluted earnings per share, or EPS, because the effect of their inclusion would have been anti-dilutive. For the three month period ended April 30, 2004, all options to purchase shares of common stock were excluded from the computation of diluted earnings per share because the effect of their inclusion would be anti-dilutive given the Company’s net loss for the quarter. Accordingly, 5,698,823 options to purchase shares of common stock at an average share price of $18.33 were excluded from the computation of diluted EPS. For the three month period ended April 30, 2005, 1,854,810 of options to purchase shares of common stock at an average share price of $25.01 were excluded from the computation of diluted EPS.

The Company’s total acquisition-related and restructuring accrual is predominantly associated with the Company’s acquisition of Merant in April 2004, and to a lesser extent, its RTM technology acquisition from Integrated Chipware, Inc. in June 2004 and its business application planning technology acquisition in March 2005.

With respect to the Company’s acquisition of Merant in April 2004, the Company recorded acquisition-related costs totaling $10.7 million, and employee severance and other restructuring costs totaling $13.4 million, accrued through purchase accounting. With the Merant acquisition, the major actions that comprised the employee severance plan included a company-wide review of the combined organization to identify redundancies, and a notification to affected employees of the acquired entity. Affected employees from the sales organization were notified in early May 2004, with the remaining affected North America employees being notified in late May 2004, and all affected international employees being notified by the end of our second

quarter of fiscal 2005 on July 31, 2004. The employee severance plan was essentially completed upon notification and employees from all employee groups across the organization were terminated.

With respect to the Company’s RTM technology acquisition from Integrated Chipware, Inc. in June 2004 and its business application planning technology acquisition in March 2005, the Company recorded $0.2 million and $0.1 million in legal and other acquisition-related costs, respectively.

In aggregate, the Company accrued $0.1 million and paid $2.3 million in acquisition-related and restructuring charges in the current fiscal quarter ended April 30, 2005. Purchase accounting adjustments recorded in the current fiscal quarter ended April 30, 2005 totaled $2.2 million and were the result of finalizing certain acquisition-related estimates associated with the Merant acquisition at the one year anniversary of the acquisition. The nature of the acquisition-related and restructuring charges and the amounts paid and accrued as of April 30, 2004 and 2005 are summarized as follows (in thousands):

The Company accounts for goodwill and certain intangible assets after an acquisition is completed in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. As such, goodwill and other indefinite life intangible assets are not amortized but instead are periodically tested for impairment. The annual impairment test required by SFAS No. 142 will be performed in the fourth fiscal quarter each year and has been performed in each of the fourth quarters of fiscal 2003, 2004 and 2005. The Company has concluded that there were no indicators of impairment of goodwill as of April 30, 2005.

As of April 30, 2005, the weighted average remaining amortization period for acquired technology is 42 months; trademark/trade name portfolio and customer relationships is 13 months; non-compete agreements is 11 months; and customer contracts is 69 months. The total weighted average remaining amortization period for all identifiable intangible assets is 48 months. The aggregate amortization expense of acquired technology and other intangible assets was $7.0 million and $3.0 million in the three months ended April 30, 2005 and 2004, respectively. There were no impairment charges in the three month periods ended April 30, 2005 and 2004.

The change in the carrying amount of goodwill for the three months ended April 30, 2005 is as follows (in thousands):

We report components of comprehensive income (loss) in our annual consolidated statements of shareholders’ equity. Comprehensive income (loss) consists of net income, foreign currency translation adjustments, and unrealized losses on marketable equity securities. Total comprehensive income (loss) for the three months ended April 30, 2005 and 2004 is as follows (in thousands):

In April 2005, the SEC amended the compliance dates for SFAS No. 123R, “Shared-Based Payment”. The new rule allows public companies to implement SFAS No. 123R at the beginning of their next fiscal year that begins after June 15, 2005. We will be required to adopt SFAS No. 123R in the first quarter of fiscal 2007 and begin to recognize stock-based compensation related to employee equity awards in our condensed consolidated statements of operations using a fair value-based method on a prospective basis. Since we currently account for equity awards granted to our employees using the intrinsic value method under APB No. 25, we expect the adoption of SFAS No. 123R will have a significant adverse impact on our financial position and results of operations.

to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act” (“FSP 109-1”) requires companies that qualify for a deduction for domestic production activities under the AJCA to account for the deduction as a special deduction under FASB Statement No. 109 and reduce their tax expense in the period or periods the amounts are deductible on the tax return.

FSP No. 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”) allows companies additional time to evaluate whether foreign earnings will be repatriated under the repatriation provisions of the AJCA and requires specified disclosures for companies needing the additional time to complete the evaluation. Once a decision is made to repatriate the foreign earnings, companies must reflect the deferred tax liabilities attributable to foreign earnings in the period that the decision is made to remit those earnings.

In December 2003, the Company issued $220.0 million in Subordinated Convertible Notes due December 15, 2023 (the “Notes”). The Notes bear interest at a rate of 1.5% per annum and are payable semi-annually on June 15 and December 15 of each year. The Notes are subordinated in right of payment to all of our future senior debt. The Notes are convertible into shares of the Company’s common stock prior to maturity at an initial conversion rate of 45.0577 shares per $1,000 principal (representing an initial conversion price of approximately $22.194 per share), subject to adjustments under certain conditions. The entire outstanding principal amount of the Notes will become due and payable at maturity. The Company may redeem the Notes, in whole or in part, under certain circumstances and at certain times. Accrued interest to the redemption date will be paid by the Company in any such redemption. Upon conversion of 100% of the Notes, the Company’s common stock issued would be approximately 9.9 million shares.

Accrued and unpaid interest on the Notes totaled $1.2 million as of April 30, 2005. The holders of the Company’s Notes may require the Company to repurchase for cash all or a portion of their Notes on December 15, 2008, December 15, 2013 or December 15, 2018 at a purchase price equal to 100% of the principal amount of the Notes being purchased, plus accrued and unpaid interest to, but excluding the purchase date.

The Company pledged to the trustee under the indenture for the exclusive benefit of the holders of the Notes, $9.6 million of U.S. government securities, which was sufficient, upon receipt of scheduled principal and interest payments thereon, to provide for the payment in full of the first six scheduled semi-annual interest payments on the Notes when due. Accordingly, at April 30, 2005, the Company had restricted cash balances on hand totaling $6.5 million to cover the remaining four semi-annual interest payments.

In connection with the Notes, the Company recorded in the fourth quarter of fiscal 2004 $6.7 million in debt issuance costs, which is being amortized over 5 years, the term of the initial put option by the Note holders. Under the put option, the Note holders may require the Company to purchase for cash all or a portion of the option holder’s Notes on December 15, 2008, December 15, 2013 or December 15, 2018 at a purchase price equal to 100% of the principal amount of the Notes being purchased, plus accrued and unpaid interest to, but excluding, the purchase date. As of April 30, 2005, the Company had approximately $4.9 million in debt issuance costs remaining and had amortized approximately $0.3 million in the first quarter ended April 30, 2005 and $0.5 million in the same quarter a year ago. Amortization of debt issuance costs will be $1.34 million annually going forward through December 15, 2008, when the initial put option expires, or earlier, upon conversion of the notes.

In February 2005, the Board of Directors authorized the repurchase of up to 1.5 million shares of the Company’s Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes.

In May 2005, the Board of Directors authorized the repurchase of up to 1.5 million shares of the Company’s Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes. The timing and size of any future stock repurchases are subject to market conditions, stock prices, our cash position and other requirements going forward.

A summary of the Company’s repurchases in the fiscal quarter ended April 30, 2005 is as follows:

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements under the Private Securities Litigation Reform Act of 1995. Certain statements under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report are “forward-looking statements.” These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts. When used in this report, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under “Factors That May Affect Future Results” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. Factors that could cause or contribute to such differences include but are not limited to, the percentage of license revenue typically closed at the end of each quarter, making estimation of operating results prior to the end of the quarter extremely uncertain; our ability to successfully integrate our acquisition of Merant plc; economic conditions worldwide which may continue to affect the overall demand for software and services, which has resulted in and could continue to result in decreased revenues or lower revenue growth rates in the future; changes in revenue mix and seasonality; dependence on revenues from our installed base; continued demand for additional mainframe MIPS capacity; our ability to complete the assessment of internal controls over financial reporting as of January 31, 2006, as required by Section 404 of the Sarbanes-Oxley Act, which may impact market perception of the reliability of our internal controls over financial reporting and thus adversely affect the market price of our common stock; expansion of our international organizations; and our ability to manage our growth. We assume no obligation to update the forward-looking information contained in this report. It is important that the discussion below be read together with the attached condensed consolidated financial statements and notes thereto, with the discussion of such risks and uncertainties and with the audited financial statements and notes thereto, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Factors Affecting Future Results” contained in the Company’s Form 10-K for fiscal 2005.

SERENA Software, Inc. is the largest company solely focused on managing change in the IT environment. SERENA’s products and services automate process and control change for teams managing development, web content, and IT infrastructure. SERENA provides software that automates change to enterprise applications. SERENA’s Enterprise Change Management (“ECM”) products manage the Software Change Management (“SCM”) process throughout the entire application development lifecycle across multiple platforms—from the mainframe to the Web. SERENA was founded in 1980 and we introduced our first SCM product, Comparex, in 1981. Since then, SERENA has developed a full suite of mainframe products, including ChangeMan ZMF which was introduced in 1988. In June 1999, SERENA introduced SERENA^® ChangeMan^® DS, a distributed systems product providing an end-to-end solution to SCM across the enterprise from the mainframe to the desktop to the Web. IT managers use our products to track software changes during the software application design and development process, manage separate programming teams that are concurrently developing and enhancing applications, and oversee the deployment of the software applications across both the mainframe and distributed systems environments. In June 2003, we introduced TeamTrack, a distributed systems product from our TeamShare acquisition providing leading-edge issue and request management technology; in September 2003, we announced the next-generation advanced framework for Application Life Cycle Management, the SAFE^™ Framework (SERENA’s Application Framework for Enterprises) which will significantly affect enterprise operations by facilitating cross-process integration; and in November 2003, we introduced TeamTrack version 6, our first product to deliver on the Next-Generation SAFE Framework.

configuration management and web content management. Its solutions help companies improve their ability to manage change of software applications, code and web content. Prior to the completion of the Offer, Merant’s ordinary shares were traded on the London Stock Exchange and its ADSs were traded on the NASDAQ National Market.

The primary reasons for the acquisition and the factors that contributed to a purchase price that resulted in recognition of a significant amount of goodwill included the large installed base that provided the combined companies with distribution leverage to cross sell products, expand into new geographies, create new opportunities in channel development and generate a profitable and steady maintenance stream.

