##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(MARK ONE)



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

FOR THE QUARTERLY PERIOD ENDED JULY 31, 2010

OR



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

FOR THE TRANSITION PERIOD FROM
 TO

COMMISSION FILE NO. 000-25285





SERENA
SOFTWARE, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 94-2669809                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

1900 SEAPORT BOULEVARD, REDWOOD CITY, CALIFORNIA 94063-5587

(Address of principal executive offices, including zip code)

650-481-3400

(Registrants telephone number, including area code)





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                           |  |                                               |  |                             
|-------------------------- |  | --------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  |                                               |  | Accelerated filer   ̈        
|                           |  |                                              
|Non-accelerated filer  x   |  | (Do not check if a smaller reporting company) |  | Smaller reporting company   ̈

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

As of August 31, 2010, 98,389,625 shares of the registrants common stock, $0.01 par value per share, were outstanding.









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##### Table of Contents

INDEX



|           |  |                                                                                                                  |  |     
|---------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                  |  | Page
|           |  | PART I FINANCIAL INFORMATION                                                                                     |  |     
|           |  |                                                                                                                 
|Item 1     |  | Financial Statements:                                                                                            |  |     
|           |  |                                                                                                                 
|           |  | Condensed Consolidated Balance Sheets as of July 31, 2010 and January 31, 2010                                   |  | 3   
|           |  |                                                                                                                 
|           |  | Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended July 31, 2010 and 2009 |  | 4   
|           |  |                                                                                                                 
|           |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2010 and 2009                  |  | 5   
|           |  |                                                                                                                 
|           |  | Notes to Condensed Consolidated Financial Statements                                                             |  | 6   
|           |  |                                                                                                                 
|Item 2     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 20  
|           |  |                                                                                                                 
|Item 3     |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 35  
|           |  |                                                                                                                 
|Item 4     |  | Controls and Procedures                                                                                          |  | 36  
|           |  |                                                                                                                 
|           |  | PART II OTHER INFORMATION                                                                                        |  |     
|           |  |                                                                                                                 
|Item 1     |  | Legal Proceedings                                                                                                |  | 37  
|           |  |                                                                                                                 
|Item 1A    |  | Risk Factors                                                                                                     |  | 37  
|           |  |                                                                                                                 
|Item 2     |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 37  
|           |  |                                                                                                                 
|Item 3     |  | Defaults Upon Senior Securities                                                                                  |  | 37  
|           |  |                                                                                                                 
|Item 4     |  | (Removed and Reserved)                                                                                           |  | 37  
|           |  |                                                                                                                 
|Item 5     |  | Other Information                                                                                                |  | 37  
|           |  |                                                                                                                 
|Item 6     |  | Exhibits                                                                                                         |  | 38  
|           | 
|SIGNATURES |  | 39                                                                                                              



2



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PART IFINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

SERENA SOFTWARE, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)



|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | --------------- | - | -------- | -
|                                                                                                                                                                          |  | July 31,2010 |          |   | January 31,2010 |  
|ASSETS                                                                                                                                                                    |  |              |          |   |                 |   |          |  
|Current assets                                                                                                                                                            |  |              |          |   |                 |   |          |  
|Cash and cash equivalents                                                                                                                                                 |  | $            | 103,309  |   |                 | $ | 124,996  |  
|Accounts receivable, net of allowance of $1,299 and $1,480 at July 31, 2010 and January 31, 2010,
respectively                                                            |  |              | 18,929   |   |                 |   | 24,799   |  
|Deferred taxes, net                                                                                                                                                       |  |              | 5,393    |   |                 |   | 5,443    |  
|Prepaid expenses and other current assets                                                                                                                                 |  |              | 6,261    |   |                 |   | 5,333    |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|Total current assets                                                                                                                                                      |  |              | 133,892  |   |                 |   | 160,571  |  
|Property and equipment, net                                                                                                                                               |  |              | 2,971    |   |                 |   | 3,213    |  
|Goodwill                                                                                                                                                                  |  |              | 462,400  |   |                 |   | 464,331  |  
|Other intangible assets, net                                                                                                                                              |  |              | 153,581  |   |                 |   | 189,331  |  
|Other assets                                                                                                                                                              |  |              | 4,897    |   |                 |   | 5,776    |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|TOTAL ASSETS                                                                                                                                                              |  | $            | 757,741  |   |                 | $ | 823,222  |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                      |  |              |          |   |                 |   |          |  
|Current liabilities:                                                                                                                                                      |  |              |          |   |                 |   |          |  
|Short-term debt and current portion of long-term debt                                                                                                                     |  | $            |         |   |                 | $ | 2,000    |  
|Accounts payable                                                                                                                                                          |  |              | 1,808    |   |                 |   | 1,573    |  
|Income taxes payable                                                                                                                                                      |  |              | 8,810    |   |                 |   | 5,972    |  
|Accrued expenses                                                                                                                                                          |  |              | 17,473   |   |                 |   | 24,665   |  
|Accrued interest on term loan and subordinated notes                                                                                                                      |  |              | 8,545    |   |                 |   | 8,764    |  
|Deferred revenue                                                                                                                                                          |  |              | 62,549   |   |                 |   | 70,620   |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|Total current liabilities                                                                                                                                                 |  |              | 99,185   |   |                 |   | 113,558  |  
|Deferred revenue, less current portion                                                                                                                                    |  |              | 8,066    |   |                 |   | 8,122    |  
|Long-term liabilities                                                                                                                                                     |  |              | 3,373    |   |                 |   | 4,667    |  
|Deferred taxes                                                                                                                                                            |  |              | 48,963   |   |                 |   | 61,846   |  
|Term loan                                                                                                                                                                 |  |              | 316,000  |   |                 |   | 316,000  |  
|Revolving term credit facility                                                                                                                                            |  |              | 35,000   |   |                 |   | 65,000   |  
|Senior subordinated notes                                                                                                                                                 |  |              | 142,952  |   |                 |   | 142,952  |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|Total liabilities                                                                                                                                                         |  |              | 653,539  |   |                 |   | 712,145  |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|Commitments and contingencies:                                                                                                                                            |  |              |          |   |                 |   |          |  
|Stockholders equity:                                                                                                                                                     |  |              |          |   |                 |   |          |  
|Preferred stock, $0.01 par value; 10,000,000 shares authorized and no shares issued and outstanding at July 31, 2010 and
January 31, 2010                                 |  |              |         |   |                 |   |         |  
|Series A Preferred stock, $0.01 par value; 1 share authorized, issued and outstanding at July 31, 2010 and January 31,
2010                                               |  |              |         |   |                 |   |         |  
|Common stock, $0.01 par value; 200,000,000 shares authorized; 98,389,625 and 98,481,641 shares issued and outstanding at
July 31, 2010 and January 31, 2010, respectively |  |              | 984      |   |                 |   | 985      |  
|Additional paid-in capital                                                                                                                                                |  |              | 513,845  |   |                 |   | 512,208  |  
|Accumulated other comprehensive (loss) income                                                                                                                             |  |              | (836     | ) |                 |   | 18       |  
|Accumulated deficit                                                                                                                                                       |  |              | (409,791 | ) |                 |   | (402,134 | )
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|Total stockholders equity                                                                                                                                                |  |              | 104,202  |   |                 |   | 111,077  |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                |  | $            | 757,741  |   |                 | $ | 823,222  |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  

See accompanying notes to condensed consolidated financial statements.



3



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SERENA SOFTWARE, INC.

Condensed Consolidated Statements of Operations

For the Three Months and Six Months Ended July 31, 2010 and 2009

(In thousands)

(Unaudited)



|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                  |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |  
|                                                  |  | 2010                       |        |   | 2009                     |   |        | 2010 |  |   | 2009    |  
|Revenue:                                          |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Software licenses                                 |  | $                          | 10,050 |   |                          | $ | 11,017 |      |  | $ | 21,462  |   |  | $ | 20,484  |  
|Maintenance                                       |  |                            | 35,610 |   |                          |   | 38,531 |      |  |   | 71,191  |   |  |   | 75,260  |  
|Professional services                             |  |                            | 4,604  |   |                          |   | 5,633  |      |  |   | 9,236   |   |  |   | 12,221  |  
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total revenue                                     |  |                            | 50,264 |   |                          |   | 55,181 |      |  |   | 101,889 |   |  |   | 107,965 |  
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Cost of revenue:                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Software licenses                                 |  |                            | 233    |   |                          |   | 808    |      |  |   | 533     |   |  |   | 1,438   |  
|Maintenance                                       |  |                            | 2,805  |   |                          |   | 3,220  |      |  |   | 5,690   |   |  |   | 6,436   |  
|Professional services                             |  |                            | 4,166  |   |                          |   | 5,441  |      |  |   | 8,340   |   |  |   | 11,583  |  
|Amortization of acquired technology               |  |                            | 8,333  |   |                          |   | 8,747  |      |  |   | 17,029  |   |  |   | 17,093  |  
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total cost of revenue                             |  |                            | 15,537 |   |                          |   | 18,216 |      |  |   | 31,592  |   |  |   | 36,550  |  
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                      |  |                            | 34,727 |   |                          |   | 36,965 |      |  |   | 70,297  |   |  |   | 71,415  |  
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Operating expenses:                               |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Sales and marketing                               |  |                            | 12,528 |   |                          |   | 14,367 |      |  |   | 26,151  |   |  |   | 29,343  |  
|Research and development                          |  |                            | 7,612  |   |                          |   | 7,961  |      |  |   | 15,952  |   |  |   | 16,321  |  
|General and administrative                        |  |                            | 3,604  |   |                          |   | 4,586  |      |  |   | 8,261   |   |  |   | 8,671   |  
|Amortization of intangible assets                 |  |                            | 9,203  |   |                          |   | 9,203  |      |  |   | 18,406  |   |  |   | 18,406  |  
|Restructuring, acquisition and other charges      |  |                            | 452    |   |                          |   | 364    |      |  |   | 2,622   |   |  |   | 2,215   |  
|Goodwill impairment                               |  |                            | 1,433  |   |                          |   |       |      |  |   | 1,433   |   |  |   |        |  
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                          |  |                            | 34,832 |   |                          |   | 36,481 |      |  |   | 72,825  |   |  |   | 74,956  |  
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Operating (loss) income                           |  |                            | (105   | ) |                          |   | 484    |      |  |   | (2,528  | ) |  |   | (3,541  | )
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Other income (expense):                           |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Interest income                                   |  |                            | 55     |   |                          |   | 134    |      |  |   | 90      |   |  |   | 347     |  
|Gain on early extinguishment of debt              |  |                            |       |   |                          |   | 1,038  |      |  |   |        |   |  |   | 4,602   |  
|Interest expense                                  |  |                            | (6,018 | ) |                          |   | (8,591 | )    |  |   | (13,193 | ) |  |   | (17,257 | )
|Change in the fair value of derivative instrument |  |                            |       |   |                          |   | 1,033  |      |  |   | 1,616   |   |  |   | 1,447   |  
|Amortization and write-off of debt issuance costs |  |                            | (436   | ) |                          |   | (674   | )    |  |   | (869    | ) |  |   | (1,306  | )
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total other income (expense)                      |  |                            | (6,399 | ) |                          |   | (7,060 | )    |  |   | (12,356 | ) |  |   | (12,167 | )
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Loss before income taxes                          |  |                            | (6,504 | ) |                          |   | (6,576 | )    |  |   | (14,884 | ) |  |   | (15,708 | )
|Income tax benefit                                |  |                            | (3,008 | ) |                          |   | (5,081 | )    |  |   | (7,227  | ) |  |   | (9,398  | )
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                          |  | $                          | (3,496 | ) |                          | $ | (1,495 | )    |  | $ | (7,657  | ) |  | $ | (6,310  | )
|                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



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SERENA SOFTWARE, INC.

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended July 31, 2010 and 2009

(In thousands)

(Unaudited)



|                                                                                                          |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                          |  | Six Months Ended July 31, |        
|                                                                                                          |  | 2010                      |         |   | 2009 |  
|Cash flows from operating activities:                                                                     |  |                           |         |   |      |   |         |  
|Net loss                                                                                                  |  | $                         | (7,657  | ) |      | $ | (6,310  | )
|Adjustments to reconcile net loss to net cash provided by operating activities:                           |  |                           |         |   |      |   |         |  
|Depreciation and amortization of acquired technology and other intangibles                                |  |                           | 36,930  |   |      |   | 38,109  |  
|Deferred income taxes                                                                                     |  |                           | (12,833 | ) |      |   | (13,518 | )
|Gain on early extinguishment of debt                                                                      |  |                           |        |   |      |   | (4,602  | )
|Interest expense on term credit facility and subordinated notes, net of interest paid                     |  |                           | (200    | ) |      |   | (386    | )
|Fair market value adjustment on the interest rate swap                                                    |  |                           | (1,616  | ) |      |   | (1,447  | )
|Amortization and write off of debt issuance costs                                                         |  |                           | 869     |   |      |   | 1,306   |  
|Stock-based compensation                                                                                  |  |                           | 1,993   |   |      |   | 341     |  
|Restructuring, acquisition and other charges                                                              |  |                           | (772    | ) |      |   |        |  
|Goodwill impairment                                                                                       |  |                           | 1,433   |   |      |   |        |  
|Changes in operating assets and liabilities:                                                              |  |                           |         |   |      |   |         |  
|Accounts receivable                                                                                       |  |                           | 5,871   |   |      |   | 11,127  |  
|Prepaid expenses and other assets                                                                         |  |                           | (918    | ) |      |   | (652    | )
|Accounts payable                                                                                          |  |                           | 55      |   |      |   | (397    | )
|Income taxes payable                                                                                      |  |                           | 1,754   |   |      |   | (4,505  | )
|Accrued expenses and other liabilities                                                                    |  |                           | (5,242  | ) |      |   | (3,023  | )
|Deferred revenue                                                                                          |  |                           | (8,127  | ) |      |   | (6,478  | )
|                                                                                                          |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities                                                                 |  |                           | 11,540  |   |      |   | 9,565   |  
|                                                                                                          |  |                           |         |   |      |   |         |  
|Cash flows used in investing activities:                                                                  |  |                           |         |   |      |   |         |  
|Capital expenditures                                                                                      |  |                           | (608    | ) |      |   | (486    | )
|Capital expenditures for internal use software                                                            |  |                           | (179    | ) |      |   | (2,379  | )
|Cash paid in acquisitions, net of cash received                                                           |  |                           |        |   |      |   | (200    | )
|                                                                                                          |  |                           |         |   |      |   |         |  
|Net cash used in investing activities                                                                     |  |                           | (787    | ) |      |   | (3,065  | )
|                                                                                                          |  |                           |         |   |      |   |         |  
|Cash flows used in financing activities:                                                                  |  |                           |         |   |      |   |         |  
|Common stock repurchased under stock repurchase plans and other plans                                     |  |                           | (347    | ) |      |   | (212    | )
|Repurchase of option rights under employee stock option plan                                              |  |                           | (36     | ) |      |   | (82     | )
|Exercise of stock options under employee stock option plan                                                |  |                           | 24      |   |      |   | 21      |  
|Principal payments and early extinguishments under the term credit facility and senior subordinated notes |  |                           | (32,000 | ) |      |   | (21,829 | )
|                                                                                                          |  |                           |         |   |      |   |         |  
|Net cash used in financing activities                                                                     |  |                           | (32,359 | ) |      |   | (22,102 | )
|                                                                                                          |  |                           |         |   |      |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                                              |  |                           | (81     | ) |      |   | (1,490  | )
|                                                                                                          |  |                           |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                                 |  |                           | (21,687 | ) |      |   | (17,092 | )
|Cash and cash equivalents at beginning of period                                                          |  |                           | 124,996 |   |      |   | 115,044 |  
|                                                                                                          |  |                           |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                                |  | $                         | 103,309 |   |      | $ | 97,952  |  
|                                                                                                          |  |                           |         |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                                        |  |                           |         |   |      |   |         |  
|Income taxes paid, net of refunds                                                                         |  | $                         | 2,919   |   |      | $ | 8,885   |  
|                                                                                                          |  |                           |         |   |      |   |         |  
|Interest expense paid                                                                                     |  | $                         | 13,393  |   |      | $ | 17,596  |  
|                                                                                                          |  |                           |         |   |      |   |         |  
|Non-cash investing and financing activity:                                                                |  |                           |         |   |      |   |         |  
|Consideration payable to shareholders in acquisitions                                                     |  | $                         |        |   |      | $ | 132     |  
|                                                                                                          |  |                           |         |   |      |   |         |  