In June 2004, the Company acquired the technology, assets, associated expertise and customer base for Integrated Chipware’s RTM product, one of the industry’s leading requirements management solutions for $3.8 million. In connection with the acquisition, which has been accounted for as an acquisition of a business, the Company has capitalized $4.3 million of acquired technology associated with the RTM product and has recorded an accrual of $0.2 million for restructuring and acquisition-related charges. There was no goodwill recorded in the business acquisition. The acquired technology will be amortized over its economic useful life of three years. Also in connection with the acquisition, the Company acquired certain selected assets and assumed certain liabilities including selected trade receivables and deferred maintenance contracts which have been recorded at their fair values.

The Company’s acquisition of RTM, which is a powerful solution for requirements engineering and design traceability that delivers the flexibility, scalability and ease of use necessary to address a broad range of enterprise projects, expanded its application lifecycle solution. This new offering is a part of the Company’s SAFE strategic vision to meet critical customer needs for comprehensive lifecycle management.

In January 2002, we entered into an OEM Agreement with IBM Corporation (“IBM”) whereby IBM acquired the rights to resell our StarTool APM technology. We recognized our first revenue from this arrangement in the second quarter of fiscal 2003 and such revenue has been subject to material fluctuations from quarter to quarter. Total revenue from our IBM OEM relationship was 5% of total revenue in fiscal 2004 and accounted for less than 2% of total revenue in both fiscal 2005 and the current fiscal quarter ended April 30, 2005. In April 2005, the Company received from IBM the notice of termination of the OEM Agreement. Under the terms of the Agreement, the Company will continue to support IBM’s customers for approximately the next five calendar quarters through June 30, 2006.

In the current fiscal quarter ended April 30, 2005, SERENA experienced an increase in total revenues of 82%, as total revenues for the quarter were $61.3 million versus $33.7 million in the same quarter from a year ago. The increase was primarily the result of the Company’s acquisition of Merant in April 2004, and to a lesser extent, its acquisition of TeamShare in June 2003.

SERENA has experienced increases in total revenues in the past two fiscal years as total revenues increased from $95.8 million in fiscal 2003 to $105.6 and $208.1 million in fiscal 2004 and fiscal 2005, respectively. The increase in fiscal 2005 over fiscal 2004 was due to the Company’s acquisition of Merant plc in the first quarter of fiscal 2005. In the two fiscal years ended January 31, 2003 and 2002, SERENA had experienced decreases in total revenue as total revenues went from $103.6 million in fiscal 2001 to $98.6 million and $95.8 million in fiscal 2002 and fiscal 2003, respectively. The overall demand for the Company’s software depends in large part

on general and economic business conditions. The general weakening of the worldwide economy and resulting slowdown in IT spending in fiscal 2003 and 2004 contributed to the overall decrease in total revenues. In general, demand had been increasing as a result of greater awareness of and need for automated third party SCM solutions. We derive our revenue from software licenses, maintenance and professional services.

For the current fiscal quarter ended April 30, 2005, 68% of our software license revenue came from our distributed systems products and 32% from our mainframe products. Our distributed systems products are licensed on a per user seat basis. Customers typically purchase the mainframe products under Million Instructions Per Second, or MIPS-based, perpetual licenses. Mainframe software products and applications are usually priced based on hardware computing capacity. The higher a hardware’s MIPS capacity, the more expensive a software license will be.

Historically, SERENA’s revenue has been generally attributable to sales in North America, Europe and to a lesser extent Asia Pacific. Revenue attributable to sales in North America accounted for approximately 61% and 69% of SERENA’s total revenue in the current fiscal quarter ended April 30, 2005 and the same quarter a year ago, respectively.

Our international revenue is attributable principally to our European operations. International sales represented approximately 39% and 31% of SERENA’s total revenue in the current fiscal quarter ended April 30, 2005, and the same quarter a year ago, respectively. As a percentage of total revenue, international revenue growth in the current fiscal quarter ended April 30, 2005, when compared to the same quarter a year ago, was in large part due to a single large transaction with an international customer in the current fiscal quarter ended April 30, 2005. This single customer accounted for 10% of total revenue in the current fiscal quarter ended April 30, 2005. No single customer accounted for 10% or more of total revenue in the same quarter a year ago.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by us. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations could be affected.

On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, trade accounts receivable and allowance for doubtful accounts, impairment or disposal of long-lived assets, and accounting for income taxes, among other things. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We refer to accounting estimates of this type as critical accounting policies, which are discussed further below.

In addition to these estimates and assumptions that we utilize in the preparation of historical financial statements, the inability to properly estimate the timing and amount of future revenues could significantly affect our future operations. We must make assumptions and estimates as to the timing and amount of future revenue. Specifically, our sales personnel monitor the status of all proposals, including the estimated closing date and potential dollar amount of such transactions. We aggregate these estimates periodically to generate a sales pipeline and then evaluate the pipeline to identify trends in our business. This pipeline analysis and related estimates of revenue may differ significantly from actual revenues in a particular reporting period as the estimates and assumptions were made using the best available data at the time, which is subject to change.

Specifically, slowdowns in the global economy and information technology spending has caused and may continue to cause customer purchasing decisions to be delayed, reduced in amount or cancelled, all of which have reduced and could continue to reduce the rate of conversion of the pipeline into contracts. A variation in the pipeline or the conversion rate of the pipeline into contracts could cause us to plan or budget inaccurately and thereby could adversely affect our business, financial condition or results of operations. In addition, because a substantial portion of our software license contracts close in the latter part of a quarter, we may not be able to adjust our cost structure to respond to a variation in the conversion of the pipeline in a timely manner, and thereby the delays may adversely and materially affect our business, financial condition or results of operations.

We believe the following are critical accounting policies and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition. SERENA recognizes revenues in accordance with SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, and recognizes revenues when all of the following criteria are met as set forth in paragraph 8 of SOP 97-2: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable and (4) collectibility is probable.

For contracts with multiple elements (e.g., license and maintenance), revenue is allocated to each component of the contract based on vendor specific objective evidence (“VSOE”) of its fair value, which is the price charged when the elements are sold separately. Since VSOE has not been established for license transactions, the residual method is used to allocate revenue to the license portion of multiple-element transactions.

The Company sells its products to its end users and distributors under license agreements or purchase orders. Software license revenue from license agreements or purchase orders is recognized upon receipt and acceptance of a signed contract or purchase order and delivery of the software, provided the related fee is fixed and determinable and collectibility of the revenue is probable. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period, as defined in the applicable software license agreement. Each new mainframe license includes maintenance, which includes the right to receive telephone support, “bug fixes” and unspecified upgrades and enhancements, for a specified duration of time, usually one year. The fee associated with such agreements is allocated between software license revenue and maintenance revenue based on the residual method.

The Company recognizes maintenance revenue ratably over the life of the related maintenance contract. Maintenance contracts on perpetual licenses generally renew annually. The Company typically invoices and collects maintenance fees on an annual basis at the anniversary date of the license. Deferred revenue represents amounts received by the Company in advance of performance of the maintenance obligation. Professional services revenue includes fees derived from the delivery of training, installation, and consulting services. Revenue from training, installation, and consulting services is recognized on a time and materials basis as the related services are performed. These services do not involve significant production, modification or customization of the software and the services are not essential to the functionality of the software.

Valuation of Long-Lived Intangible Assets, Including Goodwill. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or changes in circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or asset, a significant decrease in the benefits realized from the acquired business or asset, difficulties or delays in integrating the business, or a significant change in the operations of the acquired business or use of an asset. Recoverability of long-lived assets other than goodwill is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Significant management judgment is

required in identifying a triggering event that arises from a change in circumstances; forecasting future operating results; and estimating the proceeds from the disposition of long-lived or intangible assets. Material impairment charges could be necessary should different conditions prevail or different judgments be made. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would be no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

To date, there has been no significant impairment of long-lived assets and the Company does not expect to record an impairment loss on its long-lived assets in the near future.

In accordance with SFAS No. 142, goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. Factors we consider important which could trigger an impairment review include, but are not limited to, significant under-performance relative to expected, historical or projected future operating results, significant changes in the manner of our use of acquired assets or the strategy for our overall business, or significant negative economic trends. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.

The Company completed this test during the fourth quarters of fiscal 2003, fiscal 2004 and fiscal 2005, and the Company has not recorded an impairment loss on goodwill. The Company has concluded that there were no indicators of impairment of goodwill as of April 30, 2005.

Accounting for Income Taxes. Income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company assesses the likelihood that deferred tax assets will be recoverable from future taxable income and a valuation allowance is provided if it is determined more likely than not that some portion of the deferred tax assets will not be realized.

In December 2004 the FASB issued two FASB Staff Positions (“FSP”) related to the American Jobs Creation Act (“AJCA”). FSP No. 109-1 “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act” (“FSP 109-1”) requires companies that qualify for a deduction for domestic production activities under the AJCA to account for the deduction as a special deduction under FASB Statement No. 109 and reduce their tax expense in the period or periods the amounts are deductible on the tax return.

whether foreign earnings will be repatriated under the repatriation provisions of the AJCA and requires specified disclosures for companies needing the additional time to complete the evaluation. Once a decision is made to repatriate the foreign earnings, companies must reflect the deferred tax liabilities attributable to foreign earnings in the period that the decision is made to remit those earnings.

References to the dollar and percentage increases or decreases set forth below in this discussion and analysis of SERENA’s results of operations are derived from comparisons between SERENA’s condensed consolidated statements of operations for the three month period ended April 30, 2005 to the condensed consolidated statements of operations for the three month period ended April 30, 2004. Historical results include the post-acquisition results of TeamShare from June 5, 2003, Merant from April 23, 2004, the RTM product from June 21, 2004, and the business application planning technology product from March 7, 2005.

The following table sets forth our results of operations expressed as a percentage of total revenue. These operating results for the periods presented are not necessarily indicative of the results for the full fiscal year or any other period.

We derive revenue from software licenses, maintenance and professional services. Our total revenue increased $27.6 million, or 82%, to $61.3 million in the fiscal quarter ended April 30, 2005 from $33.7 million in the same quarter a year ago.