See accompanying notes to condensed consolidated financial statements.



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SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|(1) | Description of Business and Summary of Significant Accounting Policies
|--- | ----------------------------------------------------------------------

(a) Description of Business

SERENA Software, Inc. (SERENA or the Company) is the largest global independent software company in terms of
revenue focused solely on managing change across information technology, or IT, environments. The Companys products and services are used to manage and control change in mission critical technology and business process applications. The
Companys software configuration management, or SCM, business process management, or BPM, helpdesk and requirements management solutions enable its customers to improve process consistency, enhance software integrity, mitigate risks, support
regulatory compliance and boost productivity. The Companys revenue is generated by software licenses, maintenance contracts and professional services. The Companys software products are typically embedded within its customers
IT environments, and are generally accompanied by renewable annual maintenance contracts.

(b) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company has prepared the accompanying unaudited condensed consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America.

(c) Correction of Immaterial Errors

The Company identified certain errors related to accrued liabilities in fiscal 2010 resulting in an over-accrual for such costs.
Additionally, the Company identified certain errors impacting the tax accounts relating to state income tax and other reserves. The Company also identified errors approximating $1.4 million related to the allocation of the purchase price for
acquisitions impacting a subsequent goodwill impairment recorded in fiscal 2009. The Company recorded the correction of these errors in the three months ended July 31, 2010 resulting in an aggregate increase in the net loss of $897,000.
Management concluded that the effect of these corrections of errors was immaterial.

(d) Significant Accounting Policies

The Companys significant accounting policies are described in the notes to the Companys consolidated financial
statements, included in the Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2010 filed with the Securities and Exchange Commission (SEC) on April 30, 2010. There have been no changes to the
Companys significant accounting policies.

(e) Spyglass Merger Corp.

On March 10, 2006, Spyglass Merger Corp., an affiliate of Silver Lake, a private equity firm, merged with and into us, a transaction
we refer to in this report as the Merger. Pursuant to the Merger, Serena Software, Inc., or Serena, stockholders received $24.00 in cash in exchange for each share of stock, except that certain members of our management team retained a portion of
their shares of Serena common stock or options to purchase Serena common stock after the Merger. As a result of the Merger, our common stock ceased to be traded on the NASDAQ National Market and we became a privately-held company, with approximately
56.5% of our common stock at the time of the Merger on a fully diluted basis owned by investment funds affiliated with Silver Lake.



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(Unaudited)



|(2) | Stock-Based Compensation
|--- | ------------------------

Stock-based compensation cost is typically measured at the grant date based on the fair value of the award. The Company has elected the
graded-vesting attribution method for recognizing stock-based compensation expense over the requisite service period for each separately vesting tranche of awards as though the awards were, in substance, multiple awards.

2006 Stock Incentive Plan

Following the completion of the Merger, the Company established a new stock incentive plan, the 2006 Stock Incentive Plan (the 2006
Plan), governing, among other things, the grant of options, restricted stock awards, and other forms of awards covering shares of the Companys common stock to our employees (including officers), directors and consultants. As of the date
of the Merger, 13,515,536 shares of common stock were reserved for issuance under the 2006 Plan. Each award under the 2006 Plan specified the applicable exercise or vesting period, the applicable exercise or purchase price, and such other terms
and conditions deemed appropriate. Stock options granted under the 2006 Plan were either time options that would vest and become exercisable over a four-year period or time and performance options that would vest based on the
achievement of certain performance targets over a five-year period following the date of grant. All options granted under the 2006 Plan will expire not later than ten years from the date of grant, but generally will terminate earlier upon
termination of employment. In the event of a sale of substantially all of the assets of the Company, or a merger or acquisition of the Company, the Board of Directors may provide that awards granted under the 2006 Plan will be cashed out, continued,
replaced with new awards that substantially preserve the terms of the original awards, or terminated, with acceleration of vesting of the original awards determined at the discretion of the Board of Directors.

In the quarter ended October 31, 2009, the Company completed a tender offer permitting all eligible employees and its independent
directors to exchange, on a one-for-one basis, stock options granted under the 2006 Plan for new stock options granted under Serenas Amended and Restated 2006 Stock Incentive Plan (the Amended 2006 Plan) having a lower exercise
price and different vesting terms. Eligible optionholders exchanged part or all of their time-based options for new time-based options having a vesting period, generally, of three years and an exercise price of $3.00 per share, which was the fair
market value of Serenas common stock immediately after the closing of the tender offer. New time-based options held by the Companys independent directors have a vesting period of one year. Eligible employees who were not executive
officers or officers of the Company exchanged part or all of their performance-based options for new time-based options having a vesting period of three years and an exercise price of $3.00 per share, which was the fair market value of Serenas
common stock after the closing of the tender offer. Executive officers and officers of the Company exchanged part or all of their performance-based options for new performance-based options having a vesting period of three years and six months, with
vesting based on the achievement of EBITA targets established by the Board of Directors, and an exercise price of $3.00 per share, which was the fair market value of Serenas common stock after the closing of the tender offer. Eligible
employees holding stock options to acquire fewer than 25,000 shares of Serena common stock were offered the opportunity to sell their stock options to Serena based on a purchase price of $1.25 per share into which the options were exercisable. The
stock options exchanged through the tender offer represented the right to acquire 8,640,000 shares of Serena common stock, and the stock options purchased by Serena through the tender offer represented the right to acquire 300,500 shares
of Serena common stock. In aggregate, the incremental fair value from the tender offer was $4.4 million, and a total of 83 employees, or approximately 14% of the workforce, and 3 outside directors either exchanged stock options or cashed out stock
options through the tender offer.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



Roll Over Options

In connection with the Merger, the management participants were permitted to elect to have the surviving company in the Merger assume some
or all of the Serena stock options that they held immediately prior to the Merger and that had an exercise price of less than $24.00 per share. The number of shares subject to these roll over options was adjusted to be the number of
shares equal to the product of (1) the difference between $24.00 and the exercise price of the option and (2) the quotient of the total number of shares of Serenas common stock subject to such option, divided by $3.75. The exercise
price of these roll over options was adjusted to $1.25 per share. The roll over options are subject to terms of the original option agreements with Serena, except that in the event of a change in control of Serena
(as defined in the 2006 Plan), the treatment of the roll over options upon such transaction will be determined in accordance with the terms of the 2006 Plan.

The Amended 2006 Plan does not include an evergreen provision to provide for automatic increases in the number of shares available for
grant. Any increase in the number of shares available for grant under the Amended 2006 Plan would require approval from the Companys Board of Directors and Stockholders.

As of July 31, 2010, a total of 11,917,479 shares of common stock were reserved for issuance upon the exercise of stock options and
for the future grant of stock options or awards under the Amended 2006 Plan.

As of July 31, 2010, total unrecognized
compensation costs related to unvested stock options and restricted stock was $9.8 million. Costs related to unvested stock options are expected to be recognized over a period of 3 to 3.5 years and costs related to the restricted stock are expected
to be recognized over a period of 3 to 4 years from grant date.

The fair value of each stock option grant under the stock
option plans is 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 and six months ended July 31, 2010 and 2009.



|                         |  |                            |  |                           |  |              |  |             
|------------------------ |  | -------------------------- |  | ------------------------- |  | ------------ |  | ------------
|                         |  | Three Months EndedJuly
31, |  | Six Months EndedJuly 
31,
|                         |  | 2010                       |  | 2009(1)                   |  | 2010         |  | 2009(1)     
|Expected life (in years) |  | 2.7 to 3.0                 |  | 4.0 to 5.0                |  | 2.7 to 3.0   |  | 4.0 to 5.0  
|Risk-free interest rate  |  | 0.2% to 1.3%               |  | 2.0% to 2.4%              |  | 0.2% to 1.5% |  | 1.6% to 2.4%
|Volatility               |  | 26% to 38%                 |  | 31% to 32%                |  | 26% to 38%   |  | 31% to 32%  



|(1) | All options granted during the three months and six months ended July 31, 2009 were tendered for new options or exchanged for cash in the October 2009 tender
offer.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

With respect to the amounts set forth above, the Companys expected volatility is based on the combination of historical volatility
of the Companys common stock and the Companys peer groups common stock over the period commensurate with the expected life of the options. To assist management in determining the estimated fair value of the Companys common
stock, the Company engaged a third-party valuation specialist to perform a valuation as of October 16, 2009 in addition to the valuations that are generally performed on a semi-annual basis as of January 31 and July 31. In estimating
the fair value of the Companys common stock as of October 16, 2009 and for each semi-annual basis as of January 31 and July 31, the external valuation firm employed a



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(Unaudited)



two-step approach that first estimated the fair value of the Company as a whole, and then allocated the enterprise value to the Companys common stock. The risk-free interest rates are
derived from the average U.S. Treasury constant maturity rates during the period and approximate the rate in effect at the time of grant for the respective expected term. The expected terms are based on the observed and expected time to post-vesting
exercise or cancellation of options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero. The Company estimates forfeitures at the time of grant and revises those
estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses forecasted projections to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are
expected to vest.

General Stock Option Information

The following table sets forth the summary of option activity under our stock option programs for the six months ended July 31, 2010:



|                                                        |  |                           |   |  |                             |   |  |                               |     
|------------------------------------------------------- |  | ------------------------- | - |  | --------------------------- | - |  | ----------------------------- | ----
|                                                        |  | OptionsAvailable forGrant |   |  | Number ofOptionsOutstanding |   |  | WeightedAverageExercise Price
|Balances as of January 31, 2010                         |  | 1,997,529                 |   |  | 10,212,401                  |   |  | $                             | 2.76
|Granted(1)                                              |  | (1,005,000                | ) |  | 1,005,000                   |   |  | $                             | 3.08
|Exercised                                               |  |                          |   |  | (48,681                     | ) |  | $                             | 1.25
|Cancelled(2)                                            |  |                          |   |  | (18,770                     | ) |  | $                             | 1.25
|Cancelled                                               |  | 376,598                   |   |  | (376,598                    | ) |  | $                             | 3.66
|Restricted stock units granted, net of cancellations(3) |  | (225,000                  | ) |  |                            |   |  |                               |    
|                                                        |  |                           |   |  |                             |   |  |                               |     
|Balances as of July 31, 2010(4)                         |  | 1,144,127                 |   |  | 10,773,352                  |   |  | $                             | 2.77
|                                                        |  |                           |   |  |                             |   |  |                               |     



|(1) | Represents 295,000 options granted in the quarter ended April 30, 2010 at $3.08 per share and 710,000 options granted in the quarter ended July 31, 2010 at $3.08 per
share.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents cancelled Roll Over options which are not returned to the available-for-grant stock option pool.
|--- | -------------------------------------------------------------------------------------------------------------

|(3) | Restricted stock units granted in the six months ended July 31, 2010 were issued from the stock option pool. A total of 250,000 units were issued net of 25,000
units that were cancelled in the six months ended July 31, 2010. See Restricted Stock Unitsbelow for further details.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The number of options vested and expected to vest as of July 31, 2010 is 10,567,946 and has a weighted average exercise price of $2.77.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

Information regarding the stock options outstanding at July 31, 2010 is summarized as follows:



|                        |  |                         |  |                                           |  |                               |      |                         |           |                               |   |     
|----------------------- |  | ----------------------- |  | ----------------------------------------- |  | ----------------------------- | ---- | ----------------------- | --------- | ----------------------------- | - | ----
|Range of Exercise Price |  | NumberOutstanding(1)(2) |  | Weighted AverageRemainingContractual Life |  | WeightedAverageExercise Price |      | NumberExercisable(1)(2) |           | WeightedAverageExercise Price
|$1.25                   |  | 1,484,122               |  | 2.92 years                                |  | $                             | 1.25 |                         | 1,484,122 |                               | $ | 1.25
|$3.00                   |  | 8,265,991               |  | 8.91 years                                |  | $                             | 3.00 |                         | 1,558,041 |                               | $ | 3.00
|$3.08                   |  | 1,005,000               |  | 9.74 years                                |  | $                             | 3.08 |                         |          |                               |   |    
|$5.00                   |  | 9,125                   |  | 0.06 years                                |  | $                             | 5.00 |                         | 9,125     |                               | $ | 5.00
|$5.15                   |  | 9,114                   |  | 0.17 years                                |  | $                             | 5.15 |                         | 9,114     |                               | $ | 5.15
|                        |  |                         |  |                                           |  |                               |      |                         |           |                               |   |     
|                        |  | 10,773,352              |  | 8.15 years                                |  | $                             | 2.77 |                         | 3,060,402 |                               | $ | 2.16
|                        |  |                         |  |                                           |  |                               |      |                         |           |                               |   |     



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(Unaudited)





|(1) | The table shows options without consideration of expected forfeitures. The Company estimates its forfeiture rate to be approximately 2% annually.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Total stock options outstanding at July 31, 2010 consist of 4,898,214 performance-based options, 4,391,016 time-based options and 1,484,122 roll over options. The
Company presently does not record compensation expense associated with performance-based options because management believes their vesting is not probable.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The aggregate intrinsic value for options outstanding and options exercisable as of July 31, 2010 was $4.6 and $3.2 million,
respectively.