The following table summarizes software licenses, maintenance and professional services revenues for the periods indicated (in thousands, except percentages):

Software Licenses. Software licenses revenue as a percentage of total revenue was 36% in the current fiscal quarter ended April 30, 2005, as compared to 47% in the same quarter a year ago. For the current fiscal quarter, when compared to the same quarter a year ago, the increase in total software licenses revenue is predominantly due to increases in our distributed systems license revenue, for the most part coming from sales of Merant products after the Merant acquisition late in the first fiscal quarter ended April 30, 2004 and, to a lesser extent, sales of RTM and TeamTrack coming from our Integrated Chipware acquisition in second quarter of fiscal 2005 and our TeamShare acquisition in the second quarter of fiscal 2004. Sales of our distributed systems products, predominantly ChangeMan DS and TeamTrack beginning in fiscal 2004 and ChangeMan DS, TeamTrack and our newly acquired product line from Merant beginning in the first quarter of fiscal 2005, make up an increasing proportion of total software licenses revenue. Distributed systems products accounted for $15.0 million or 68% of total software licenses revenue in the current fiscal quarter ended April 30, 2005, as compared to $8.4 million or 53% in the same quarter a year ago. The Company expects that its distributed systems revenues in total and as a percentage of software licenses revenue will increase over time, and that core software change management will continue to account for a substantial portion of software licenses revenue in the future.

Maintenance. Maintenance revenue as a percentage of total revenue was 54% in the current fiscal quarter ended April 30, 2005, as compared to 44% in the same quarter a year ago. For the current fiscal quarter ended April 30, 2005, when compared to the same quarter a year ago, the increase in maintenance revenue is predominantly due to the Company’s acquisition of Merant late in the first fiscal quarter ended April 30, 2004, and to a lesser extent, growth in installed software licenses base, as new licenses generally include one year of maintenance, renewals of maintenance agreements by existing customers, and maintenance price increases; all partially offset by some cancellations in maintenance contracts. Accordingly, we expect maintenance revenue to grow in absolute dollars in the near term as maintenance contracts renew.

Professional Services. Professional services revenue as a percentage of total revenue was 10% in the current fiscal quarter ended April 30, 2005, as compared to 9% in the same quarter a year ago. For the current fiscal quarter ended April 30, 2005, when compared to the same quarter a year ago, the dollar increase is predominantly due to the acquisition of Merant. In general, professional services revenue is attributable to consulting opportunities resulting from our installed customer base and our expanded consulting service capabilities, all partially offset by the continued weak U.S. economy, price pressures on consulting rates, and the deferral of existing consulting projects.

Cost of revenue, which consists of cost of software licenses, cost of maintenance, cost of professional services, amortization of acquired technology and stock-based compensation, was 23% of total revenue in the current fiscal quarter ended April 30, 2005, as compared to 20% in the same quarter a year ago.

The following table summarizes cost of revenue for the periods indicated (in thousands, except percentages):

Software Licenses. Cost of software licenses consists principally of fees associated with our StarTool FDM products through the second quarter of fiscal 2004 and, to a lesser extent, salaries, bonuses and other costs associated with our product release organization, and fees associated with integrating third party technology into our distributed systems products. Cost of software licenses as a percentage of total software licenses revenue was 3% in the current fiscal quarter ended April 30, 2005, as compared to 2% in the same quarter a year ago. The increase in absolute dollars and as a percentage of total software licenses revenue is primarily due to increases in fees associated with sales of Merant products beginning with the acquisition of Merant late in the first fiscal quarter ended April 30, 2004; offset by decreases in fees associated with our StarTool FDM product as a result of lower revenues, and particularly, the elimination of such fees beginning in the third quarter of fiscal 2004.

Maintenance. Cost of maintenance consists primarily of salaries, bonuses and other costs associated with our customer support organizations. Cost of maintenance as a percentage of total maintenance revenue was 10% in the current fiscal quarter ended April 30, 2005, as compared to 11% in the same quarter a year ago. In absolute dollar terms, the increase in cost of maintenance is primarily attributable to increases in expenses associated with our customer support organizations as a result of the growth in both maintenance revenue and our installed customer base with our acquisition of Merant late in the first quarter of fiscal 2005, and to a lesser extent, the increase in our installed customer base resulting from the RTM technology acquisition in the second quarter of fiscal 2005. As a percentage of total maintenance revenue, the margin improvement in the quarter reflects economies of scale achieved as the rate of growth in maintenance revenue was greater than the rate of growth in costs associated with our customer support organizations.

Professional Services. Cost of professional services consists of salaries, bonuses and other costs associated with supporting our professional services organization. Cost of professional services as a percentage of total professional services revenue was 95% in the current fiscal quarter ended April 30, 2005, as compared to 89% in the same quarter a year ago. The increase in cost of professional services in absolute dollars is predominantly due to increases in expenses associated with our professional services organization to support higher professional services revenue, for the most part fueled by increases in fees associated with Merant services beginning with the acquisition of Merant late in the first fiscal quarter ended April 30, 2004. As a percentage of total professional services revenue, the margin decline in the current fiscal quarter, when compared to the same quarter a year ago,

is the result of the rate of growth in costs associated with our professional services organizations being greater than the rate of growth in professional services revenue.

Amortization of Acquired Technology. In connection with various prior acquisitions and most recently TeamShare, Merant, the RTM technology, and the Process View Composer technology, the Company has recorded $93.8 million in acquired technologies, offset by amortization totaling $35.9 million as of April 30, 2005. The increase in amortization expense was predominantly due to the acquired technology recorded in connection with the Company’s acquisition of Merant, and to a lesser extent, the acquired technology recorded in connection with the Company’s acquisitions of TeamShare, the RTM product and the Process View Composer Product. The Company expects to record $4.2 million per quarter in amortization expense over the remaining three quarters of fiscal 2006, then between $4.2 million and $3.3 million per quarter over the next four quarters following thereon through the end of fiscal 2007. See Notes 1 and 6 of Notes to Condensed Consolidated Financial Statements for additional information related to amortization of acquired technology and the acquisitions of Merant and the RTM technology from Integrated Chipware.

The following table summarizes operating expenses for the periods indicated (in thousands, except percentages):

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses, payroll taxes, and employee benefits as well as travel, entertainment and marketing expenses. Sales and marketing expenses as a percentage of total revenue were 29% in the current fiscal quarter ended April 30, 2005, as compared to 28% in the same quarter a year ago. The percentage and absolute dollar increases in the current fiscal quarter, when compared to the same quarter a year ago, are due primarily to the expansion of our direct sales and marketing organizations to support license revenue growth, salary, benefits and other employee related cost increases associated with our Merant acquisition, and to a lesser extent, our TeamShare acquisition. In absolute dollar terms, we expect sales and marketing expenses to increase as we continue to hire additional sales and marketing personnel, market our distributed systems products and undertake additional marketing programs.

Research and Development. Research and development expenses consist primarily of salaries, bonuses, payroll taxes, and employee benefits and costs attributable to research and development activities. Research and development expenses as a percentage of total revenue were 14% in the current fiscal quarter ended April 30, 2005, as compared to 15% in the same quarter a year ago. The increase in research and development expenses in absolute dollars is primarily attributable to salary, benefits and other employee related cost increases as a result

of our acquisition of Merant, and to a lesser extent, our acquisitions of TeamShare and the Process View Composer technology, and continued expansion of our research and development efforts to enhance existing products and develop our distributed systems products. As a percentage of total revenue, research and development expenses decreased slightly in the current fiscal quarter, when compared to the same quarter a year ago, as a result of the rate of growth in revenue being greater than the rate of growth in costs associated with our research and development activities. We expect research and development expenses to increase, both in absolute dollar terms and as a percentage of total revenue, as we continue to hire additional research and development personnel primarily to develop our distributed systems product suite.

General and Administrative. General and administrative expenses consist primarily of salaries, bonuses, payroll taxes, and benefits and certain non-allocable administrative costs, including legal and accounting fees and bad debts. General and administrative expenses as a percentage of total revenue were 8% in the current fiscal quarter ended April 30, 2005, as compared to 6% in the same quarter a year ago. The increase in general and administrative expenses in both absolute dollars and as a percentage of total revenue is primarily due to our Merant acquisition. We expect general and administrative expenses to increase in absolute dollar terms as we expand our infrastructure and our operations in the future.

Stock-Based Compensation. In connection with the Company’s acquisition of Merant, the Company recorded $1.8 million in deferred stock-based compensation reflecting the intrinsic value of the stock options assumed in the acquisition. The deferred stock-based compensation is being amortized over four years under an accelerated method whereby approximately $0.9 million, $0.5 million, $0.3 million and $0.1 million will be amortized to expense in the first, second, third and fourth years, respectively. As of April 30, 2005, the Company has amortized $0.9 million in deferred stock-based compensation and has $0.9 million remaining to be amortized.

Amortization of Intangible Assets. In connection with various prior acquisitions, most recently TeamShare and Merant, the Company has recorded $65.3 million in identifiable intangible assets, offset by amortization totaling $15.4 million as of April 30, 2005. Amortization expense in the current fiscal quarter ended April 30, 2005 is almost exclusively due to the Merant acquisition, which added $59.2 million in amortizable intangible assets and, to a lesser extent, the TeamShare acquisition, which added $5.2 million in amortizable intangible assets. Amortization of intangible assets will be approximately $2.6 million per quarter over the next four quarters through the first quarter of fiscal 2007, and $2.2 million per quarter thereafter through the end of fiscal 2009.

Acquired In-Process Research and Development. In connection with the Company’s acquisition of Merant, the Company recognized a charge in the first quarter of fiscal 2005 of $10.4 million for acquired in-process research and development. See Note 2 of Notes to Condensed Consolidated Financial Statements for additional information related to the acquired in-process research and development charge.

Restructuring, acquisition and other charges. In connection with the Company’s acquisition of Merant, the Company incurred restructuring, acquisition and other charges in the quarter ended April 30, 2004 related to the acquisition that are not part of the Company’s ongoing operations. Such charges included certain employee payroll, severance and other employee related costs associated with transitional activities that are not part of ongoing operations, and travel and other direct costs associated with integrating the two companies.

The following table summarizes other (expense) income for the periods indicated (in thousands, except percentages):

Interest Income. For the current fiscal quarter ended April 30, 2005, when compared to the same quarter a year ago, the dollar decrease in interest income is predominantly due to decreases in balances on interest-bearing accounts, such as cash and cash equivalents, and both short and long-term investments, resulting from our acquisition of Merant in which the Company paid approximately $267 million in cash, in the second fiscal quarter ended July 31, 2004 for the acquisition itself and an additional $18.4 million in acquisition related costs, and to a lesser extent, decreases in cash balances of $79.9 million due to the Company’s stock repurchase programs implemented after the fiscal quarter ended April 30, 2004, and $4.5 million, including acquisition related-costs, paid for the acquisition of Integrated Chipware in the second quarter of fiscal 2005; all partially offset by increases in balances on interest-bearing accounts, such as cash and cash equivalents, and both short and long-term investments, resulting from the accumulation of earnings.