Restricted Stock Awards

In connection with the consummation of the Merger, the Company entered into a restricted stock agreement, dated as of March 10, 2006
with Robert Pender, the Companys Chief Financial Officer. Pursuant to this agreement, Mr. Pender was issued 307,200 shares of the Companys common stock. The restricted stock award vested in full on June 16, 2010 pursuant to the
terms of the restricted stock agreement. Mr. Pender transferred 112,681 shares of the Companys common stock to the Company for purposes of paying applicable income tax withholdings resulting from the vesting of the restricted stock award
pursuant to the terms of the restricted stock agreement.

The following table sets forth the summary of restricted stock award
activity under our restricted stock agreement for the six months ended July 31, 2010:



|                                              |  |                  |   |  |                                     |     
|--------------------------------------------- |  | ---------------- | - |  | ----------------------------------- | ----
|                                              |  | Non-VestedShares |   |  | WeightedAverageGrant DateFair Value
|Balances as of January 31, 2010               |  | 307,200          |   |  | $                                   | 5.00
|Granted                                       |  |                 |   |  | $                                   |    
|Restricted stock awards released upon vesting |  | (307,200         | ) |  | $                                   | 5.00
|Cancelled                                     |  |                 |   |  | $                                   |    
|                                              |  |                  |   |  |                                     |     
|Balances as of July 31, 2010                  |  |                 |   |  | $                                   |    
|                                              |  |                  |   |  |                                     |     

Restricted Stock Units

In the six months ended July 31, 2010, the Company entered into restricted stock agreements with certain employees. Pursuant to these
agreements, each employee was issued restricted stock units in aggregate totaling 250,000 of the Companys common stock. These units are unvested and subject to the employees continued employment with the Company for a period of three
years from the date of issuance. With respect to all outstanding restricted stock agreements issued to date, if the Company is subject to a change in control or an initial public offering (as defined in these agreements)
while the employee remains an employee of the Company, his or her remaining unvested restricted stock units will immediately vest in part or in full depending on the price per share at the time of such event.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



The following table sets forth the summary of restricted stock units activity under our
restricted stock purchase agreements for the six months ended July 31, 2010:



|                                |  |                  |   |  |                                     |     
|------------------------------- |  | ---------------- | - |  | ----------------------------------- | ----
|                                |  | Non-VestedShares |   |  | WeightedAverageGrant DateFair Value
|Balances as of January 31, 2010 |  | 1,820,000        |   |  | $                                   | 3.00
|Granted                         |  | 250,000          |   |  | $                                   | 3.08
|Cancelled                       |  | (25,000          | ) |  | $                                   | 3.00
|                                |  |                  |   |  |                                     |     
|Balances as of July 31, 2010    |  | 2,045,000        |   |  | $                                   | 3.01
|                                |  |                  |   |  |                                     |     

The aggregate intrinsic value for restricted stock units outstanding as of July 31, 2010 was
$6.5 million. There were no restricted stock units exercisable as of July 31, 2010.

Stock-based compensation
expense for the three months and six months ended July 31, 2010 and 2009 is categorized as follows (in thousands):



|                                                                |  |                            |      |   |                          |   |      |      |  |   |       |   |  |   |      |  
|--------------------------------------------------------------- |  | -------------------------- | ---- | - | ------------------------ | - | ---- | ---- |  | - | ----- | - |  | - | ---- | -
|                                                                |  | Three Months EndedJuly 31, |      |   | Six Months EndedJuly 31, |  
|                                                                |  | 2010                       |      |   | 2009                     |   |      | 2010 |  |   | 2009  |  
|Cost of maintenance                                             |  | $                          | 20   |   |                          | $ | 1    |      |  | $ | 53    |   |  | $ | 8    |  
|Cost of professional services                                   |  |                            | 16   |   |                          |   | (14  | )    |  |   | 30    |   |  |   | (13  | )
|                                                                |  |                            |      |   |                          |   |      |      |  |   |       |   |  |   |      |  
|Stock-based compensation expense (benefit) in cost of revenue   |  |                            | 36   |   |                          |   | (13  | )    |  |   | 83    |   |  |   | (5   | )
|                                                                |  |                            |      |   |                          |   |      |      |  |   |       |   |  |   |      |  
|Sales and marketing                                             |  |                            | 154  |   |                          |   | 54   |      |  |   | 321   |   |  |   | (26  | )
|Research and development                                        |  |                            | 146  |   |                          |   | 81   |      |  |   | 423   |   |  |   | 80   |  
|General and administrative                                      |  |                            | 460  |   |                          |   | 220  |      |  |   | 1,166 |   |  |   | 292  |  
|                                                                |  |                            |      |   |                          |   |      |      |  |   |       |   |  |   |      |  
|Stock-based compensation expense (benefit) in operating expense |  |                            | 760  |   |                          |   | 355  |      |  |   | 1,910 |   |  |   | 346  |  
|                                                                |  |                            |      |   |                          |   |      |      |  |   |       |   |  |   |      |  
|Total stock-based compensation expense (benefit)                |  |                            | 796  |   |                          |   | 342  |      |  |   | 1,993 |   |  |   | 341  |  
|Income tax expense (benefit)                                    |  |                            | (309 | ) |                          |   | (133 | )    |  |   | (774  | ) |  |   | (133 | )
|                                                                |  |                            |      |   |                          |   |      |      |  |   |       |   |  |   |      |  
|Total stock-based compensation expense (benefit), net of tax    |  | $                          | 487  |   |                          | $ | 209  |      |  | $ | 1,219 |   |  | $ | 208  |  
|                                                                |  |                            |      |   |                          |   |      |      |  |   |       |   |  |   |      |  



|(3) | Restructuring Charges and Accruals
|--- | ----------------------------------

On March 1, 2010, in response to the Companys re-alignment of certain development resources associated with its Agileand PPMproduct offerings, the Company announced and began to execute plans to reduce its workforce by approximately 5%, or 33 positions, affecting primarily its research and development organization. The Company has realized and expects
to continue to realize cost savings going forward as a result of this restructuring and other cost saving initiatives. The restructuring is substantially complete, and in connection with these actions, the Company recorded restructuring charges in
the three months and six months ended July 31, 2010 totaling $0.1 million and $1.3 million, respectively, consisting principally of severance, payroll taxes and other employee benefits, a facilities closure and legal and other miscellaneous
costs. Restructuring charges are included in restructuring, acquisition and other charges in the Companys unaudited condensed consolidated



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(Unaudited)



statements of operations. The nature of all restructuring charges and the amounts paid and accrued as of July 31, 2010 are summarized as follows (in thousands):



|                                |  |                                                  |      |   |                                                   |   |       |                                        |  |   |        |  
|------------------------------- |  | ------------------------------------------------ | ---- | - | ------------------------------------------------- | - | ----- | -------------------------------------- |  | - | ------ | -
|                                |  | Severance,payroll taxesand otheremployeebenefits |      |   | Facilitiesclosures,legal andothermiscellaneous(1) |   |       | Total restructuringcharges andaccruals | 
|Balances as of January 31, 2010 |  | $                                                | 84   |   |                                                   | $ | 1,682 |                                        |  | $ | 1,766  |  
|Accrued                         |  |                                                  | 651  |   |                                                   |   | 600   |                                        |  |   | 1,251  |  
|Paid                            |  |                                                  | (735 | ) |                                                   |   | (879  | )                                      |  |   | (1,614 | )
|Adjustments                     |  |                                                  |     |   |                                                   |   | (326  | )                                      |  |   | (326   | )
|                                |  |                                                  |      |   |                                                   |   |       |                                        |  |   |        |  
|Balances as of July 31, 2010    |  | $                                                |     |   |                                                   | $ | 1,077 |                                        |  | $ | 1,077  |  
|                                |  |                                                  |      |   |                                                   |   |       |                                        |  |   |        |  



|(1) | In the six months ended July 31, 2010, contract termination costs accrued totaled $0.4 million and related to an abandoned facility lease which will be paid out
over the remaining lease term of 19 months, and legal and other miscellaneous costs accrued totaled $0.2 million. In the quarter ended July 31, 2010, the Company recorded an adjustment to the abandoned facility lease accrual totaling $0.3
million to reflect the actual costs associated with the Company entering into a sublease agreement for part of the abandoned facility space.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Restructuring accruals are reflected in accrued expenses in the Companys unaudited condensed consolidated balance sheets.

The agreements underlying the Companys senior subordinated notes and the Credit Facility include financial covenants
based on Adjusted EBITDA and restructuring, acquisition and other charges are a component of that computation. These charges have been included as a separate line within operating expenses in the Companys unaudited condensed consolidated
statements of operations and are categorized as follows for the three months and six months ended July 31, 2010 and 2009 (in thousands):



|                                                                                                                                                                                                                           |  |                            |      |   |                          |   |     |      |  |      |       |  |   |      
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---- | - | ------------------------ | - | --- | ---- |  | ---- | ----- |  | - | -----
|                                                                                                                                                                                                                           |  | Three Months EndedJuly 31, |      |   | Six Months EndedJuly 31,
|                                                                                                                                                                                                                           |  | 2010                       |      |   | 2009                     |   |     | 2010 |  | 2009
|Sponsor fees, administration fees and other costs related to the Merger and the issuance of debt                                                                                                                           |  | $                          | 310  |   |                          | $ | 327 |      |  | $    | 620   |  | $ | 614  
|Restructuring charges consisting principally of severance, payroll taxes and other employee benefits, facilities closures and
legal and other miscellaneous costs                                                          |  |                            | (225 | ) |                          |   | (18 | )    |  |      | 925   |  |   | 1,546
|Other redundancy costs not related to our restructuring plans including severance and other employee related costs, costs to
establish or liquidate entities, and other miscellaneous costs not part of ongoing operations |  |                            | 367  |   |                          |   | 55  |      |  |      | 1,077 |  |   | 55   
|                                                                                                                                                                                                                           |  |                            |      |   |                          |   |     |      |  |      |       |  |   |      
|Total restructuring, acquisition and other charges                                                                                                                                                                         |  | $                          | 452  |   |                          | $ | 364 |      |  | $    | 2,622 |  | $ | 2,215
|                                                                                                                                                                                                                           |  |                            |      |   |                          |   |     |      |  |      |       |  |   |      



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SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



|(4) | Goodwill and Other Intangible Assets
|--- | ------------------------------------

(a) Goodwill:

Goodwill is not amortized but instead is periodically tested for impairment. The required annual impairment test is performed in the
fourth fiscal quarter each year. The Company has concluded that there were no indicators of impairment of goodwill in the three months or six months ended July 31, 2010. In the quarter ended July 31, 2010, the Company corrected certain
immaterial errors related to acquisition purchase accounting allocations totaling $1.9 million and offset by tax reserves totaling $0.5 million that resulted in recording an impairment charge in the three months ended July 31, 2010 totaling
$1.4 million. See Note 1(c) of notes to our unaudited condensed consolidated financial statements for further details regarding the correction of immaterial errors.

The change in the carrying amount of goodwill for the six months ended July 31, 2010 is as follows (in thousands):



|                                                                                           |  |   |         |  
|------------------------------------------------------------------------------------------ |  | - | ------- | -
|Balance as of January 31, 2010                                                             |  | $ | 464,331 |  
|Correction of immaterial error purchase accounting allocation for the Projity acquisition |  |   | (1,931  | )
|                                                                                           |  |   |         |  
|Balance as of July 31, 2010                                                                |  | $ | 462,400 |  
|                                                                                           |  |   |         |  

(b) Other Intangible Assets:

Other intangible assets are comprised of the following (in thousands):



|                               |  |                        |         |                         |   |          |                    |  |   |        
|------------------------------ |  | ---------------------- | ------- | ----------------------- | - | -------- | ------------------ |  | - | -------
|                               |  | As of July 31, 2010   
|                               |  | Gross CarryingAmount   |         | AccumulatedAmortization |   |          | Net CarryingAmount
|Amortizing intangible assets:  |  |                        |         |                         |   |          |                    |  |   |        
|Acquired technology            |  | $                      | 178,699 |                         | $ | (158,361 | )                  |  | $ | 20,338 
|Customer relationships         |  |                        | 278,900 |                         |   | (153,506 | )                  |  |   | 125,394
|Trademark/Trade name portfolio |  |                        | 14,300  |                         |   | (7,881   | )                  |  |   | 6,419  
|Capitalized software           |  |                        | 6,973   |                         |   | (5,543   | )                  |  |   | 1,430  
|                               |  |                        |         |                         |   |          |                    |  |   |        
|Total                          |  | $                      | 478,872 |                         | $ | (325,291 | )                  |  | $ | 153,581
|                               |  |                        |         |                         |   |          |                    |  |   |        
|                               | 
|                               |  | As of January 31, 2010
|                               |  | Gross CarryingAmount   |         | AccumulatedAmortization |   |          | Net CarryingAmount
|Amortizing intangible assets:  |  |                        |         |                         |   |          |                    |  |   |        
|Acquired technology            |  | $                      | 178,699 |                         | $ | (141,332 | )                  |  | $ | 37,367 
|Customer relationships         |  |                        | 278,900 |                         |   | (135,998 | )                  |  |   | 142,902
|Trademark/Trade name portfolio |  |                        | 14,300  |                         |   | (6,982   | )                  |  |   | 7,318  
|Capitalized software           |  |                        | 7,130   |                         |   | (5,386   | )                  |  |   | 1,744  
|                               |  |                        |         |                         |   |          |                    |  |   |        
|Total                          |  | $                      | 479,029 |                         | $ | (289,698 | )                  |  | $ | 189,331
|                               |  |                        |         |                         |   |          |                    |  |   |        



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##### Table of Contents

SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



|                                                         |  |   |        
|-------------------------------------------------------- |  | - | -------
|Estimated amortization expense:                          |  |   |        
|For remaining six months of year ending January 31, 2011 |  | $ | 35,310 
|For year ending January 31, 2012                         |  |   | 40,946 
|For year ending January 31, 2013                         |  |   | 36,884 
|For year ending January 31, 2014                         |  |   | 36,538 
|For year ending January 31, 2015                         |  |   | 3,903  
|                                                         |  |   |        
|Total                                                    |  | $ | 153,581
|                                                         |  |   |        

As of July 31, 2010, the weighted average
remaining amortization periods for acquired technology, trademark/trade name portfolio and customer relationships, and capitalized software are 6 months, 43 months and 7 months, respectively. The total weighted average remaining amortization period
for all identifiable intangible assets is 29 months. The aggregate amortization expense of acquired technology and other intangible assets was $17.5 million and $35.4 million in the three months and six months ended July 31, 2010,
respectively, as compared to $18.0 million and $35.5 million in the same three months and six months, respectively, a year ago.