Interest Expense. On December 15, 2003, the Company issued 1.5% Convertible Subordinated Notes due 2023 (the “Notes”) in a private placement. The Company will pay interest on the Notes on June 15 and December 15 of each year. The first interest payment was made on June 15, 2004. The Company has pledged a portfolio of U.S. government securities to secure the first six scheduled interest payments on the Notes.

The Company records interest expense in connection with the Notes at a rate of 1.5% per annum on a principal balance of $220 million, or $825,000 per quarter. Accordingly, interest expense for the current fiscal quarter ended April 30, 2005 and the same quarter a year ago was $825,000.

Amortization of Debt Issuance Costs. The Company records amortization of debt issuance costs in connection with the Notes, which will be amortized over 5 years, the term of the initial put option by the Note holders. Amortization of debt issuance costs will be $1.34 million annually going forward through December 15, 2008, when the initial put option expires, or earlier, upon conversion of the Notes.

Income Taxes. Income taxes were $4.8 million in the current fiscal quarter ended April 30, 2005, as compared to $3.4 million in the same quarter a year ago. The Company’s projected effective income tax rate for fiscal 2006 is 37%. The Company’s effective income tax rate for fiscal 2005 was 53%, and excluding the impact of the one-time in-process research and development charge of $10.4 million taken in the first quarter of fiscal 2005 ended April 30, 2004, would have been 35%. SERENA’s effective income tax rate has historically benefited from the United States research and experimentation tax credit and tax benefits generated from export sales made from the United States.

Cash, cash equivalents and investments. Since SERENA’s inception, we have financed our operations and met our capital expenditure requirements through cash flows from operations. As of April 30, 2005 and excluding $6.5 million in restricted cash, SERENA had $93.3 million in cash and cash equivalents, and an additional $31.8 million and $41.8 million in short and long-term investments, respectively, consisting principally of high grade commercial paper, certificates of deposit and short and long-term corporate notes and bonds.

Net cash provided by operating activities. Cash flows provided by operating activities were $12.6 million and $17.1 million in the current fiscal quarter ended April 30, 2005 and the same quarter a year ago, respectively. In the current fiscal quarter ended April 30, 2005, the Company’s cash flows provided by operating activities exceeded net income principally due to the inclusion of non-cash expenses in net income and cash collections in advance of revenue recognition on maintenance contracts; all partially offset by an increase in accounts receivable and a decrease in accounts payable. In the same quarter a year ago, the Company’s cash flows provided by operating activities exceeded net loss principally due to the inclusion of non-cash expenses in net income and cash collections in advance of revenue recognition for maintenance contracts; all partially offset by a decrease in accrued expenses and an increase in accounts receivable.

Net cash used in or provided by investing activities. Net cash used in investing activities was $23.9 million in the current fiscal quarter ended April 30, 2005 and net cash provided by investing activities was $147.4 million in the same quarter a year ago. In the current fiscal quarter ended April 30, 2005, net cash used in investing activities related to net purchases of short and long-term investments totaling $17.9 million, acquisition related costs paid in connection with the acquisition of business application planning technology totaling $3.0, acquisition related costs paid in connection with the Merant acquisition totaling $2.3 million, and the purchase of computer equipment and office furniture and equipment totaling $0.7 million. In the same quarter a year ago, net cash provided by investing activities related to cash received in the Merant acquisition totaling $97.2 million and net sales of short and long-term investments totaling $50.6 million; all partially offset by the purchase of computer equipment and office furniture and equipment totaling $0.4 million.

Net cash used in or provided by financing activities. Net cash used in financing activities was $28.6 million in the current fiscal quarter ended April 30, 2005 and net cash provided by financing activities was $1.8 million in the same quarter a year ago. In the current fiscal quarter ended April 30, 2005, net cash used in financing activities related to common stock repurchased under the stock repurchase plan totaling $34.4 million; partially offset by the exercise of stock options under the Company’s employee stock option plan totaling $5.8 million. In the same quarter a year ago, net cash provided by financing activities was entirely due to the exercise of stock options under the Company’s employee stock option plan totaling $1.8 million.

Contractual obligations and commitments. At April 30, 2005, the Company did not have any material commitments for capital expenditures and has no revolving credit agreement or other term loan agreements with any bank or other financial institution.

On December 15, 2003, the Company issued the Notes in a private placement. Under certain conditions, the Notes are convertible into shares of the Company’s common stock at an initial conversion rate of 45.0577 shares per $1,000 principal (representing an initial conversion price of approximately $22.194 per share), subject to certain adjustments. Upon conversion of 100% of the Notes, the Company’s common stock issued would be 9,912,694.

The Company has pledged a portfolio of U.S. government securities to secure the first six scheduled interest payments on the Notes. Accordingly, as of April 30, 2005, the Company has approximately $6.5 million in restricted cash against this pledge to cover the remaining four scheduled interest payments. Other than this pledge of U.S. government securities, the Notes are subordinated unsecured obligations and rank junior in right of payment to the Company’s existing and future senior indebtedness and structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries. The Notes are not listed on any securities exchange.

The Company may redeem the Notes, in whole or in part, under certain circumstances and at certain times. Accrued interest to the redemption date will be paid by the Company in any such redemption. The holders of the Notes may require the Company to repurchase for cash all or a portion of their Notes on December 15, 2008, December 15, 2013, or December 15, 2018 at a purchase price equal to 100% of the principal amount of the Notes being purchased, plus accrued and unpaid interest to, but excluding the purchase date.

At April 30, 2005, the Company had Notes outstanding totaling $220 million. The Notes bear interest at 1.5% per annum and are due in 2023. Accrued and unpaid interest on the notes totaled $1.2 million as of April 30, 2005 with restricted cash balances on hand totaling $6.5 million to cover the next four semi-annual interest payments.

The Company has noncancelable operating lease agreements for office space that expire between calendar 2005 and 2016. Future payments due under operating leases and debt as of April 30, 2005 are as follows (in thousands):

Working capital, accounts receivable and deferred revenue. At April 30, 2005, the Company had working capital of $70.4 million and accounts receivable, net of allowances, of $47.1 million. Total deferred revenue increased to $83.6 million at April 30, 2005 from $76.3 million at January 31, 2005 primarily as a result of the Merant acquisition in April 2004, and to a lesser extent, increased billings of maintenance fees and the RTM technology asset purchase from Integrated Chipware in June 2004.

Off-balance sheet arrangements. As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, or SPEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of April 30, 2005, we are not involved in any unconsolidated SPE transactions.

We believe that current cash and short-term investments, and cash flows from operations will satisfy our working capital and capital expenditure requirements for at least the next twelve months. At some point in the future we may require additional funds for either operating or strategic purposes and may seek to raise the additional funds through public or private debt or equity financing. If we ever need to seek additional financing, there is no assurance that this additional financing will be available, or if available, will be on reasonable terms and not dilutive to our stockholders.

This report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements under the Private Securities Reform Act of 1995 and other prospective information relating to future events. These forward-looking statements and other prospective information are subject to certain risks and uncertainties that could cause results to differ materially from historical results or anticipated results, including but are not limited to, the percentage of license revenue typically closed at the end of each quarter making estimation of operating results prior to the end of the quarter extremely uncertain; our ability to successfully integrate our acquisition of Merant plc; economic conditions worldwide which may continue to affect the overall demand for software and services, which has resulted in and could continue to result in decreased revenues or lower revenue growth rates in the future; changes in revenue

mix and seasonality; dependence on revenues from our installed base; continued demand for additional mainframe MIPS capacity; our ability to complete the assessment of internal controls over financial reporting as of January 31, 2006, as required by Section 404 of the Sarbanes-Oxley Act, which may impact market perception of the reliability of our internal controls over financial reporting and thus adversely affect the market price of our common stock; expansion of our international organizations; our ability to manage our growth; and the following:

There Are Many Factors, Including Some Beyond Our Control, That May Cause Fluctuations in Our Quarterly Operating Results

Our quarterly operating results have varied greatly in the past and may vary greatly in the future depending upon a number of factors described below and elsewhere in this “Factors That May Affect Future Results” section of this report, including many that are beyond our control. As a result, we believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful, and you should not rely on them as an indication of our future performance.

Our software license revenue in any quarter depends on orders booked and shipped in the last month, weeks or days of that quarter. At the end of each quarter, we typically have either minimal or no backlog of orders for the subsequent quarter. If a large number of orders or several large orders do not occur or are deferred, our revenue in that quarter could be substantially reduced. This would materially adversely affect our operating results and could impair our business in future periods.

Because we do not know when, or if, our potential customers will place orders and finalize contracts, we cannot accurately predict our revenue and operating results for future quarters. In addition, as a result of general economic slowdown or weakness worldwide that has occurred and could occur in the future, a number of customers have delayed and could delay in the future discretionary spending for software and hardware, which has reduced or could reduce in the future our revenue. Additionally, sales cycles have lengthened and could lengthen in the future as customers delay decisions to purchase our products.

Changes in the mix of software products and services sold by us, including the mix between higher margin software products and lower margin maintenance and services, could materially affect our operating results for future quarters.

Economic Conditions Worldwide Could Adversely Affect Our Revenue Growth and Ability to Forecast Revenue

The revenue growth and profitability of our business depends on the overall demand for application software and services. Because our sales are primarily to major corporate customers, our business also depends on general economic and business conditions. The general weakening of the worldwide economy has caused the Company in the past to experience a decrease in revenues and revenue growth rates of its software licenses. A softening of demand for computer software caused by a continued weakening of the economy, domestically or internationally, may result in a continued decrease in revenues and revenue growth rates. Our license revenues have fluctuated in recent years and we may not experience any license revenue growth in the future and our license revenues could in fact decline.

Management personnel identify, track and forecast future revenues, backlog and trends in our business. Our sales personnel monitor the status of all proposals, such as the estimated date when a transaction will close and the potential dollar amount of such sale. We aggregate these estimates periodically in order to generate a sales pipeline and then evaluate the pipeline at various times to look for trends in our business. While this pipeline analysis provides visibility to our potential customers and the associated revenues for budgeting and planning purposes, these pipeline estimates may not consistently correlate to revenues in a particular quarter or ever. A slowdown in the economy, domestically and internationally, has caused in the past and may cause in the future

customer purchasing decisions to be delayed, reduced in amount or cancelled, all of which have reduced and could reduce the rate of conversion of the pipeline into contracts. A variation in the pipeline or in the conversion of the pipeline into contracts could cause us to plan or budget improperly and thereby could adversely affect our business or results of operations. In addition, primarily due to a substantial portion of our software licenses revenue contracts closing in the latter part of a quarter, management may not be able to adjust the Company’s cost structure in response to a variation in the conversion of the pipeline into contracts in a timely manner, and thereby adversely affect our business or results of operations.