The Company tests its long-lived assets for recoverability whenever events or changes in circumstances indicate that their carrying
amounts may not be recoverable. A long-lived asset is not recoverable, and therefore subject to an impairment charge, if its carrying amount exceeds the undiscounted cash flows associated with it. There were no impairment charges in the three month
and six month periods ended July 31, 2010 and 2009.



|(5) | Comprehensive Loss
|--- | ------------------

The
Company reports components of comprehensive loss in our annual consolidated statements of shareholders equity. Comprehensive loss consists of net loss and foreign currency translation adjustments. Total comprehensive loss for the three months
and six months ended July 31, 2010 and 2009 is as follows (in thousands):



|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                  |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |  
|                                                                  |  | 2010                       |        |   | 2009                     |   |        | 2010 |  |   | 2009   |  
|Comprehensive loss:                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net loss                                                          |  | $                          | (3,496 | ) |                          | $ | (1,495 | )    |  | $ | (7,657 | ) |  | $ | (6,310 | )
|Other comprehensive lossforeign currency translation adjustments |  |                            | (413   | ) |                          |   | (1,070 | )    |  |   | (81    | ) |  |   | (1,490 | )
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total comprehensive loss                                          |  | $                          | (3,909 | ) |                          | $ | (2,565 | )    |  | $ | (7,738 | ) |  | $ | (7,800 | )
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



|(6) | Recent Accounting Pronouncements
|--- | --------------------------------

In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820)  Measuring Liabilities at Fair Value(ASU 2010-06). ASU 2010-06 requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement. The new disclosures
and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company does not expect adoption of this guidance to have an impact on
its consolidated financial position or results of operations.



14



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##### Table of Contents

SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



In October 2009, the FASB issued Accounting Standards Update (ASU)
No. 200913, MultipleDeliverable Revenue Arrangements,(ASU 200913). ASU 200913 amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB ASC
Subtopic 605-25. The new standard provides guidance on whether certain non-software multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish
that there is objective evidence of fair value of undelivered products and services for nonsoftware elements and also eliminates the residual method of allocating arrangement consideration to nonsoftware elements. The new guidance provides for
separate revenue recognition based upon managements estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. Under the previous guidance, if the fair value of all
of the undelivered elements in the arrangement was not determinable, then revenue was generally deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010. This guidance will not be effective for the Company until the first quarter of fiscal 2012. Early adoption is permitted. The Company is currently
evaluating the potential impact of this standard on its financial position and results of operations.



|(7) | Debt
|--- | ----

Debt as of
July 31, 2010 and January 31, 2010 consisted of the following (in thousands):



|                                                                                 |  |              |         |                 |   |        
|-------------------------------------------------------------------------------- |  | ------------ | ------- | --------------- | - | -------
|                                                                                 |  | July 31,2010 |         | January 31,2010
|Senior secured term loan, due March 10, 2013, three-month LIBOR plus 2.00%       |  | $            | 316,000 |                 | $ | 318,000
|Revolving term credit facility, due March 10, 2012, three-month LIBOR plus 2.25% |  |              | 35,000  |                 |   | 65,000 
|Senior subordinated notes, due March 15, 2016, 10.375%                           |  |              | 142,952 |                 |   | 142,952
|                                                                                 |  |              |         |                 |   |        
|Total long-term debt                                                             |  |              | 493,952 |                 |   | 525,952
|Less current portion                                                             |  |              |        |                 |   | 2,000  
|                                                                                 |  |              |         |                 |   |        
|Total long-term debt, less current portion                                       |  | $            | 493,952 |                 | $ | 523,952
|                                                                                 |  |              |         |                 |   |        

Senior Secured Credit Agreement

In connection with the consummation of the Merger, the Company entered into a senior secured credit agreement pursuant to a debt
commitment obtained from affiliates of the initial purchasers of our senior subordinated notes (the Credit Facility).

General.    The borrower under the Credit Facility initially was Spyglass Merger Corp. and immediately
following completion of the Merger became Serena. The Credit Facility provides for (1) a seven-year term loan in the amount of $400.0 million amortizing at a rate of 1.00% per year on a quarterly basis for the first six and three-quarters
years after the closing date of the Merger, with the balance paid at maturity, and (2) a six-year revolving Credit Facility that permits loans in an aggregate amount of up to $75.0 million, including a letter of credit facility and a swing line
facility. In addition, subject to certain terms and conditions, the Credit Facility provides for one or more uncommitted incremental term loan or revolving credit facilities in an aggregate amount not to exceed $150.0 million. Proceeds of the term
loan on the initial borrowing date were used to partially finance the Merger, to refinance certain indebtedness of Serena and to pay fees and expenses incurred in



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##### Table of Contents

SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



connection with the Merger. Proceeds of the revolving credit facility have been and any incremental facilities will be used for working capital and general corporate purposes of the Company and
its restricted subsidiaries.

In the quarter ended April 30, 2010, the Company made a mandatory principal payment
totaling $2 million on the senior secured term loan and a voluntary principal payment totaling $30 million on the revolving term credit facility.

The revolving term credit facility bears an annual commitment fee of 0.50% on the undrawn portion of that facility commencing on the date
of execution and delivery of the senior secured credit agreement. As a result of the Company borrowing $65.0 million under the revolving term Credit Facility in the quarter ended October 31, 2008 and Lehman Commercial Paper, Inc., or LCPI,
becoming a defaulting lender due to its failure to fund its loan commitment, the annual commitment fee of 0.50% was not payable pursuant to the terms of the senior secured credit agreement until April 2010, when a $30 million portion of the loans
under the revolving Credit Facility was repaid.

Senior Subordinated Notes

As of July 31, 2010, the Company has outstanding $143.0 million principal amount of senior subordinated notes, bearing interest at a
rate of 10.375%, payable semi-annually on March 15 and September 15, and maturing on March 15, 2016. The notes are the Companys unsecured, senior subordinated obligations. The notes are subject to redemption at the
Companys option under terms and conditions specified in the indenture related to the notes, and may be redeemed at the option of the holders at 101% of their face amount, plus accrued and unpaid interest, upon certain change of control events.

In the six months ended July 31, 2009, the Company repurchased, in six separate privately negotiated transactions, an
aggregate of $24.4 million of principal amount of its senior subordinated notes. The repurchases resulted in a gain of $4.6 million from the extinguishment of debt in the six months ended July 31, 2009.

In September 2010 the Company repurchased, in two separate privately negotiated transactions, an aggregate of $8.7 million of principal
amount of its senior subordinated notes. The resulting loss from the extinguishment of debt will not be material.

The Company
may from time to time repurchase its senior subordinated notes in open market or privately negotiated purchases or otherwise.

Debt Covenants

The senior subordinated notes and the Credit Facility contain various covenants including limitations on additional indebtedness, capital
expenditures, restricted payments, the incurrence of liens, transactions with affiliates and sales of assets. In addition, the Credit Facility requires the Company to comply with certain financial covenants, including leverage and interest coverage
ratios and capital expenditure limitations. The Company was in compliance with all of the covenants of the Credit Facility as of July 31, 2010.

The Companys senior secured credit agreement requires the Company to maintain a rolling twelve-month consolidated Adjusted EBITDA
to consolidated Interest Expense ratio of a minimum of 2.00x at the end of each quarter beginning with the fiscal year ending January 31, 2010. Consolidated Interest Expense is defined in the senior secured credit agreement as consolidated cash
interest expense less cash interest income and is further



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SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



adjusted for certain non-cash interest expenses and other items. The Company is also required to maintain a consolidated Total Debt to consolidated Adjusted EBITDA ratio of a maximum of 5.50x at
the end of each quarter beginning with the fiscal year ending January 31, 2010 and until it decreases to 5.00x by the end of the fiscal year ending January 31, 2011. Consolidated Total Debt is defined in the senior secured credit agreement
as total debt other than certain indebtedness and is reduced by the amount of cash and cash equivalents on our consolidated balance sheet in excess of $5.0 million. As of July 31, 2010, our consolidated Total Debt was $395.6 million, consisting
of total debt other than certain indebtedness totaling $494.0 million, reduced by cash and cash equivalents in excess of $5.0 million of $98.4 million. Failure to satisfy these ratio requirements would constitute a default under the senior
secured credit agreement. If the Companys lenders failed to waive any such default, our repayment obligations under the senior secured credit agreement could be accelerated, also constituting a default under the indenture governing the senior
subordinated notes.

The Companys ability to incur additional debt and make certain restricted payments under the
indenture governing the senior subordinated notes, subject to specified exceptions, is tied to an Adjusted EBITDA to Fixed Charges ratio of at least 2.0x, except that we may incur certain debt and make certain restricted payments and certain
permitted investments without regard to the ratio, such as the Companys ability to incur up to an aggregate principal amount of $625.0 million under our senior secured credit agreement (inclusive of amounts outstanding under our senior secured
credit agreement from time to time; as of July 31, 2010, we had $316.0 million outstanding under our term loan and $35.0 million under our revolving credit facility), to acquire persons engaged in a similar business that become restricted
subsidiaries and to make other investments equal to the greater of $25.0 million or 2% of our consolidated assets. Fixed Charges are defined in the indenture governing the senior subordinated notes as consolidated Interest Expense less interest
income, adjusted for acquisitions, and further adjusted for non-cash interest expense.



|(8) | Income Taxes
|--- | ------------

The income
tax benefit was $3.0 million and $7.2 million in the three months and six months ended July 31, 2010, respectively, as compared to $5.1 million and $9.4 million in the same three months and six months, respectively, a year ago. The
Companys projected effective income tax benefit rate for fiscal year 2011 is 51%. The Companys effective income tax benefit rate for fiscal year 2010 was 59%. The Companys effective income tax benefit rate is greater than the
statutory rate due to the impacts of permanently reinvested foreign earnings, the domestic production deduction and state taxes.

At January 31, 2010, the Company had total federal, state and foreign unrecognized tax benefits of $7.8 million, including
interest of $1.7 million. During the six months ended July 31, 2010, the total unrecognized tax benefits, excluding interest, was reduced by $1.5 million primarily due to expiring statutes and prior year tax positions totaling $1.0 million
and the correction of an immaterial error with respect to an over-provided UK tax reserve totaling $0.5 million. The Company accrued immaterial amounts in interest and penalties.

The Company files tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The statute of limitations on
our federal and major state tax return filings remains open for the years ended January 31, 2006 through January 31, 2009. The statute of limitations on U.K. income tax filings remains open for the years ended January 31, 1999 through
January 31, 2009. Over the next twelve months, we expect a decrease of $3.1 million in our unrecognized tax benefits as a result of expiring statutes and audit settlements.



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SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



|(9) | Fair Value Measurement
|--- | ----------------------

The Company adopted the provisions of FASB ASC Topic 820 Fair Value Measurements and Disclosureson February 1,
2008 with respect to financial assets and financial liabilities measured at fair value on a recurring basis, on February 1, 2009 with respect to non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis,
and on May 1 2009 with respect to estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. The adoption of FASB ASC Topic 820 did not have a material impact on our unaudited
condensed consolidated financial statements. The Company recorded no change to its opening balance of retained earnings as of February 1, 2008 as it did not have any financial instruments requiring retrospective application under the provisions
of FASB ASC Topic 820.

Fair Value Hierarchy

FASB ASC Topic 820 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect
assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Companys own assumptions of market participant valuation (unobservable inputs). In accordance with FASB
ASC Topic 820, these two types of inputs have created the following fair value hierarchy:



| |  |  | Level 1Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or
liabilities;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in
active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
| | - |  | --------------------------------------------------------------------------------------------------------------------------

FASB ASC Topic 820 requires the use of observable market data if such data is available without undue cost
and effort.

Items Measured at Fair Value on a Recurring Basis

The following table presents the Companys assets and liabilities that are measured at fair value on a recurring basis at
July 31, 2010 consistent with the fair value hierarchy provisions of FASB ASC Topic 820 (in thousands):



|                   |  |                                                             |        |                                                |   |                                         |  |   |   |  |   |  
|------------------ |  | ----------------------------------------------------------- | ------ | ---------------------------------------------- | - | --------------------------------------- |  | - | - |  | - | -
|Description        |  | Estimated FairValue atJuly 31, 2010                         |        | Fair Value Measurement at Reporting Date Using
|                   |  | Quoted Prices inActive Marketsfor Identical Assets(Level 1) |        | Significant OtherObservable Inputs(Level 2)    |   | SignificantUnobservable Inputs(Level 3)
|Assets:            |  |                                                             |        |                                                |   |                                         |  |   |   |  |   |  
|Money market funds |  | $                                                           | 86,239 |                                                | $ | 86,239                                  |  | $ |  |  | $ | 
|                   |  |                                                             |        |                                                |   |                                         |  |   |   |  |   |  
|Total Assets       |  | $                                                           | 86,239 |                                                | $ | 86,239                                  |  | $ |  |  | $ | 
|                   |  |                                                             |        |                                                |   |                                         |  |   |   |  |   |  
|Total Liabilities  |  | $                                                           |       |                                                | $ |                                        |  | $ |  |  | $ | 
|                   |  |                                                             |        |                                                |   |                                         |  |   |   |  |   |  

At July 31, 2010, the Company did not have any
assets or liabilities measured at fair value on a recurring basis using significant other observable inputs (Level 2) or significant unobservable inputs (Level 3).