If SERENA Encounters Difficulties Integrating the Business Operations of SERENA and Merant, It Could Adversely Affect the Business of the Combined Company

We have and will continue to integrate our operations with those of Merant. Our goal in integrating these operations is to increase earnings and achieve cost savings by taking advantage of the significant anticipated synergies of consolidation and enhanced growth opportunities. We have incurred and expect to continue to incur, severance payments and other employee related costs, costs for lease terminations, meetings, trainings, rebranding, integration of information technology systems, and other costs in connection with the integration of SERENA and Merant. We cannot be sure that we will not encounter substantial difficulties integrating our operations with Merant’s operations, resulting in a delay or the failure to achieve the anticipated synergies and, therefore, the expected increases in earnings and cost savings. The difficulties of combining the operations of the two companies include, among other things:

For these reasons, we may fail to complete successfully the necessary integration of SERENA and Merant, or to realize any of the anticipated benefits of the integration of the two companies. Actual cost savings and synergies may be lower than we currently expect and may take a longer time to achieve than we currently anticipate.

Charges to Earnings Resulting From Our Acquisition of Merant, Including the Application of the Purchase Method of Accounting, and Restructuring and Integration Costs May Materially Adversely Affect the Market Value of SERENA Shares

In accordance with U.S. GAAP, SERENA has accounted for the Merant plc acquisition using the purchase method of accounting. SERENA has allocated the total estimated purchase price to Merant’s net tangible assets, amortizable intangible assets, and in-process research and development based on their fair values as at the date of the acquisition, and recorded the excess of the purchase price over those fair values as goodwill. SERENA’s financial results, including earnings per share, could be adversely affected by a number of financial adjustments required by US GAAP including the following:

We have incurred and expect to incur costs associated with combining the operations of the two companies, including advisors’ fees and other costs related to the acquisition. These costs may be substantial and include those related to the severance and stock option acceleration provisions of Merant’s employee benefit plans, which were triggered by the acquisition. We also face potential costs related to employee redeployment or relocation, employee retention, which could include salary increases, bonuses or option grants, reorganization or closure of facilities, relocation and disposal of excess equipment, termination of contracts with third parties that provide redundant or conflicting services and other integration costs. We have accounted for these costs as purchase related adjustments in the acquisition, and such costs have decreased our net income and have impacted cash balances. Each of these charges has negatively impacted earnings, which could have a material adverse effect on the price of SERENA shares.

Our Future Revenue Is Substantially Dependent Upon Our Installed Customers Renewing Maintenance Agreements for Our Products and Licensing or Upgrading Additional SERENA Products; Our Future Professional Service and Maintenance Revenue Is Dependent on Future Sales of Our Software Products

We depend on our installed customer base for future revenues from maintenance renewal fees and licenses or upgrades of additional products. If our customers do not purchase additional products, upgrade existing products or cancel or fail to renew their maintenance agreements, this could materially adversely affect our business and future quarterly and annual operating results. The terms of our standard license arrangements provide for a one-time license fee and a prepayment of one year of software maintenance and support fees. The maintenance agreements are renewable annually at the option of the customers and there are no minimum payment obligations or obligations to license additional software. Therefore, our current customers may not necessarily generate significant maintenance revenue in future periods. In addition, our customers may not necessarily purchase additional products, upgrades or professional services. Our professional service revenue and maintenance revenue are also dependent upon the continued use of these services by our installed customer base. Any downturn in our software license revenue would have a negative impact on the growth of our professional service revenue and maintenance revenue in future quarters.

We Expect That Our Operating Expenses Will Increase in the Future and These Increased Expenses May Adversely Affect Our Future Operating Results and Financial Condition

Although SERENA has been profitable in recent years, we may not remain profitable on a quarterly or annual basis in the future. We anticipate that our expenses will increase in the foreseeable future as we:

With these additional expenses, in order to maintain our current levels of profitability, we will be required to increase our revenue correspondingly. Any failure to increase our revenue as we implement our product, service and distribution strategies would materially adversely affect our business, quarterly and annual operating results and financial condition. Our revenue has fluctuated in recent years and we may not experience any revenue growth in the future and our revenue could in fact decline. Our efforts to expand our software product suites, sales and marketing activities, direct and indirect distribution channels and professional service offerings and to pursue strategic relationships or acquisitions may not succeed or may prove more expensive than we currently anticipate. As a result, we cannot predict our future operating results with any degree of certainty.

We introduced our ChangeMan DS product in fiscal 2000 and our ChangeMan ZDD product in the first quarter of fiscal 2003. In the second quarter of fiscal 2004, we acquired the TeamTrack product with our acquisition of TeamShare effective June 5, 2003. In the first quarter of fiscal 2005, we acquired the Merant product line with our acquisition of Merant effective April 23, 2004. In the second quarter of fiscal 2005, we acquired the RTM product with our asset purchase from Integrated Chipware, Inc. In the first quarter of fiscal 2006, we acquired business application planning technology in an asset purchase. While license revenues from our distributed systems products increased to 68% of total license revenue in the current fiscal quarter ended April 30, 2005, they may fluctuate materially from quarter to quarter and could in fact decline. We are currently developing new products and enhancing our product suite to support additional distributed systems products. If we do not successfully develop, market, sell and support our distributed systems products, this would materially adversely affect our business and our future quarterly and annual operating results. Prior to our acquisition of Merant in the first quarter of fiscal 2005, the majority of our products had been designed for the mainframe platform, and the majority of our software license revenue, maintenance revenue and professional services revenue had been attributable to licenses for these mainframe products. Our competitors may have substantially greater experience providing distributed systems compatible software products than we do, and many also may have significantly greater financial and organizational resources.

Any Delays in Our Normally Lengthy Sales Cycles Could Result in Significant Fluctuations in Our Quarterly Operating Results

Our sales cycle typically takes three to eighteen months to complete and varies from product to product. Any delay in the sales cycle of a large license or a number of smaller licenses could result in significant fluctuations in our quarterly operating results. The length of the sales cycle may vary depending on a number of factors over which we may have little or no control, including the size and complexity of a potential transaction

and the level of competition that we encounter in our selling activities. Beginning in fiscal 2002, we have experienced an overall lengthening of sales cycles as customers delayed purchases or customers reduced budgets as a result of economic conditions. Additionally, the emerging market for our products and services contributes to the lengthy sales process in that during the sales cycle we often have to teach potential customers about the use and benefits of our products. In certain circumstances, we license our software to customers on a trial basis to assist the customers in their evaluation of our products. Our sales cycle can be further extended for product sales made through third party distributors.

If the Market for IBM and IBM-Compatible Mainframes Decreases, It Could Adversely Affect Our Business

Our mainframe revenues are dependent upon the continued use and acceptance of International Business Machines Corporation (“IBM”) and IBM-compatible mainframes and the growth of this market. If the role of the mainframe does not increase as we anticipate, or if it in any way decreases, this would materially adversely affect our business, future quarterly and annual operating results and financial condition. Additionally, if there is a wide acceptance of other platforms or if new platforms emerge that provide enhanced enterprise server capabilities, our business and future operating results may be materially adversely affected. Prior to the Company’s acquisition of Merant in April 2004, the majority of our software license revenue had been attributable to sales of our mainframe products. We expect that, for the foreseeable future, a significant portion of our software license revenue will continue to come from sales of our mainframe products. As a result, future sales of our existing products and associated maintenance revenue and professional service revenue will depend on continued use of mainframes.

Acquisitions May be Difficult to Integrate, Disrupt Our Business, Dilute Stockholder Value or Divert the Attention of Our Management

In June 2003, we acquired TeamShare, Inc.; in April 2004, we acquired Merant plc.; in June 2004, we acquired the RTM product with our asset purchase from Integrated Chipware, Inc.; in March 2005, we acquired business application planning technology in an asset purchase. We may acquire or make investments in other companies and technologies. In the event of any acquisitions or investments, we could:

If we fail to achieve the financial and strategic benefits of past and future acquisitions or investments, our operating results will suffer. Acquisitions and investments involve numerous other risks, including:

Seasonal Trends in Sales of Our Software Products May Affect Our Quarterly Operating Results

We have experienced and expect to continue to experience seasonality in sales of our software products. These seasonal trends materially affect our quarter-to-quarter operating results. Revenue and operating results in our quarter ending January 31 are typically higher relative to our other quarters, because many customers make purchase decisions based on their calendar year-end budgeting requirements. In addition, our January quarter tends to reflect the effect of the incentive compensation structure for our sales organization, which is based on satisfaction of fiscal year-end quotas. As a result, we have historically experienced a substantial decline in revenue in the first quarter of each fiscal year relative to the preceding quarter. We expect our quarter ending October 31 to reflect the effects of summer slowing of international business activity and spending activity generally associated with that time of year.

If the SCM Market Does Not Evolve as We Anticipate, Our Business Will Be Adversely Affected

If we fail to properly assess and address the SCM market or if our products and services fail to achieve market acceptance for any reason, our business and quarterly and annual operating results would be materially adversely affected. The SCM market is in an early stage of development. IT organizations have traditionally addressed SCM needs internally and have only recently become aware of the benefits of third-party SCM solutions as their SCM requirements have become more complex. Since the market for our products is still evolving, it is difficult to assess the competitive environment or the size of the market that may develop. Our future financial performance will depend in large part on the continued growth in the number of businesses adopting third-party SCM products and the expansion of their use on a company-wide basis. The SCM market for third-party products may grow more slowly than we anticipate. In addition, technologies, customer requirements and industry standards may change rapidly. If we cannot improve or augment our products as rapidly as existing technologies, customer requirements and industry standards evolve; our products or services could become obsolete. The introduction of new or technologically superior products by competitors could also make our products less competitive or obsolete. As a result of any of these factors, our position in existing markets or potential markets could be eroded.

We May Experience Delays in Developing Our Products Which Could Adversely Affect Our Business

If we are unable, for technological or other reasons, to develop and introduce new and improved products in a timely manner, this could materially adversely affect our business and future quarterly and annual operating results. We have experienced product development delays in new version and update releases in the past and may experience similar or more significant product delays in the future. To date, none of these delays has materially affected our business. Difficulties in product development could delay or prevent the successful introduction or marketing of new or improved products or the delivery of new versions of our products to our customers. Any delay in releasing our new distributed systems products, for whatever reason, would impair our revenue growth.