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SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



Fair Value of Financial Instruments

The carrying amount of the Companys financial instruments including cash and cash equivalents, accounts receivable, accounts payable
and accrued liabilities approximate their respective fair values because of the relatively short period of time between origination of the instruments and their expected realization. The fair value of the Companys senior secured term loan and
revolving term credit facility approximate their respective carrying amounts because these instruments include LIBOR-based interest rates that are variable and fluctuate based on market conditions.

The estimated fair values of certain of the Companys long-term debt obligations, based on quoted market prices, as of July 31,
2010 and January 31, 2010 are as follows:



|                                           |  |                |         |            |   |        
|------------------------------------------ |  | -------------- | ------- | ---------- | - | -------
|                                           |  | CarryingAmount |         | Fair Value
|                                           |  | (In thousands)
|As of July 31, 2010:                       |  |                |         |            |   |        
|10.375% Senior Subordinated Notes due 2016 |  | $              | 142,952 |            | $ | 151,529
|As of January 31, 2010:                    |  |                |         |            |   |        
|10.375% Senior Subordinated Notes due 2016 |  | $              | 142,952 |            | $ | 135,804

Financial
instruments that potentially subject us to credit risk consist of cash and cash equivalents, and trade accounts receivable. The Company maintains the majority of its cash and cash equivalents balances with recognized financial institutions which
follow the Companys investment policy. The Company has not experienced any significant losses on these investments to date. One of the most significant credit risks is the ultimate realization of accounts receivable. This risk is mitigated by
(i) ongoing credit evaluation of our customers, and (ii) frequent contact with our customers, especially our most significant customers, thus enabling the Company to monitor current changes in business operations and to respond
accordingly. The Company generally does not require collateral for sales on credit. The Company considers these concentrations of credit risks in establishing our allowance for doubtful accounts.



|(10) | Litigation
|---- | ----------

The Company
is involved in various legal proceedings that have arisen during the ordinary course of its business. The final resolution of these matters, individually or in the aggregate, is not expected to have a material adverse effect on the Companys
consolidated financial position or results of operations.



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##### Table of Contents

|ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are
subject to safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include, but are not limited to, statements about financial projections, operational plans and objectives, future
economic performance and other projections and estimates contained in this report. When used in this report, the words expects, anticipates, intends, plans, believes, seeks,
estimates and similar expressions identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, they are subject to important factors that could cause actual results to differ materially
from those expressed or implied by the forward-looking statements, including those risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 and Part II, Item 1A of our
Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2010. We assume no obligation to update any forward-looking statements contained in this report. It is important that the discussion below be read together with the attached
unaudited condensed consolidated financial statements and notes thereto and the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 and Part II, Item 1A of our
Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2010.

Overview

We are the largest global independent software company in terms of revenue focused solely on managing change across information
technology, or IT, environments. Our products and services are used to manage and control change in mission critical technology and business process applications. Our software configuration management, business process management, helpdesk and
requirements management solutions enable our customers to improve process consistency, enhance software integrity, mitigate risks, support regulatory compliance and boost productivity. Our revenue is generated by software licenses, maintenance
contracts and professional services. Our customers rely on our software products, which are typically embedded within their IT environment, and are generally accompanied by renewable annual maintenance contracts.

In connection with our merger with Spyglass Merger Corp., an affiliate of Silver Lake, in March 2006, which we refer to as the Merger, we
entered into a senior secured credit agreement, issued senior subordinated notes, and entered into other related transactions, referred to collectively as the acquisition transactions. As a result of the acquisition transactions, we became, and
continue to be, highly leveraged. As of July 31, 2010 we had outstanding $494.0 million in aggregate indebtedness, including $35.0 million of borrowing under our revolving term credit facility. Our liquidity requirements are significant,
primarily due to debt service requirements.

In April 2010, we made a mandatory principal payment totaling $2 million on the
senior secured term loan and a voluntary principal payment totaling $30 million on the revolving term credit facility.

We
derive our revenue from software licenses, maintenance and professional services. Our distributed systems products are licensed on a per user seat basis. Customers typically purchase mainframe products under million instructions per second, or
MIPS-based, perpetual licenses. Mainframe software products and applications are generally priced based on hardware computing capacity  the higher the mainframe computers MIPS capacity, the higher the cost of the software license.

We also provide ongoing maintenance, including technical support, version upgrades and enhancements, for an annual fee of
approximately 21% of the discounted list price of the licensed product for our distributed systems products and approximately 17% to 18% of the discounted list price of the licensed product for our mainframe products. We recognize maintenance
revenue over the term of the maintenance contract on a straight-line basis.

Professional services revenue is derived from
technical consulting and educational services. Our professional services are typically billed on a time and materials basis and revenue is recognized as the related services are performed. Maintenance revenue and professional services revenue have
lower gross profit margins than software license revenue as a result of the costs inherent in operating our customer support and professional services organizations.



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##### Table of Contents

In the quarter ended July 31, 2010, when compared to the same quarter a year ago, total
revenues decreased 9%, as total revenues were $50.3 million in the current quarter versus $55.2 million in the same quarter a year ago. In the six months ended July 31, 2010, when compared to the same six months a year ago, total revenues
decreased 6%, as total revenues were $101.9 million in the current six months versus $108.0 million in the same six months a year ago. For both the quarter and six months ended July 31, 2010, when compared to the same quarter and six months a year
ago, the decrease in total revenue was primarily the result of declines in our maintenance revenues and consulting business due to slower software purchasing activity resulting from the general weakening of the worldwide economy and slowdown in IT
spending.

In the quarter and six months ended July 31, 2010, 66% and 64%, respectively, of our total software license
revenue came from our distributed systems products, as compared to 73% and 65%, respectively, in the same quarter and six months a year ago. In the quarter and six months ended July 31, 2010, 34% and 36%, respectively, of our total software
license revenue came from our mainframe products, as compared to 27% and 35%, respectively, in the same quarter and six months a year ago.

Historically, our 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 67% of our total revenue in both the quarter and six months ended July 31, 2010, as compared to 68% in both the same quarter and six months a year ago.

Our international revenue is attributable principally to our European operations. International revenue accounted for approximately 33%
of our total revenue in both the quarter and six months ended July 31, 2010, as compared to 32% in both the same quarter and six months a year ago. We expect any improvement in IT spending to occur more slowly in Europe than in North America.

Critical Accounting Policies and Estimates

This discussion is based upon our consolidated financial statements 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, revenue 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. If actual results differ significantly from these estimates, the resulting changes could have a material adverse effect on our future reported financial results.

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, accounting for income taxes, projections used in purchase accounting, impairment of goodwill, valuation of our common stock, and assumptions related to
valuation of our options and restricted stock, 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
believe the following are critical accounting policies and estimates used in the preparation of our consolidated financial statements.



| |  |  | Revenue recognition,
| | - |  | --------------------



| |  |  | Stock-based compensation,
| | - |  | -------------------------



| |  |  | Valuation of long-lived assets, including goodwill, and
| | - |  | -------------------------------------------------------



| |  |  | Accounting for income taxes
| | - |  | ---------------------------



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In the second quarter of fiscal year 2011, there has been no change in the above critical
accounting policies or the underlying assumptions and estimates used in their application. See our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 filed with the SEC on April 30, 2010 for further information regarding
our critical accounting policies and estimates.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements and their anticipated effect on our consolidated financial statements, see Note 6 of
notes to our unaudited condensed consolidated financial statements.

Historical Results of Operations

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.



|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|------------------------------------------------- |  | --------------------------- | -- |  | ------------------------- | -- |  | ---- | -- |  | ---- | --
|                                                  |  | Three Months Ended July 31, |    |  | Six Months Ended July 31, |   
|                                                  |  | 2010                        |    |  | 2009                      |    |  | 2010 |    |  | 2009 |   
|Revenue:                                          |  |                             |    |  |                           |    |  |      |    |  |      |   
|Software licenses                                 |  | 20                          | %  |  | 20                        | %  |  | 21   | %  |  | 19   | % 
|Maintenance                                       |  | 71                          | %  |  | 70                        | %  |  | 70   | %  |  | 70   | % 
|Professional services                             |  | 9                           | %  |  | 10                        | %  |  | 9    | %  |  | 11   | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Total revenue                                     |  | 100                         | %  |  | 100                       | %  |  | 100  | %  |  | 100  | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Cost of revenue:                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Software licenses                                 |  |                            |    |  | 1                         | %  |  | 1    | %  |  | 1    | % 
|Maintenance                                       |  | 6                           | %  |  | 6                         | %  |  | 5    | %  |  | 6    | % 
|Professional services                             |  | 8                           | %  |  | 10                        | %  |  | 8    | %  |  | 11   | % 
|Amortization of acquired technology               |  | 17                          | %  |  | 16                        | %  |  | 17   | %  |  | 16   | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Total cost of revenue                             |  | 31                          | %  |  | 33                        | %  |  | 31   | %  |  | 34   | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Gross profit                                      |  | 69                          | %  |  | 67                        | %  |  | 69   | %  |  | 66   | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Operating expenses:                               |  |                             |    |  |                           |    |  |      |    |  |      |   
|Sales and marketing                               |  | 25                          | %  |  | 26                        | %  |  | 26   | %  |  | 27   | % 
|Research and development                          |  | 15                          | %  |  | 14                        | %  |  | 16   | %  |  | 15   | % 
|General and administrative                        |  | 7                           | %  |  | 8                         | %  |  | 8    | %  |  | 8    | % 
|Amortization of intangible assets                 |  | 18                          | %  |  | 17                        | %  |  | 18   | %  |  | 17   | % 
|Restructuring, acquisition and other charges      |  | 1                           | %  |  | 1                         | %  |  | 2    | %  |  | 2    | % 
|Goodwill impairment                               |  | 3                           | %  |  |                          |    |  | 1    | %  |  |     |   
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Total operating expenses                          |  | 69                          | %  |  | 66                        | %  |  | 71   | %  |  | 69   | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Operating (loss) income                           |  |                            |    |  | 1                         | %  |  | (2   | )% |  | (3   | )%
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Other income (expense):                           |  |                             |    |  |                           |    |  |      |    |  |      |   
|Interest income                                   |  |                            |    |  |                          |    |  |     |    |  |     |   
|Gain on early extinguishment of debt              |  |                            |    |  | 2                         | %  |  |     |    |  | 4    | % 
|Interest expense                                  |  | (12                         | )% |  | (16                       | )% |  | (13  | )% |  | (16  | )%
|Change in the fair value of derivative instrument |  |                            |    |  | 2                         | %  |  | 2    | %  |  | 1    | % 
|Amortization and write-off of debt issuance costs |  | (1                          | )% |  | (1                        | )% |  | (1   | )% |  | (1   | )%
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Total other income (expense)                      |  | (13                         | )% |  | (13                       | )% |  | (12  | )% |  | (12  | )%
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Loss before income taxes                          |  | (13                         | )% |  | (12                       | )% |  | (14  | )% |  | (15  | )%
|Income tax benefit                                |  | (6                          | )% |  | (9                        | )% |  | (7   | )% |  | (9   | )%
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Net loss                                          |  | (7                          | )% |  | (3                        | )% |  | (7   | )% |  | (6   | )%
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   



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Revenue

We derive revenue from software licenses, maintenance and professional services. Our total revenue decreased $4.9 million, or 9%, to $50.3
million in the quarter ended July 31, 2010 from $55.2 million in the same quarter a year ago. For the six months ended July 31, 2010, total revenue decreased $6.1 million, or 6%, to $101.9 million from $108.0 million in the same
six months a year ago. For both the quarter and six months ended July 31, 2010, when compared to the same quarter and six months a year ago, the decrease in total revenue was primarily the result of declines in our maintenance revenues and
consulting business due to slower software purchasing activity resulting from the general weakening of the worldwide economy and slowdown in IT spending.

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



|                      |  |                             |            |      |                           |                    |  |   |        |   |            |     |                    |      |   |         |  |   |         |  |   |        |   |  |     |   
|--------------------- |  | --------------------------- | ---------- | ---- | ------------------------- | ------------------ |  | - | ------ | - | ---------- | --- | ------------------ | ---- | - | ------- |  | - | ------- |  | - | ------ | - |  | --- | --
|                      |  | Three Months Ended July 31, |            |      | Six Months Ended July 31, |                   
|                      |  | 2010                        |            | 2009 |                           | Increase(Decrease) |  |   | 2010   |   | 2009       |     | Increase(Decrease) |     
|                      |  |                             | In Dollars |      |                           | In %               |  |   |        |   | In Dollars |     |                    | In % |  
|Revenue:              |  |                             |            |      |                           |                    |  |   |        |   |            |     |                    |      |   |         |  |   |         |  |   |        |   |  |     |   
|Software licenses     |  | $                           | 10,050     |      | $                         | 11,017             |  | $ | (967   | ) |            | (9  | )%                 |      | $ | 21,462  |  | $ | 20,484  |  | $ | 978    |   |  | 5   | % 
|Maintenance           |  |                             | 35,610     |      |                           | 38,531             |  |   | (2,921 | ) |            | (8  | )%                 |      |   | 71,191  |  |   | 75,260  |  |   | (4,069 | ) |  | (5  | )%
|Professional services |  |                             | 4,604      |      |                           | 5,633              |  |   | (1,029 | ) |            | (18 | )%                 |      |   | 9,236   |  |   | 12,221  |  |   | (2,985 | ) |  | (24 | )%
|                      |  |                             |            |      |                           |                    |  |   |        |   |            |     |                    |      |   |         |  |   |         |  |   |        |   |  |     |   
|Total revenue         |  | $                           | 50,264     |      | $                         | 55,181             |  | $ | (4,917 | ) |            | (9  | )%                 |      | $ | 101,889 |  | $ | 107,965 |  | $ | (6,076 | ) |  | (6  | )%
|                      |  |                             |            |      |                           |                    |  |   |        |   |            |     |                    |      |   |         |  |   |         |  |   |        |   |  |     |   

Software Licenses.    Software licenses revenue as a percentage of
total revenue was 20% and 21% in the quarter and six months ended July 31, 2010, respectively, as compared to 20% and 19% in the same quarter and six months, respectively, a year ago. For the current quarter, when compared to the same quarter a
year ago, the decrease in software license revenue in absolute dollars is predominantly the result of slower software purchasing activity resulting from worldwide general economic weakness. For the current six months, when compared to the same six
months a year ago, the increase in software licenses revenue, in both absolute dollars and as a percentage of total revenue, is predominantly due to improvements in software purchasing activity during the first quarter of fiscal 2011. Our core SCM
products continue to make up a significant portion of our total software license revenue. Combined, our core SCM products accounted for $9.7 million, or 96%, and $20.4 million, or 95%, of total software licenses revenue in the quarter and six months
ended July 31, 2010, respectively, as compared to $10.5 million, or 96%, and $19.6 million, or 95%, in the same quarter and six months, respectively, a year ago. Distributed systems products accounted for $6.7 million, or 66%, and $13.7
million, or 64%, of total software licenses revenue in the quarter and six months ended July 31, 2010, respectively, as compared to $8.1 million, or 73%, and $13.3 million, or 65%, in the same quarter and six months, respectively, a year ago.
We expect that our Dimensions, ZMF and SBM family of products will continue to account for a substantial portion of software license revenue in the future. We expect our software license revenue for the fiscal quarter ending
October 31, 2010 to increase sequentially.