We Intend to Expand Our International Operations and May Encounter a Number of Problems in Doing So; There Are Also a Number of Factors Associated With International Operations that Could Adversely Affect Our Business

Expansion of International Operations. With the acquisition of Merant we expanded the scope of our international operations. We currently have sales subsidiaries in the United Kingdom, Germany, Sweden, France, Belgium, Spain, the Netherlands, Australia and Singapore. If we are unable to expand our international operations successfully and in a timely manner, or if these operations experience declining revenue growth, this could materially adversely affect our business and quarterly and annual operating results. We have only limited experience in marketing, selling and supporting our products internationally. Additionally, we do not have significant experience in developing foreign language versions of our products. Such development may be more difficult or take longer than we anticipate. We may not be able to successfully market, sell, deliver and support our products internationally.

Risks of International Operations. International sales increased to 39% of our total revenue in the current fiscal quarter ended April 30, 2005, as compared to 31% in the same quarter a year ago, primarily as a result of the Merant acquisition in the first quarter of fiscal 2005 and a single large transaction with an international customer in the first quarter of fiscal 2006. Our international revenue is attributable principally to our European operations, however we plan to increase our investment in sales and marketing in the Asia Pacific region going forward. Our international operations are, and any expanded international operations will be, subject to a variety of risks associated with conducting business internationally that could materially adversely affect our business and future quarterly and annual operating results, including the following:

Substantial Leverage and Debt Service Obligations May Adversely Affect Our Cash Flow

As a result of the December 15, 2003 sale of the Notes, we incurred $220 million of indebtedness. There is a possibility that we may be unable to generate cash sufficient to pay the principal of, interest on and other amounts due in respect of our indebtedness when due. We are not restricted under the indenture governing the notes from incurring additional debt in the future.

Our substantial leverage could have significant negative consequences, including:

Upon the occurrence of a change in control, we would be required under the indenture governing the Notes to purchase all outstanding Notes tendered to us by the holders of such Notes. In addition, holders may require us

to purchase their Notes on December 15, 2008, December 15, 2013 or December 15, 2018. While we have the right, subject to certain conditions, to pay common stock for the purchase price in the event of a change in control, we cannot assure you that we will have sufficient financial resources, or will be able to arrange financing, to pay the purchase price in cash for all Notes tendered by the holders and future credit facilities may restrict our ability to make such payments. A change in control may also constitute an event of default under any other agreement governing then-existing indebtedness and could prevent us from purchasing the Notes. Any failure to purchase the Notes when required will result in an event of default under the indenture.

Our Reported Earnings Per Share Will Be Reduced Because of the Contingent Conversion Provision of the Notes

Holders of the Notes are entitled to convert the Notes into our common stock if (1) the price of our common stock over a specified period exceeds a specified threshold, (2) the trading price of the Notes falls below a specified threshold, (3) the Notes have been called for redemption or (4) specified corporate transactions occur.

In October 2004, the FASB ratified the consensus reached by the EITF with respect to EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share.” In accordance with EITF Issue 04-8, potential shares issuable under contingently convertible securities with a market price trigger should be accounted for the same way as other convertible securities and included in the diluted earnings per share computation, regardless of whether the market price trigger has been met. Upon our adoption of EITF Issue No. 04-8 in the fourth quarter of fiscal 2005, 9,912,694 shares issuable from the conversion of the Notes have been included in the diluted earnings per share calculation for the current fiscal quarter ended April 30, 2005, using the “if converted” method. The 9,912,964 shares issuable from the conversion of the Notes have not been included in the diluted earnings per share calculation for the fiscal quarter ended April 30, 2004, since their inclusion would have been anti-dilutive. Accordingly, we have not restated our diluted earnings per share calculation for the fiscal quarter ended April 30, 2004. The original instrument was issued in the fourth quarter of fiscal 2004. These common shares will continue to be considered in our diluted earnings per share calculation until the Notes are redeemed, retired or, under certain circumstances, amended.

If We Do Not Adequately Manage and Evolve Our Financial Reporting and Managerial Systems and Processes, Our Ability to Manage and Grow Our Business May be Harmed

Our ability to successfully implement our business plan and comply with regulations, including the Sarbanes-Oxley Act of 2002, or the SOX Act, requires an effective planning and management process. We expect that we will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures and controls, could harm our ability to accurately forecast sales demand, manage our supply chain and record and report financial and management information on a timely and accurate basis.

If We Are Unable To Assess Favorably The Effectiveness Of Our Internal Control Over Financial Reporting, Or If Our Independent Auditors Are Unable To Provide An Unqualified Attestation Report On Our Assessment In The Future, Our Stock Price Could Be Adversely Affected

Under the SOX Act, or the Act, we are required to assess the effectiveness of our internal controls over financial reporting and assert that such internal controls are effective. Our independent auditors must evaluate management’s assessment concerning the effectiveness of our internal controls over financial reporting and render an opinion on our assessment and the effectiveness of our internal controls over financial reporting. The SOX Act has resulted in and is likely to continue to result in increased expenses, and has required and is likely to continue to require significant efforts by management and other employees. Although we believe that our efforts will enable us to remain compliant under the Act, we can give no assurance that in the future such efforts will be successful. Our business is complex and involves significant judgments and estimates as described in our

“Critical Accounting Estimates.” If certain judgments and estimates are determined incorrectly, we may be unable to assert that our internal controls over financial reporting are effective, or our independent auditors may not be able to render the required attestation concerning our assessment and the effectiveness of our internal controls over financial reporting, which could adversely effect investor confidence in us and the market price of our common stock.

The Requirement to Account for Stock Options Under Our Employee Stock Plans as Compensation Expense, Would Significantly Reduce Our Net Income and Our Earnings Per Share or We May Reflect a Loss

Statement of Financial Accounting Standards No.123 (revised 2004) (SFAS No. 123R), Shared-Based Payment, will require us to account for equity under our stock plans using fair value based model on the option grant date and record it as a stock-based compensation expense. Our net income and our earnings per share will be significantly reduced or may reflect a loss. We currently calculate stock-based compensation expense using the Black-Scholes option-pricing model and disclose the pro forma impact on net income (loss) and net income (loss) per share in Note 3 to our condensed consolidated financial statements for the three months ended April 30, 2005 and 2004. A fair value based model such as the Black-Scholes option-pricing model requires the input of highly subjective assumptions and does not necessarily provide a reliable single measure of the fair value of our stock options. Assumptions used under the Black-Scholes option-pricing model that are highly subjective include the expected stock price volatility and expected life of an option. SFAS No. 123R requires us to adopt the new accounting provisions beginning in our first quarter of fiscal 2007, and will require us to expense shares issued under employee stock purchase plans and stock options as a stock-based compensation expense using a fair value based model.

Changes in Accounting Regulations and Related Interpretations and Policies Regarding Revenue Recognition Could Cause Us to Defer Recognition of Revenue or Recognize Lower Revenue and Profits

Although we use standardized license agreements designed to meet current revenue recognition criteria under generally accepted accounting principles, we must often negotiate and revise terms and conditions of these standardized agreements, particularly in multi-product or multi-year transactions. As our transactions increase in complexity with the sale of larger, multi-product, multi-year licenses, negotiation of mutually acceptable terms and conditions can extend the sales cycle and, in certain situations, may require us to defer recognition of revenue on such licenses. We believe that we are in compliance with Statement of Position 97-2, “Software Revenue Recognition” as amended, however these future, more complex, multi-product, multi-year license transactions may require additional accounting analysis to account for them accurately, could lead to unanticipated changes in our current revenue accounting practices and may contain terms affecting the timing of revenue recognition.

We May Incur Future Impairment Losses Related to Intangible Assets From Prior Acquisitions That Could Harm Our Future Operating Results

In the recent past, we have acquired significant assets and businesses. If the assets and businesses do not perform as expected, we may be required to take impairment charges related to the intangible assets from these acquisitions. Such charges could harm our operating results.

Fluctuations in the Value of Foreign Currencies Could Result in Currency Transaction Losses for SERENA

A majority of our international business is conducted in foreign currencies, principally the British pound and euro. Fluctuations in the value of foreign currencies relative to the U.S. dollar will continue to cause currency transaction gains and losses. We cannot predict the effect of exchange rate fluctuations upon future quarterly and annual operating results. We may experience currency losses in the future. To date, we have not adopted a hedging program to protect SERENA from risks associated with foreign currency fluctuations.

SERENA is Subject to Intense Competition in the SCM Industry and We Expect to Face Increased Competition in the Future, Including Competition in the SCM Distributed Systems Market

We may not be able to compete successfully against current or future competitors and such inability would materially adversely affect our business, quarterly and annual operating results and financial condition. The market for our products is highly competitive and diverse. Moreover, the technology for SCM products may change rapidly. New products are frequently introduced, and existing products are continually enhanced. Competition may also result in changes in pricing policies by SERENA or our competitors, which could materially adversely affect our business and future quarterly and annual operating results. Competitors vary in size and in the scope and breadth of the products and services that they offer. Many of our current and potential competitors have greater financial, technical, marketing and other resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the development, promotion and sale of their products than we can.

Mainframe Competition. We currently face competition from a number of sources, including:

Competition in the Distributed Systems SCM Market. We also face significant competition as we develop, market and sell our distributed systems products, including ChangeMan DS, TeamTrack and our newly acquired Merant product line. If we are unable to successfully penetrate the distributed systems SCM market, our business and future quarterly and annual operating results will be materially adversely affected. Penetrating the existing distributed systems SCM market will be difficult. Competitors in the distributed systems market include IBM, Computer Associates, Microsoft, Telelogic and other smaller private companies.

Future Competition. We may face competition in the future from established companies who have not previously entered the mainframe or distributed systems SCM market, or from emerging software companies. Increased competition may materially adversely affect our business and future quarterly and annual operating results due to price reductions, reduced gross margins and reduction in market share. Established companies may not only develop their own mainframe or distributed systems SCM solutions, but they may also acquire or establish cooperative relationships with our current competitors, including cooperative relationships between large, established companies and smaller private companies. Because larger companies have significant financial and organizational resources available, they may be able to quickly penetrate the mainframe or distributed systems SCM market through acquisitions or strategic relationships and may be able to leverage the technology and expertise of smaller companies and develop successful SCM products for the mainframe. We expect that the software industry, in general, and providers of SCM solutions, in particular, will continue to consolidate. It is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.

Bundling or Compatibility Risks. Our ability to sell our products also depends, in part, on the compatibility of our products with other third party products, particularly those provided by IBM. Developers of these third party products may change their products so that they will no longer be compatible with our products. These third party developers may also decide to bundle their products with other SCM products for promotional purposes. If that were to happen, our business and future quarterly and annual operating results may be materially adversely affected as we may be priced out of the market or no longer be able to offer commercially viable products.

Our Executive Officers and Certain Key Personnel Are Critical to Our Business and Such Officers and Key Personnel May Not Remain with SERENA in the Future

Our success will depend to a significant extent on the continued service of our senior executives and certain other key employees, including certain sales, consulting, technical and marketing personnel. If we lost the services of one or more of our executives or key employees, including if one or more of our executives or key employees decided to join a competitor or otherwise compete directly or indirectly with SERENA, this could materially adversely affect our business. In particular, we have historically relied on the experience and dedication of our product authors. With the exception of Douglas D. Troxel, SERENA’s founder, Chief Technology Officer and chairman of SERENA’s board of directors, the employment of all of our senior and key employees, including key product authors, is at will. Mr. Troxel’s employment is on a year-to-year basis. In addition, we do not maintain key man life insurance on our employees and have no plans to do so.

Our Industry Changes Rapidly Due to Evolving Technology Standards and Our Future Success Will Depend on Our Ability to Continue to Meet the Sophisticated Needs of Our Customers

Our future success will depend on our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging hardware, software, database and networking platforms particularly for our distributed systems products. We will have to develop and introduce enhancements to our existing products and new products on a timely basis to keep pace with technological developments, evolving industry standards and changing customer requirements. We expect that we will have to respond quickly to rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. As a result, our position in existing markets or potential markets could be eroded rapidly by product advances. The life cycles of our products are difficult to estimate. Our growth and future financial performance will depend in part upon our ability to enhance existing applications, develop and introduce new applications that keep pace with technological advances, meet changing customer requirements and respond to competitive products. We expect that our product development efforts will continue to require substantial investments. We may not have sufficient resources to make the necessary investments. Any of these events could have a material adverse effect on our business, quarterly and annual operating results and financial condition.

The market price of our common shares has fluctuated significantly in recent months, and we expect that the market price of our common shares may fluctuate substantially as a result of variations in our quarterly operating results and market conditions. These fluctuations may be exaggerated if the trading volume of our common shares is low. In addition, the market price of our common shares may fluctuate dramatically in response to a variety of factors, including:

Because of this volatility, we may fail to meet the expectations of our stockholders or of securities analysts at some time in the future and the trading prices of our securities could decline as a result.

In addition, equity securities of many technology companies have recently experienced significant price and volume fluctuations. These price and volume fluctuations are sometimes unrelated to the operating performance of the affected companies. Volatility in the market price of our common shares could result in securities class action litigation. This type of litigation, regardless of the outcome, could result in substantial costs to us and a diversion of our management’s attention and resources.

Third Parties in the Future Could Assert That Our Products Infringe Their Intellectual Property Rights, Which Could Adversely Affect Our Business

Third parties may claim that our current or future products infringe their proprietary rights. Any claims of this type could affect our relationships with existing customers and may prevent future customers from licensing our products. Because we are dependent upon a limited number of products, any such claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or license agreements may not be available on acceptable terms or at all. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the software industry segment grows and the functionality of products in different industry segments overlaps. As a result of these factors, infringement claims could materially adversely affect our business.

Errors in Our Products or the Failure of Our Products to Conform to Specifications Could Result in Our Customers Demanding Refunds from Us or Asserting Claims for Damages Against Us

Because our software products are complex, they often contain errors or “bugs” that can be detected at any point in a product’s life cycle. While we continually test our products for errors and work with customers through our customer support services to identify and correct bugs in our software, we expect that errors in our products will continue to be found in the future. Although many of these errors may prove to be immaterial, certain of these errors could be significant. Detection of any significant errors may result in, among other things, loss of, or delay in, market acceptance and sales of our products, diversion of development resources, injury to our reputation, or increased service and warranty costs. These problems could materially adversely affect our business and future quarterly and annual operating results. In the past we have discovered errors in certain of our products and have experienced delays in the shipment of our products during the period required to correct these errors. These delays have principally related to new version and product update releases. To date, none of these delays have materially affected our business. However, product errors or delays in the future, including any product errors or delays associated with the introduction of our distributed systems products, could be material. In addition, in certain cases we have warranted that our products will operate in accordance with specified customer requirements. If our products fail to conform to such specifications, customers could demand a refund for the software license fee paid to us or assert claims for damages.

Product Liability Claims Asserted Against Us in the Future Could Adversely Affect Our Business

We may be subject to claims for damages related to product errors in the future. A material product liability claim could materially adversely affect our business. Our license agreements with our customers typically contain provisions designed to limit exposure to potential product liability claims. SERENA’s standard software licenses provide that if our products fail to perform, we will correct or replace such products. If these corrective measures fail, we may be required to refund the license fee for such non-performing product. However, our standard license agreement limits our liability for non-performing products to the amount of license fee paid, if the license has been in effect for less than one year, or to the amount of the licensee’s current annual maintenance fee, if the license is more than one year old. Our standard license also provides that SERENA shall not be liable for indirect or consequential damages caused by the failure of our products. Such limitation of liability provisions may, however, not be effective under the laws of certain jurisdictions to the extent local laws treat certain warranty exclusions as unenforceable. Although we have not experienced any product liability claims to date, the sale and support of our products entail the risk of such claims.

The Company does not use derivative financial instruments in its investment portfolio and has no foreign exchange contracts. Its financial instruments consist of cash and cash equivalents, short and long-term investments, trade accounts receivable and accounts payable. The Company considers investments in highly liquid instruments purchased with a remaining maturity of 90 days or less to be cash equivalents. All of the Company’s cash equivalents and short and long-term investments principally consist of commercial paper and debt securities, and are classified as available-for-sale as of April 30, 2005. The Company’s exposure to market risk for changes in interest rates relates primarily to its short and long-term investments and short-term obligations, thus, a hypothetical 10% fluctuation in interest rates would not have a material impact on the fair value of these securities.

Sales to foreign countries accounted for approximately 39% of the total sales during the current fiscal quarter ended April 30, 2005. Because the Company invoices certain of its foreign sales in currencies other than the United States dollar, predominantly the British pound sterling and euro, and does not hedge these transactions, fluctuations in exchange rates could adversely affect the translated results of operations of the Company’s foreign subsidiaries. Therefore, foreign exchange fluctuations could create a risk of significant balance sheet gains or losses on the Company’s consolidated financial statements. However, given the Company’s foreign subsidiaries’ net book values as of April 30, 2005 and net cash flows for the most recent fiscal quarter then ended, the Company does not believe that a hypothetical 10% fluctuation in foreign currency exchange rates would have a material impact on our financial position or results of operations.

Attached as exhibits to this Form 10-Q are certifications of SERENA’s Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Evaluation of disclosure controls and procedures. Disclosure controls and procedures are designed to ensure that the information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include components of our internal control over our financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of financial reporting and permitting

the preparation of our financial statements in conformity with generally accepted accounting principles. To the extent that components of our internal control over our financial reporting are included within our disclosure controls and procedures, they are included in the scope of our quarterly controls evaluation. Internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set forth in our Form 10-K.

The evaluation of our disclosure controls and procedures included a review of our processes and implementation and the effect on the information generated for use in this Quarterly Report. In the course of this evaluation, we sought to identify any significant deficiencies or material weaknesses in our controls, to determine whether we had identified any acts of fraud involving personnel who have significant roles in disclosure controls and to confirm that any necessary corrective action, including process improvements, were being undertaken.

This type of evaluation is done every fiscal quarter so that our conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. The overall goals of these evaluations activities are to monitor our disclosure controls and procedures and to make modifications as necessary.

Based on this evaluation, and subject to the limitations described below, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Our management, including the Chief Executive Officer and the Chief Financial Officer, do not expect that the disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurances that the objectives of the control system are met. The design of a control system reflects resource constraints; the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within the Company have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

A summary of the Company’s repurchases for the quarter ended April 30, 2005 is as follows:

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, SERENA Software, Inc., a corporation organized and existing under the laws of the State of Delaware, has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


SERENA SOFTWARE, INC. (Registrant)

By:		/s/ ROBERT I. PENDER, JR.
		Robert I. Pender, Jr. Senior Vice President, Finance And Administration, Chief Financial Officer (Principal Financial And Accounting Officer) And Director


		Page
PART I FINANCIAL INFORMATION

Item 1	Financial Statements:

	Condensed Consolidated Balance Sheets as of April 30, 2005 and January 31, 2005	3

	Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2005 and 2004	4

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2005 and 2004	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4	Controls and Procedures	42

PART II OTHER INFORMATION

Item 1	Legal Proceedings	44

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3	Defaults Upon Senior Securities	44

Item 4	Submission of Matters to a Vote of Security Holders	44

Item 5	Other Information	44

Item 6	Exhibits	45

SIGNATURES		46


	April 30, 2005			January 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	93,284		$	133,330
Restricted cash		3,300			3,300
Short-term investments		31,849			16,778
Accounts receivable, net of allowance of $1,119 and $1,700 at April 30 and January 31, 2005, respectively		47,135			40,988
Deferred taxes		12,267			12,267
Prepaid expenses and other current assets		5,307			4,964

Total current assets		193,142			211,627
Long-term investments		41,837			39,095
Restricted cash, non-current		3,189			3,157
Property and equipment, net		5,711			5,722
Goodwill		321,435			323,671
Other intangible assets, net		107,823			107,790
Other assets		3,723			4,057

TOTAL ASSETS	$	676,860		$	695,119

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	934		$	3,415
Income taxes payable		27,741			27,667
Accrued expenses		22,485			26,103
Accrued interest on subordinated notes		1,238			413
Deferred revenue		70,309			63,152

Total current liabilities		122,707			120,750
Deferred revenue, net of current portion		13,329			13,110
Long-term liabilities		2,508			2,660
Deferred taxes		41,185			40,983
Subordinated notes		220,000			220,000

Total liabilities		399,729			397,503

Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.001 par value; 90,000,000 shares authorized; 41,183,609 and 42,266,206 shares issued and outstanding at April 30 and January 31, 2005, respectively		41			42
Additional paid-in capital		149,165			177,750
Deferred stock-based compensation		(864	)		(1,092	)
Accumulated other comprehensive loss		(4,912	)		(4,646	)
Retained earnings		133,701			125,562

Total stockholders’ equity		277,131			297,616

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	676,860		$	695,119


	Three Months Ended April 30,
	2005			2004
Revenue:
Software licenses	$	22,178		$	15,839
Maintenance		32,996			14,765
Professional services		6,135			3,137

Total revenue		61,309			33,741

Cost of revenue:
Software licenses		603			326
Maintenance		3,419			1,563
Professional services		5,846			2,789
Amortization of acquired technology		4,167			2,045
Stock-based compensation (*)		14			1