Maintenance.Maintenance revenue as a
percentage of total revenue was 71% and 70% in the quarter and six months ended July 31, 2010, respectively, as compared to 70% in both the same quarter and six months a year ago. For both the current quarter and six months, when compared to
the same quarter and six months a year ago, the decrease in maintenance revenue in absolute dollars is primarily due to pricing pressures on maintenance renewals as a result of the weak global economy and several small maintenance contract
cancellations. We expect maintenance revenue to increase slightly over the near term as maintenance contracts continue to renew at consistent rates and we continue to sell software licenses, offset by cancellations caused by the expected
continuation of adverse worldwide economic conditions.



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##### Table of Contents

Professional Services.    Professional services revenue as a
percentage of total revenue was 9% in both the quarter and six months ended July 31, 2010, as compared to 10% and 11% in the same quarter and six months, respectively, a year ago. For both the current quarter and six months, when compared to
the same quarter and six months a year ago, the decrease in professional services revenue, in both absolute dollars and as a percentage of total revenue, is predominantly due to a decline in the number of consulting engagements primarily as a result
of slower software purchasing activity resulting from worldwide general economic weakness. In general, professional services revenue is attributable to consulting opportunities in our installed customer base and expanding our consulting service
capabilities. We expect professional services revenue to remain generally flat or slightly increase over the near term as a result of the expansion of our professional services organization, offset by the expected continuation of adverse worldwide
economic conditions.

Cost of Revenue

Cost of revenue, consisting of cost of software licenses, cost of maintenance, cost of professional services and amortization of acquired
technology, was 31% of total revenue in both the quarter and six months ended July 31, 2010, as compared to 33% and 34% in the same quarter and six months, respectively, a year ago.

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



|                                    |  |                             |            |   |                           |      |        |                    |  |   |            |   |  |      |    |  |                    |        |   |  |   |        |   |  |   |        |   |  |     |   
|----------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | ---- | ------ | ------------------ |  | - | ---------- | - |  | ---- | -- |  | ------------------ | ------ | - |  | - | ------ | - |  | - | ------ | - |  | --- | --
|                                    |  | Three Months Ended July 31, |            |   | Six Months Ended July 31, |     
|                                    |  | 2010                        |            |   | 2009                      |      |        | Increase(Decrease) |  |   | 2010       |   |  | 2009 |    |  | Increase(Decrease) |       
|                                    |  |                             | In Dollars |   |                           | In % |        |                    |  |   | In Dollars |   |  | In % |   
|Cost of revenue:                    |  |                             |            |   |                           |      |        |                    |  |   |            |   |  |      |    |  |                    |        |   |  |   |        |   |  |   |        |   |  |     |   
|Software licenses                   |  | $                           | 233        |   |                           | $    | 808    |                    |  | $ | (575       | ) |  | (71  | )% |  | $                  | 533    |   |  | $ | 1,438  |   |  | $ | (905   | ) |  | (63 | )%
|Maintenance                         |  |                             | 2,805      |   |                           |      | 3,220  |                    |  |   | (415       | ) |  | (13  | )% |  |                    | 5,690  |   |  |   | 6,436  |   |  |   | (746   | ) |  | (12 | )%
|Professional services               |  |                             | 4,166      |   |                           |      | 5,441  |                    |  |   | (1,275     | ) |  | (23  | )% |  |                    | 8,340  |   |  |   | 11,583 |   |  |   | (3,243 | ) |  | (28 | )%
|Amortization of acquired technology |  |                             | 8,333      |   |                           |      | 8,747  |                    |  |   | (414       | ) |  | (5   | )% |  |                    | 17,029 |   |  |   | 17,093 |   |  |   | (64    | ) |  |    |   
|                                    |  |                             |            |   |                           |      |        |                    |  |   |            |   |  |      |    |  |                    |        |   |  |   |        |   |  |   |        |   |  |     |   
|Total cost of revenue               |  | $                           | 15,537     |   |                           | $    | 18,216 |                    |  | $ | (2,679     | ) |  | (15  | )% |  | $                  | 31,592 |   |  | $ | 36,550 |   |  | $ | (4,958 | ) |  | (14 | )%
|                                    |  |                             |            |   |                           |      |        |                    |  |   |            |   |  |      |    |  |                    |        |   |  |   |        |   |  |   |        |   |  |     |   
|Percentage of total revenue         |  |                             | 31         | % |                           |      | 33     | %                  |  |   |            |   |  |      |    |  |                    | 31     | % |  |   | 34     | % |  |   |        |   |  |     |   

Software Licenses.    Cost of software licenses consists principally of
fees associated with integrating third party technology into our PVCS and Dimensions distributed systems products and, to a lesser extent, salaries, bonuses and other costs associated with our product release organization. In fiscal
2010 only, cost of software licenses also included amortization of certain capitalized software costs associated with our on-demand application services. Beginning in fiscal 2011, we ceased amortizing capitalized software costs since such
capitalized software costs were fully impaired in the fourth quarter of fiscal 2010. Accordingly, there was no amortization of capitalized software costs in the quarter and six months ended July 31, 2010, as compared to $0.5 million and $0.8
million, respectively, in the same quarter and six months a year ago. Cost of software licenses as a percentage of total software licenses revenue was 2% in both the quarter and six months ended July 31, 2010, as compared to 7% in both the same
quarter and six months a year ago. For both the current quarter and six months, when compared to the same quarter and six months a year ago, the decrease in both absolute dollars and as a percentage of total software licenses revenue was primarily
due to our capitalized software costs associated with our on-demand application services being fully impaired in the fourth quarter of fiscal 2010.

Maintenance.Cost of maintenance consists primarily of salaries, bonuses and other costs associated with
our customer support organization. Cost of maintenance as a percentage of total maintenance revenue was 8% in both the quarter and six months ended July 31, 2010, as compared to 8% and 9% in the same quarter and six months, respectively, a year
ago. For both the current quarter and six months, when compared to the same quarter



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and six months a year ago, the decrease in cost of maintenance in absolute dollars was primarily attributable to decreases in expenses resulting from restructuring and other cost cutting
initiatives affecting our customer support organization and, to a lesser extent, benefits from currency fluctuations.

Professional Services.    Cost of professional services consists of salaries, bonuses and other costs
associated with supporting and growing our professional services organization. Cost of professional services as a percentage of total professional services revenue was 90% in both the quarter and six months ended July 31, 2010, as compared to
97% and 95% in the same quarter and six months, respectively, a year ago. For both the current quarter and six months, when compared to the same quarter and six months a year ago, the decrease in the cost of professional services in both absolute
dollars and as a percentage of total professional services revenue was predominantly due to decreases in expenses to support lower professional services revenue and, to a lesser extent, restructuring and other cost cutting initiatives.

Amortization of Acquired Technology.    In connection with the Merger, and to a lesser extent small technology
acquisitions in March 2006, October 2006 and September 2008, we have recorded $178.7 million in acquired technology, reduced by amortization totaling $158.4 million as of July 31, 2010. For both the current quarter and six months
ended July 31, 2010, when compared to the same quarter and six months a year ago, amortization expense was predominantly due to the acquired technology recorded in connection with the Merger. Assuming there are no impairments and no
acquisitions, we expect to record $8.3 million in amortization expense in each of the next two quarters of fiscal 2011 and finally, $3.6 million in amortization expense in the first quarter of fiscal 2012.

Operating Expenses

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



|                                           |      |                             |            |      |                           |      |                    |   |  |      |            |   |      |      |    |                    |   |        |   |  |   |        |   |  |   |        |   |  |     |   
|------------------------------------------ | ---- | --------------------------- | ---------- | ---- | ------------------------- | ---- | ------------------ | - |  | ---- | ---------- | - | ---- | ---- | -- | ------------------ | - | ------ | - |  | - | ------ | - |  | - | ------ | - |  | --- | --
|                                           |      | Three Months Ended July 31, |            |      | Six Months Ended July 31, |     
|                                           | 2010 |                             |            | 2009 |                           |      | Increase(Decrease) |   |  | 2010 |            |   | 2009 |      |    | Increase(Decrease) |  
|                                           |      |                             | In Dollars |      |                           | In % |                    |   |  |      | In Dollars |   |      | In % |   
|Operating expenses:                        |      |                             |            |      |                           |      |                    |   |  |      |            |   |      |      |    |                    |   |        |   |  |   |        |   |  |   |        |   |  |     |   
|Sales and marketing                        |      | $                           | 12,528     |      |                           | $    | 14,367             |   |  | $    | (1,839     | ) |      | (13  | )% |                    | $ | 26,151 |   |  | $ | 29,343 |   |  | $ | (3,192 | ) |  | (11 | )%
|Research and development                   |      |                             | 7,612      |      |                           |      | 7,961              |   |  |      | (349       | ) |      | (4   | )% |                    |   | 15,952 |   |  |   | 16,321 |   |  |   | (369   | ) |  | (2  | )%
|General and administrative                 |      |                             | 3,604      |      |                           |      | 4,586              |   |  |      | (982       | ) |      | (21  | )% |                    |   | 8,261  |   |  |   | 8,671  |   |  |   | (410   | ) |  | (5  | )%
|Amortization of intangible assets          |      |                             | 9,203      |      |                           |      | 9,203              |   |  |      |           |   |      |     |    |                    |   | 18,406 |   |  |   | 18,406 |   |  |   |       |   |  |    |   
|Restructuring, acquisition & other charges |      |                             | 452        |      |                           |      | 364                |   |  |      | 88         |   |      | 24   | %  |                    |   | 2,622  |   |  |   | 2,215  |   |  |   | 407    |   |  | 18  | % 
|Goodwill impairment                        |      |                             | 1,433      |      |                           |      |                   |   |  |      | 1,433      |   |      |     |    |                    |   | 1,433  |   |  |   |       |   |  |   | 1,433  |   |  |    |   
|                                           |      |                             |            |      |                           |      |                    |   |  |      |            |   |      |      |    |                    |   |        |   |  |   |        |   |  |   |        |   |  |     |   
|Total operating expenses                   |      | $                           | 34,832     |      |                           | $    | 36,481             |   |  | $    | (1,649     | ) |      | (5   | )% |                    | $ | 72,825 |   |  | $ | 74,956 |   |  | $ | (2,131 | ) |  | (3  | )%
|                                           |      |                             |            |      |                           |      |                    |   |  |      |            |   |      |      |    |                    |   |        |   |  |   |        |   |  |   |        |   |  |     |   
|Percentage of total revenue                |      |                             | 69         | %    |                           |      | 66                 | % |  |      |            |   |      |      |    |                    |   | 71     | % |  |   | 69     | % |  |   |        |   |  |     |   

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 25% and 26% in the quarter and six months ended
July 31, 2010, respectively, as compared to 26% and 27% in the same quarter and six months, respectively, a year ago. For the quarter ended July 31, 2010, when compared to the same quarter a year ago, in both absolute dollars and as a
percentage of total revenue, the decrease in sales and marketing expenses was primarily the result of lower travel expenses and sales commissions, and a $0.3 million decrease in costs related to the correction of immaterial errors. For the six
months ended July 31, 2010, when compared to the same six months



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a year ago, in both absolute dollars and as a percentage of total revenue, the decrease in sales and marketing expenses was the result of restructuring and other cost cutting initiatives put in
place in fiscal 2010 and a $0.3 million decrease in costs related to the correction of immaterial errors. In absolute dollar terms, we expect sales and marketing expenses to increase over the near term.

Research and Development.    Research and development expenses consist primarily of salaries, bonuses, payroll
taxes, employee benefits and costs attributable to research and development activities. Research and development expenses as a percentage of total revenue were 15% and 16% in the quarter and six months ended July 31, 2010, respectively, as
compared to 14% and 15% in the same quarter and six months, respectively, a year ago. For both the current quarter and six months, when compared to the same quarter and six months a year ago, the slight decrease in research and development expenses
in absolute dollars is primarily attributable to restructuring and other cost cutting initiatives put in place in fiscal 2010 and a $0.2 million decrease in costs recorded in the current quarter related to the correction of immaterial errors, all
partially offset by decreases in capitalization of certain research and development costs associated with our on-demand application services totaling $1.2 million and $2.4 million in the current quarter and six months, respectively. In absolute
dollar terms, we expect research and development expenses to remain generally flat over the near term.

General and
Administrative.    General and administrative expenses consist primarily of salaries, bonuses, payroll taxes, benefits and certain non-allocable administrative costs, including legal and accounting fees and bad debt. General
and administrative expenses as a percentage of total revenue were 7% and 8% in the quarter and six months ended July 31, 2010, respectively, as compared to 8% in both the same quarter and six months a year ago. For the quarter ended
July 31, 2010, when compared to the same quarter a year ago, the decrease in general and administrative expenses in both absolute dollars and as a percentage of total revenue is primarily attributable to restructuring and other cost cutting
initiatives put in place in fiscal 2010, a $0.5 million decrease in costs due to fluctuations in foreign currency exchange rates and a $0.2 million decrease in costs related to the correction of immaterial errors. For the six months ended
July 31, 2010, when compared to the same six months a year ago, the decrease in general and administrative expenses in absolute dollars is primarily attributable to restructuring and other cost cutting initiatives put in place in fiscal 2010, a
$0.5 million decrease in bad debt expense and a $0.2 million decrease in costs related to the correction of immaterial errors. We expect general and administrative expenses to remain generally flat in absolute dollar terms over the near term.