Total cost of revenue		14,049			6,724

Gross profit		47,260			27,017

Operating expenses:
Sales and marketing		17,778			9,357
Research and development		8,856			4,949
General and administrative		4,630			2,048
Stock-based compensation (*)		215			17
Amortization of intangible assets		2,814			950
Acquired in-process research and development		—			10,400
Restructuring, acquisition and other charges		—			210

Total operating expenses		34,293			27,931

Operating income (loss)		12,967			(914	)
Interest income		1,112			1,315
Interest expense		(825	)		(825	)
Amortization of debt issuance costs		(335	)		(461	)

Income (loss) before income taxes		12,919			(885	)
Income taxes		4,780			3,390

Net income (loss)	$	8,139		$	(4,275	)

Net income (loss) per share:
Basic	$	0.20		$	(0.11	)

Diluted	$	0.17		$	(0.11	)

Weighted average shares used in per share calculations:
Basic		41,725			38,871

Diluted		52,789			38,871

Net income (loss)	$	8,139		$	(4,275	)
Plus: Income impact of assumed conversions:
Tax effected interest, including amortization of debt issuance costs, on 1.5% convertible debentures		697			N/A

Adjusted net income (loss) for diluted net income per share calculation	$	8,836		$	(4,275	)

*() Stock-based compensation:**
Cost of maintenance	$	7		$	—
Cost of professional services		7			1

Stock-based compensation in cost of revenue		14			1

Sales and marketing		121			10
Research and development		55			4
General and administrative		39			3

Stock-based compensation in operating expenses		215			17

Total stock-based compensation	$	229		$	18


	Three Months Ended April 30,
	2005			2004
Cash flows from operating activities:
Net income (loss)	$	8,139		$	(4,275	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		693			521
Deferred income taxes		(2,591	)		—
Provision for doubtful accounts		66			150
Accrued interest income, net of cash received		(31	)		(40	)
Accrued interest expense on subordinated notes		825			825
Amortization of debt issuance costs		335			461
Amortization of deferred stock-based compensation		229			18
Amortization of acquired technology		4,167			2,045
Amortization of intangible assets		2,814			950
Acquired in-process research and development		—			10,400
Changes in operating assets and liabilities:
Accounts receivable		(6,213	)		(2,131	)
Prepaid expenses and other assets		(345	)		(764	)
Accounts payable		(2,481	)		735
Income taxes payable		74			982
Accrued expenses		(478	)		(3,206	)
Deferred revenue		7,378			10,431

Net cash provided by operating activities		12,581			17,102

Cash flows (used in) provided by investing activities:
Purchases of property and equipment		(704	)		(432	)
(Purchases) sales of short-term and long-term investments		(17,899	)		50,594
Cash paid in acquisition of Apptero, Inc., net of cash received and acquisition related costs paid		(2,956	)		—
Cash paid in acquisition of Merant Plc, net of cash received and acquisition related costs paid		(2,300	)		97,208

Net cash (used in) provided by investing activities		(23,589	)		147,370

Cash flows (used in) provided by financing activities:
Exercise of stock options under the employee stock option plan		5,848			1,774
Common stock repurchased under the stock repurchase plan		(34,435	)		—

Net cash (used in) provided by financing activities		(28,587	)		1,774

Effect of exchange rate changes on cash		(181	)		(225	)

Net (decrease) increase in cash and cash equivalents		(40,046	)		165,991
Cash and cash equivalents at beginning of period		133,330			257,281

Cash and cash equivalents at end of period	$	93,284		$	423,272

Supplemental disclosures of cash flow information:
Income taxes paid	$	6,736		$	1,494

Non-cash investing and financing activity:
Unrealized loss on marketable securities	$	(86	)	$	(224	)

Common stock issued in the acquisition of Merant Plc., including estimated fair value of options assumed	$	—		$	127,683

Consideration payable to Merant Shareholders in the acquisition	$	—		$	274,654

Consideration payable to Apptero Shareholders in the acquisition	$	1,157		$	—


Fair market value of SERENA common stock issued (approximately 5.9 million shares)	$	120,481
Cash paid		266,957
Estimated fair value of options assumed		7,201
Estimated employee severance and other costs		13,381
Estimated acquisition-related costs		7,573

Total estimated purchase price of acquisition	$	415,593


Fair value of assets acquired	$	131,071
Acquired technology		45,000
Acquired in-process research and development		10,400
Trademark / Trade name portfolio		2,400
Customer contracts		47,500
Non-compete agreements		9,300
Intrinsic value of options assumed		1,822
Fair value of liabilities assumed		(67,094	)
Deferred tax liability		(45,771	)
Goodwill		280,965

Total estimated purchase price of acquisition	$	415,593


Application Under Development	Percentage Complete		Discount Rate
Professional version 8.1	95	%	18	%
Professional version 8.2	95	%	18	%
Dimension version 9.0	85	%	18	%
Formula 1	0	%	23	%


	Stock Option Plans				ESPP
	Three Months Ended April 30,
	2005		2004		2005		2004
Expected life (in years)	4.5		4.5		0.5		0.5
Risk-free interest rate	3.8	%	3.5	%	3.1	%	1.4	%
Volatility	82	%	98	%	37	%	37	%
Dividend yield	none		none		none		none


	Net Income (Numerator)			Shares (Denominator)	Per Share Amount
Three Months Ended April 30, 2004:
Basic net loss per share:
Net loss	$	(4,275	)	38,871	$	(0.11	)
Effect of potentially dilutive securities outstanding—restricted stock and options		—		—		—
Effect of potentially dilutive securities outstanding—shares issuable under contingently convertible securities		—		—		—

Diluted net loss per share	$	(4,275	)	38,871	$	(0.11	)

Three Months Ended April 30, 2005:
Basic net income per share:
Net income	$	8,139		41,725	$	0.20
Effect of potentially dilutive securities outstanding—restricted stock and options		—		1,151		—
Effect of potentially dilutive securities outstanding—shares issuable under contingently convertible securities		697		9,913		—

Diluted net income per share	$	8,836		52,789	$	0.17


	Severance, payroll taxes and other employee benefits			Facilities closures			Legal and other acquisition- related costs			Total acquisition- related and restructuring charges and accruals
Balances as of January 31, 2004	$	115		$	47		$	5		$	167
Activity during the three months ended April 30, 2004:
Accrued		—			—			—			—
Paid		—			(32	)		—			(32	)
Adjustments		—			—			—			—

Balances as of April 30, 2004	$	115		$	15		$	5		$	135

Balances as of January 31, 2005	$	5,066		$	637		$	940		$	6,643
Activity during the three months ended April 30, 2005:
Accrued		—			—			100			100
Paid		(1,581	)		(333	)		(385	)		(2,299	)
Adjustments		(1,428	)		(143	)		(665	)		(2,236	)

Balances as of April 30, 2005	$	2,057		$	161		$	(10	)	$	2,208


	As of January 31, 2005
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizing intangible assets:
Non-compete agreements	$	10,933	$	(2,950	)	$	7,983
Acquired technology		86,741		(31,708	)		55,033
Maintenance service contracts		49,300		(7,030	)		42,270
Trademark / Trade name portfolio		2,600		(1,212	)		1,388
Customer relationships		2,510		(1,394	)		1,116

Total	$	152,084	$	(44,294	)	$	107,790


	As of April 30, 2005
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizing intangible assets:
Non-compete agreements	$	10,933	$	(3,501	)	$	7,432
Acquired technology		93,755		(35,881	)		57,874
Customer contracts		49,300		(8,716	)		40,584
Trademark / Trade name portfolio		2,600		(1,573	)		1,027
Customer relationships		2,510		(1,604	)		906

Total	$	159,098	$	(51,275	)	$	107,823

Aggregate amortization expense:
For the remaining nine months of year ending January 31, 2006						$	20,463
Estimated amortization expense:
For year ended January 31, 2007							23,741
For year ended January 31, 2008							19,745
For year ended January 31, 2009							17,547
For year ended January 31, 2010							16,116
For year ended January 31, 2011							8,597
Thereafter							1,614

Total						$	107,823


Balance as of January 31, 2005	$	323,671
Activity during the three months ended April 30, 2005:
Purchase accounting adjustments to the Merant goodwill		(2,236	)

Balance as of April 30, 2005	$	321,435


Month	Repurchased Shares	Average Price Per Share
March 2005	1,415,000	$	23.50
April 2005	50,000	$	23.56


	Percentage of Revenue Three Months Ended April 30,
	2005		2004
Revenue:
Software licenses	36	%	47	%
Maintenance	54	%	44	%
Professional services	10	%	9	%

Total revenue	100	%	100	%

Cost of revenue:
Software licenses	1	%	1	%
Maintenance	6	%	5	%
Professional services	9	%	8	%
Amortization of acquired technology	7	%	6	%
Stock-based compensation	—		—

Total cost of revenue	23	%	20	%

Gross profit	77	%	80	%

Operating expenses:
Sales and marketing	29	%	28	%
Research and development	14	%	15	%
General and administrative	8	%	6	%
Stock-based compensation	—		—
Amortization of intangible assets	5	%	3	%
Acquired in-process research and development	—		31	%
Restructuring, acquisition and other charges	—		—

Total operating expenses	56	%	83	%

Operating income (loss)	21	%	(3	)%
Interest income	2	%	3	%
Interest expense	(1	)%	(2	)%
Amortization of debt issuance costs	(1	)%	(1	)%

Income (loss) before income taxes	21	%	(3	)%
Income taxes	8	%	10	%

Net income (loss)	13	%	(13	)%


	Payments Due by Period
	Total		Less than 1 year		1-3 years		3-5 years		Thereafter
Operating lease obligations	$	18,113	$	6,018	$	7,327	$	2,815	$	1,953
1¹/2% Convertible Subordinated Notes due 2023		220,000								220,000

	$	238,113	$	6,018	$	7,327	$	2,815	$	221,953


	Three Months Ended April 30,
					Increase (Decrease)
	2005		2004		In Dollars		In %
Revenue:
Software licenses	$	22,178	$	15,839	$	6,339	40	%
Maintenance		32,996		14,765		18,231	123	%
Professional services		6,135		3,137		2,998	96	%

Total revenue	$	61,309	$	33,741	$	27,568	82	%


	Three Months Ended April 30,
							Increase (Decrease)
	2005			2004			In Dollars			In %
Other (expense) income
Interest income	$	1,112		$	1,315		$	(203	)	(15	)%
Interest expense		(825	)		(825	)		—		0	%
Amortization of debt issuance costs		(335	)		(461	)		126		(27	)%

Total other (expense) income	$	(48	)	$	29		$	(77	)	(	*)

Percentage of total revenue		0	%		0	%


Exhibit Number		Exhibit Title

31.1 (a)		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 (a)		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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


Exhibit No.		Description

31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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