Amortization of Intangible Assets.    In connection with the Merger, and to a lesser extent a
small technology acquisition in October 2006, we have recorded $293.2 million in identifiable intangible assets, reduced by amortization totaling $161.4 million as of July 31, 2010. For the current quarter and six months ended
July 31, 2010 and the same quarter and six months a year ago, amortization expense was predominantly due to the identifiable intangible assets recorded in connection with the Merger. Assuming there are no impairments and no acquisitions,
we expect to record $9.2 million in amortization expense in each of the next seven fiscal quarters, $9.1 million in amortization expense in each of the seven fiscal quarters following thereafter and finally, $3.9 million in amortization expense in
the first quarter of fiscal 2015.



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##### Table of Contents

Restructuring, Acquisition and Other Charges.    In connection
with our restructuring plans put in place on April 30, 2009 and again on March 1, 2010, and in connection with the Merger and the issuance of debt and other activities not part of ongoing operations, we recorded $0.5 million and $2.6
million in restructuring, acquisition and other charges in the quarter and six months ended July 31, 2010, respectively, as compared to $0.4 million and $2.2 million in the same quarter and six months, respectively, a year ago. Restructuring,
acquisition and other charges for the three months and six months ended July 31, 2010 and 2009 are categorized as follows (in thousands):



|                                                                                                                                                                                                                           |  |                            |      |   |                          |   |     |      |  |      |       |  |   |      
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---- | - | ------------------------ | - | --- | ---- |  | ---- | ----- |  | - | -----
|                                                                                                                                                                                                                           |  | Three Months EndedJuly 31, |      |   | Six Months EndedJuly 31,
|                                                                                                                                                                                                                           |  | 2010                       |      |   | 2009                     |   |     | 2010 |  | 2009
|Sponsor fees, administration fees and other costs related to the Merger and the issuance of debt                                                                                                                           |  | $                          | 310  |   |                          | $ | 327 |      |  | $    | 620   |  | $ | 614  
|Restructuring charges consisting principally of severance, payroll taxes and other employee benefits, facilities closures and
legal and other miscellaneous costs(1)                                                       |  |                            | (225 | ) |                          |   | (18 | )    |  |      | 925   |  |   | 1,546
|Other redundancy costs not related to our restructuring plans including severance and other employee related costs, costs to
establish or liquidate entities, and other miscellaneous costs not part of ongoing operations |  |                            | 367  |   |                          |   | 55  |      |  |      | 1,077 |  |   | 55   
|                                                                                                                                                                                                                           |  |                            |      |   |                          |   |     |      |  |      |       |  |   |      
|Total restructuring, acquisition and other charges                                                                                                                                                                         |  | $                          | 452  |   |                          | $ | 364 |      |  | $    | 2,622 |  | $ | 2,215
|                                                                                                                                                                                                                           |  |                            |      |   |                          |   |     |      |  |      |       |  |   |      



|(1) | See Note 3 of notes to our unaudited condensed consolidated financial statements for additional information related to our restructuring plans.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

Goodwill Impairment.    In the quarter ended July 31, 2010, we corrected
certain immaterial errors related to acquisition purchase accounting allocations and tax reserves that resulted in recording an impairment charge in the three months and six months ended July 31, 2010 totaling $1.4 million. See Notes 1(c)
Correction of Immaterial Errors and 4(a) Goodwillof notes to our unaudited condensed consolidated financial statements for further details regarding the correction of immaterial errors and the resulting
goodwill impairment charge.

Other Income (Expense)

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



|                                                  |      |                             |            |      |                           |      |                    |    |  |      |            |   |      |      |    |                    |   |         |    |  |   |         |    |  |   |        |   |  |      |   
|------------------------------------------------- | ---- | --------------------------- | ---------- | ---- | ------------------------- | ---- | ------------------ | -- |  | ---- | ---------- | - | ---- | ---- | -- | ------------------ | - | ------- | -- |  | - | ------- | -- |  | - | ------ | - |  | ---- | --
|                                                  |      | Three Months Ended July 31, |            |      | Six Months Ended July 31, |     
|                                                  | 2010 |                             |            | 2009 |                           |      | Increase(Decrease) |    |  | 2010 |            |   | 2009 |      |    | Increase(Decrease) |  
|                                                  |      |                             | In Dollars |      |                           | In % |                    |    |  |      | In Dollars |   |      | In % |   
|Other income (expense):                           |      |                             |            |      |                           |      |                    |    |  |      |            |   |      |      |    |                    |   |         |    |  |   |         |    |  |   |        |   |  |      |   
|Interest income                                   |      | $                           | 55         |      |                           | $    | 134                |    |  | $    | (79        | ) |      | (59  | )% |                    | $ | 90      |    |  | $ | 347     |    |  | $ | (257   | ) |  | (74  | )%
|Gain on early extinguishment of debt              |      |                             |           |      |                           |      | 1,038              |    |  |      | (1,038     | ) |      | (100 | )% |                    |   |        |    |  |   | 4,602   |    |  |   | (4,602 | ) |  | (100 | )%
|Interest expense                                  |      |                             | (6,018     | )    |                           |      | (8,591             | )  |  |      | 2,573      |   |      | (30  | )% |                    |   | (13,193 | )  |  |   | (17,257 | )  |  |   | 4,064  |   |  | (24  | )%
|Change in the fair value of derivative instrument |      |                             |           |      |                           |      | 1,033              |    |  |      | (1,033     | ) |      | (100 | )% |                    |   | 1,616   |    |  |   | 1,447   |    |  |   | 169    |   |  | 12   | % 
|Amortization and write-off of debt issuance costs |      |                             | (436       | )    |                           |      | (674               | )  |  |      | 238        |   |      | (35  | )% |                    |   | (869    | )  |  |   | (1,306  | )  |  |   | 437    |   |  | (33  | )%
|                                                  |      |                             |            |      |                           |      |                    |    |  |      |            |   |      |      |    |                    |   |         |    |  |   |         |    |  |   |        |   |  |      |   
|Total other income (expense)                      |      | $                           | (6,399     | )    |                           | $    | (7,060             | )  |  | $    | 661        |   |      | (9   | )% |                    | $ | (12,356 | )  |  | $ | (12,167 | )  |  | $ | (189   | ) |  | 2    | % 
|                                                  |      |                             |            |      |                           |      |                    |    |  |      |            |   |      |      |    |                    |   |         |    |  |   |         |    |  |   |        |   |  |      |   
|Percentage of total revenue                       |      |                             | (13        | )%   |                           |      | (13                | )% |  |      |            |   |      |      |    |                    |   | (12     | )% |  |   | (12     | )% |  |   |        |   |  |      |   



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Interest Income.    For the current quarter and six months ended
July 31, 2010, when compared to the same quarter and six months a year ago, the dollar decrease in interest income is predominantly due to decreases in balances in interest bearing accounts, such as cash and cash equivalents, resulting from
servicing and paying down principal on our debt and, to a lesser extent, lower yields, all partially offset by increases in cash balances resulting from the accumulation of free cash flows from operations.

Gain on Early Extinguishment of Debt.In the quarter and six months ended July 31, 2009, we recorded
gains on the early extinguishment of debt totaling $1.0 million and $4.6 million, respectively, following repurchases of our senior subordinated notes. See Note 7 of notes to our unaudited condensed consolidated financial statements for additional
information related to our debt.

Interest Expense.    For the quarter and six months ended
July 31, 2010, when compared to the same quarter and six months a year ago, the dollar decrease in interest expense is predominantly due to our paying down principal on our senior subordinated notes totaling $24.4 million in the first half of
fiscal 2010 and paying down principal on our revolving term credit facility and senior secured term loan totaling $30.0 million and $2.0 million, respectively, in the fiscal quarter ended April 30, 2010. See Note 7 of notes to our
unaudited condensed consolidated financial statements for additional information related to our debt.

Change in the Fair
Value of Derivative Instrument.    We used an interest rate swap as part of our interest rate risk management strategy and to comply with certain requirements of our senior secured credit agreement to enter a hedging
agreement with a term of at least two years. In the second fiscal quarter ended July 31, 2006, we entered into an interest rate swap transaction to effectively convert the variable interest rate on a portion of the $400.0 million senior
secured term loan to a fixed rate. The swap, which expired on April 10, 2010, was recorded on the balance sheet at fair value. The swap was not designated as an accounting hedge, and accordingly, changes in the fair value of the derivative were
recognized in the statement of operations. The notional amount of the swap was $250.0 million initially declining over time to $126.0 million at the time the swap transaction expired on April 10, 2010. Under the terms of the swap, we
made interest payments based on a fixed rate equal to 5.38% and received interest payments based on the LIBOR setting rate, set in arrears. In the quarter ended April 30, 2010, which was the final quarter for our interest rate swap contract, we
recorded $1.6 million in income related to the changes in the fair value of the derivative, as compared to $1.0 million and $1.4 million in income related to the changes in the fair value of the derivative in the quarter and six months ended
July 31, 2009, respectively. We do not expect to enter into a similar interest rate swap during fiscal year 2011.

Amortization and Write-Off of Debt Issuance Costs.    In connection with the Merger, we recorded $16.1 million
in debt issuance costs, reduced by accumulated amortization totaling $9.7 million as of July 31, 2010. In the quarter and six months ended July 31, 2010, we recorded $0.4 million and $0.9 million in amortization and write-off of debt
issuance costs, respectively, as compared to $0.7 million and $1.3 million in the same quarter and six months, respectively, a year ago. For both the quarter and six months ended July 31, 2010, when compared to the same quarter and six months a
year ago, the decrease in amortization and write-off of debt issuance costs is predominantly due to the write-off of unamortized debt issuance costs of approximately $0.3 million and $0.4 million recorded in the year ago quarter and six months,
respectively, associated with the early extinguishment of senior subordinated notes. Assuming we do not incur additional debt or extinguish senior subordinated notes before maturity, we expect to record $0.4 million to $0.5 million per quarter in
amortization expense over the next ten fiscal quarters through the end of fiscal 2013 and $0.1 million to $0.2 million per quarter in amortization expense over the eleven fiscal quarters following thereafter through the end of fiscal 2016.



28



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Income Tax Benefit

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



|                            |      |                             |            |      |                           |   |                    |    |  |            |       |      |      |    |  |                    |        |    |  |   |        |    |  |   |       |  |     |   
|--------------------------- | ---- | --------------------------- | ---------- | ---- | ------------------------- | - | ------------------ | -- |  | ---------- | ----- | ---- | ---- | -- |  | ------------------ | ------ | -- |  | - | ------ | -- |  | - | ----- |  | --- | --
|                            |      | Three Months Ended July 31, |            |      | Six Months Ended July 31, |  
|                            | 2010 |                             |            | 2009 |                           |   | Increase(Decrease) |    |  | 2010       |       |      | 2009 |    |  | Increase(Decrease) |       
|                            |      |                             | In Dollars |      | In %                      |   |                    |    |  | In Dollars |       | In % |     
|Income tax benefit          |      | $                           | (3,008     | )    |                           | $ | (5,081             | )  |  | $          | 2,073 |      | (41  | )% |  | $                  | (7,227 | )  |  | $ | (9,398 | )  |  | $ | 2,171 |  | (23 | )%
|                            |      |                             |            |      |                           |   |                    |    |  |            |       |      |      |    |  |                    |        |    |  |   |        |    |  |   |       |  |     |   
|Percentage of total revenue |      |                             | (6         | )%   |                           |   | (9                 | )% |  |            |       |      |      |    |  |                    | (7     | )% |  |   | (9     | )% |  |   |       |  |     |   

Income Tax Benefit.    The income tax benefit was $3.0 and
$7.2 million in the quarter and six months ended July 31, 2010, respectively, as compared to $5.1 million and $9.4 million in the same quarter and six months, respectively, a year ago. The Companys projected effective income tax
benefit rate for fiscal year 2011 is 51%. The Companys effective income tax benefit rate for fiscal year 2010 was 59%. The Companys effective income tax benefit rate is greater than the statutory rate due to the impacts of permanently
reinvested foreign earnings, the domestic production deduction and state taxes. See Note 8 of notes to our unaudited condensed consolidated financial statements included elsewhere in this report for further information regarding income taxes
and its impact on our results of operations and financial position.

Liquidity and Capital Resources

Cash and Cash Equivalents.    Since our inception, we have financed our operations and met our capital
expenditure requirements through cash flows from operations. As of July 31, 2010, we had $103.3 million in cash and cash equivalents.

Net Cash Provided by Operating Activities.    Cash flows provided by operating activities were
$11.5 million and $9.6 million in the six months ended July 31, 2010 and the same six months a year ago, respectively. In the six months ended July 31, 2010, our cash flows provided by operating activities exceeded net loss
principally due to the inclusion of non-cash expenses in net loss and a decrease in accounts receivable, all partially offset by interest payments made on the term credit facility and subordinated notes totaling $13.4 million, cash collections
in advance of revenue recognition for maintenance contracts, decreases in accrued expenses and other liabilities and income tax payments net of refunds totaling $2.9 million. In the six months ended July 31, 2009, our cash flows provided by
operating activities exceeded net loss principally due to the inclusion of non-cash expenses in net loss and a decrease in accounts receivable, all partially offset by interest payments made on the term credit facility and subordinated notes
totaling $17.6 million, income tax payments net of refunds totaling $8.9 million, cash collections in advance of revenue recognition for maintenance contracts and decreases in accrued expenses and other liabilities.

Net Cash Used in Investing Activities.    Net cash used in investing activities was $0.8 million and $3.1
million in the six months ended July 31, 2010 and the same six months a year ago, respectively. In the six months ended July 31, 2010, net cash used in investing activities related to the purchase of computer equipment and office furniture
and equipment totaling $0.6 million and capitalized software totaling $0.2 million. In the six months ended July 31, 2009, net cash used in investing activities related to capitalized software totaling $2.4 million, the purchase of computer
equipment and office furniture and equipment totaling $0.5 million and acquisition related costs paid totaling $0.2 million related to Projity.

Net Cash Used in Financing Activities.    Net cash used in financing activities was $32.4 million and
$22.1 million in the six months ended July 31, 2010 and the same six months a year ago, respectively. In the six months ended July 31, 2010, net cash used in financing activities principally related to principal payments made on the
revolving term credit facility and senior secured term loan totaling $30.0 million and $2.0 million,



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respectively, and the repurchases of common stock totaling $0.3 million. In the six months ended July 31, 2009, net cash used in financing activities principally related to principal
payments made on the senior subordinated notes and senior secured term loan totaling $19.8 million and $2.0 million, respectively, and the repurchases of common stock totaling $0.2 million.

Contractual Obligations and Commitments

As a result of the acquisition transactions related to the Merger, we became highly leveraged. As of July 31, 2010, we had
outstanding $494.0 million in aggregate indebtedness. Our liquidity obligations are significant, primarily due to debt service obligations. Our interest expense for the quarter and six months ended July 31, 2010 was $6.0 million and $13.2
million, respectively, as compared to $8.6 million and $17.3 million in the same quarter and six months, respectively, a year ago.

We believe that current cash and cash equivalents, and cash flows from operations will satisfy our working capital and capital
expenditure requirements through the fiscal year ending January 31, 2011. At some point in the future, we may require additional funds for either operating or strategic purposes and may seek to raise additional funds through public or private
debt or equity financing. If we are required to seek additional financing in the future through public or private debt or equity financing, there is no assurance that this additional financing will be available or, if available, will be upon
reasonable terms and not legally or structurally senior to or on parity with our existing debt obligations.

The following is
a summary of our various contractual commitments, including non-cancelable operating lease agreements for office space that expire between calendar years 2011 and 2013. All periods start from August 1, 2010.



|                                                  |  |                           |         |                 |   |           |  |           |         |            |   |        |  |   |        
|------------------------------------------------- |  | ------------------------- | ------- | --------------- | - | --------- |  | --------- | ------- | ---------- | - | ------ |  | - | -------
|                                                  |  | Payments Due by Period(2)
|                                                  |  | Total                     |         | Less than1 year |   | 1-3 years |  | 3-5 years |         | Thereafter
|                                                  |  | (in thousands)           
|Operating lease obligations                       |  | $                         | 5,888   |                 | $ | 4,201     |  | $         | 1,687   |            | $ |       |  | $ |       
|Credit Facility:                                  |  |                           |         |                 |   |           |  |           |         |            |   |        |  |   |        
|Senior secured term loan due March 10, 2013       |  |                           | 316,000 |                 |   |          |  |           | 316,000 |            |   |       |  |   |       
|Revolving term credit facility due March 10, 2012 |  |                           | 35,000  |                 |   |          |  |           | 35,000  |            |   |       |  |   |       
|Senior subordinated notes due March 15, 2016      |  |                           | 142,952 |                 |   |          |  |           |        |            |   |       |  |   | 142,952
|Scheduled interest on debt(1)                     |  |                           | 106,296 |                 |   | 23,972    |  |           | 43,391  |            |   | 29,663 |  |   | 9,270  
|                                                  |  |                           |         |                 |   |           |  |           |         |            |   |        |  |   |        
|                                                  |  | $                         | 606,136 |                 | $ | 28,173    |  | $         | 396,078 |            | $ | 29,663 |  | $ | 152,222
|                                                  |  |                           |         |                 |   |           |  |           |         |            |   |        |  |   |        



|(1) | Scheduled interest on debt is calculated through the instruments due date and assumes no principal paydowns or borrowings. Scheduled interest on debt includes the
seven year senior secured term loan due March 10, 2013 at an annual rate of 2.53656%, which is the rate in effect as of July 31, 2010, the six year revolving term credit facility due March 10, 2012 at an annual rate of 2.78656%, which
is the rate in effect as of July 31, 2010, the commitment fee on the unutilized amount of the six year revolving term credit facility due March 10, 2012 at the stated annual rate of 0.5%, and the ten year senior subordinated notes due
March 15, 2016 at the stated annual rate of 10.375%.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This table excludes our unrecognized tax benefits totaling $6.2 million as of July 31, 2010 since we have determined that the timing of payments with respect to
this liability cannot be reasonably estimated.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accounts Receivable and Deferred
Revenue.    At July 31, 2010, we had accounts receivable, net of allowances, of $18.9 million and total deferred revenue of $70.6 million.



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Off-Balance Sheet Arrangements.    As part of our ongoing
operations, 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 July 31, 2010, we were not involved in any unconsolidated SPE transactions.

Senior Secured Credit Agreement

In connection with the consummation of the Merger, we entered into a senior secured credit agreement pursuant to a debt commitment we
obtained from affiliates of the initial purchasers of our senior subordinated notes.

General.    The borrower under the senior secured credit agreement initially was Spyglass Merger Corp. and
immediately following completion of the Merger became Serena. The senior secured credit agreement provides for (1) a seven-year term loan in the amount of $400.0 million amortizing at a rate of 1.00% per year on a quarterly basis for the
first six and three-quarter years after the closing date of the acquisition transactions, with the balance paid at maturity, and (2) a six-year revolving credit facility that permits loans in an aggregate amount of up to $75.0 million (see
discussion below regarding default by a participating lender), including a letter of credit facility and a swing line facility. In addition, subject to certain terms and conditions, the senior secured credit agreement provides for one or more
uncommitted incremental term loan or revolving credit facilities in an aggregate amount not to exceed $150.0 million. Proceeds of the term loan on the initial borrowing date were used to partially finance the Merger, to refinance certain
indebtedness of Serena and to pay fees and expenses incurred in connection with the Merger. Proceeds of the revolving credit facility have been, and any incremental facilities will be, used for working capital and general corporate purposes of the
borrower and its restricted subsidiaries.

Interest Rates and Fees.    The $400.0 million term
loan, of which $316.0 million was outstanding as of July 31, 2010, bears interest at a rate equal to three-month LIBOR plus 2.00%. That rate was 2.53656% as of July 31, 2010. The revolving term credit facility, of which $35.0 million was
outstanding as of July 31, 2010, bears interest at a rate equal to three-month LIBOR plus 2.25%. That rate was 2.78656% as of July 31, 2010. More generally, the loans under the senior secured credit agreement bear interest, at the option
of the borrower, at the following:



| |  |  | a rate equal to the London Interbank Offered Rate, or LIBOR, plus an applicable margin of (1) 2.00% with respect to the term loan and
(2) 2.25% with respect to the revolving credit facility or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the alternate base rate, which is the higher of (1) the corporate base rate of interest announced by the administrative agent and (2) the
Federal Funds rate plus 0.50%, plus, in each case, an applicable margin of (a) 1.25% with respect to the term loan and (b) 1.50% with respect to the revolving credit facility.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The revolving term credit facility bears an annual commitment fee of 0.50% on the undrawn portion of that facility commencing on the date
of execution and delivery of the senior secured credit agreement. As a result of the Company borrowing $65.0 million under the revolving term Credit Facility in the quarter ended October 31, 2008 and Lehman Commercial Paper, Inc., or LCPI,
becoming a defaulting lender due to its failure to fund its loan commitment, the annual commitment fee of 0.50% was not payable pursuant to the terms of the senior secured credit agreement until April 2010, when a $30 million portion of the loans
under the revolving Credit Facility was repaid.

We used an interest rate swap as part of our interest rate risk management
strategy and to comply with certain requirements of our senior secured credit agreement to enter a hedging agreement with a term of at least two years. In the second fiscal quarter ended July 31, 2006, we entered into an interest rate swap
transaction to effectively convert the variable interest rate on a portion of the $400.0 million senior secured term loan to a fixed rate. The swap, which expired on April 10, 2010, was recorded on the consolidated balance sheet at fair
value.



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The swap was not designated as an accounting hedge and accordingly, changes in the fair value of the derivative were recognized in the consolidated statement of operations. The notional amount of
the swap was $250.0 million initially and amortized down over time to $126.0 million at the time the swap transaction expired on April 10, 2010. Under the terms of the swap, we made interest payments based on a fixed rate equal to
5.38% and received interest payments based on the LIBOR setting rate, set in arrears. We do not expect to enter into a similar interest rate swap during fiscal year 2011.

After our delivery of financial statements and a computation of the maximum ratio of total debt (defined in the senior secured credit
agreement) to trailing four quarters of EBITDA (defined in the senior secured credit agreement), or total leverage ratio, for the first full quarter ending after the closing date of the Merger, the applicable margins and the commitment fee became
subject to a grid based on the most recent total leverage ratio.

Prepayments.    At our option,
(1) amounts outstanding under the term loan may be voluntarily prepaid and (2) the unutilized portion of the commitments under the revolving credit facility may be permanently reduced and the loans under such facility may be voluntarily
repaid, in each case subject to requirements as to minimum amounts and multiples, at any time in whole or in part without premium or penalty, except that any prepayment of LIBOR rate advances other than at the end of the applicable interest periods
will be made with reimbursement for any funding losses or redeployment costs of the lenders resulting from the prepayment. Loans under the term loan and under any incremental term loan facility are subject to mandatory prepayment with (a) 50%
of annual excess cash flow with certain step downs to be based on the most recent total leverage ratio and agreed upon by the issuer and the lenders, (b) 100% of net cash proceeds of asset sales and other asset dispositions by the borrower or
any of its restricted subsidiaries, subject to various reinvestment rights of our company and other exceptions, and (c) 100% of the net cash proceeds of the issuance or incurrence of debt by our company or any of its restricted subsidiaries,
subject to various baskets and exceptions.

We have made principal payments totaling $25 million and $55 million in each of
the fiscal years ended January 31, 2007 and January 31, 2008, respectively, and $2 million in the fiscal year ended January 31, 2010 on the $400 million senior secured term loan.

In April 2010, we made a mandatory principal payment totaling $2 million on the senior secured term loan and a voluntary principal
payment totaling $30 million on the revolving term credit facility. Given the aggregate principal payments totaling $32 million in the first quarter of fiscal 2011, we do not expect that there will be a mandatory excess cash principal payment within
the next twelve months.

Guarantors.    All obligations under the senior secured credit agreement
are to be guaranteed by each future direct and indirect restricted subsidiary of our company, other than foreign subsidiaries. We do not have any domestic subsidiaries and, accordingly, there are no guarantors.

Security.    All obligations of our company and each guarantor (if any) under the senior secured credit
agreement are secured by the following:



| |  |  | a perfected lien on and pledge of (1) the capital stock and intercompany notes of each existing and future direct and indirect domestic subsidiary
of our company, (2) all the intercompany notes of our company and (3) 65% of the capital stock of each existing and future direct and indirect first-tier foreign subsidiary of our company, and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a perfected first priority lien, subject to agreed upon exceptions, on, and security interest in, substantially all of the tangible and intangible
properties and assets of the company and each guarantor.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Covenants, Representations and
Warranties.    The senior secured credit agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, investments,
capital expenditures, sales of assets, mergers and acquisitions, liens



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and dividends and other distributions. There are no financial covenants included in the senior secured credit agreement, other than a minimum interest coverage ratio and a maximum total leverage
ratio as discussed below under Covenant Compliance.

Events of Default.    Events of
default under the senior secured credit agreement include, among others, nonpayment of principal or interest, covenant defaults, a material inaccuracy of representations or warranties, bankruptcy and insolvency events, cross defaults and a change of
control.

Senior Subordinated Notes

As of July 31, 2010, we had outstanding $143.0 million principal amount of senior subordinated notes, bearing interest at a rate of
10.375%, payable semi-annually on March 15 and September 15, and maturing on March 15, 2016. The notes are our unsecured, senior subordinated obligations. The notes are subject to redemption at our option under terms and conditions
specified in the indenture related to the notes, and the holders of the notes have the right to require us to repurchase some or all the notes at 101% of their face amount, plus accrued and unpaid interest, upon certain change of control events.

In the fiscal year ended January 31, 2009, we repurchased, in eight separate privately negotiated transactions, an
aggregate of $32.6 million of principal amount of our original outstanding $200.0 million senior subordinated notes. In the fiscal year ended January 31, 2010, we repurchased, in six separate privately negotiated transactions, an aggregate of
$24.4 million of principal amount of our original outstanding $200.0 million senior subordinated notes. These repurchases resulted in gains of $8.7 million and $4.6 million from the extinguishment of debt in the fiscal years ended January 31,
2009 and 2010, respectively.

In September 2010 we repurchased, in two separate privately negotiated transactions, an
aggregate of $8.7 million of principal amount of our senior subordinated notes. The resulting loss from the extinguishment of debt will not be material.

We may from time to time, in our sole discretion, purchase, redeem or retire our senior subordinated notes in privately negotiated or
open market transactions by tender offer or otherwise.

Covenant Compliance

Our senior secured credit agreement and the indenture governing the senior subordinated notes contain various covenants that limit our
ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries ability to, among other things:



| |  |  | incur additional indebtedness or issue certain preferred shares;
| | - |  | ----------------------------------------------------------------



| |  |  | pay dividends on, redeem or repurchase our capital stock or make other restricted payments;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | make investments;
| | - |  | -----------------



| |  |  | make capital expenditures;
| | - |  | --------------------------



| |  |  | create certain liens;
| | - |  | ---------------------



| |  |  | sell certain assets;
| | - |  | --------------------



| |  |  | enter into agreements that restrict the ability of our subsidiaries to make dividend or other payments to us;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | guarantee indebtedness;
| | - |  | -----------------------



| |  |  | engage in transactions with affiliates;
| | - |  | ---------------------------------------



| |  |  | prepay, repurchase or redeem the notes;
| | - |  | ---------------------------------------



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| |  |  | create or designate unrestricted subsidiaries; and
| | - |  | --------------------------------------------------



| |  |  | consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

In addition, under our senior secured credit agreement, we are required to satisfy and maintain specified
financial ratios and other financial condition tests, including minimum interest coverage ratio and a maximum total leverage ratio. We were in compliance with all of the covenants under the secured credit agreement and indenture as of July 31,
2010. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests in the future. A breach of any of these covenants would result in a default
(which, if not cured, could mature into an event of default) and in certain cases an immediate event of default under our senior secured credit agreement. Upon the occurrence of an event of default under our senior secured credit agreement, all
amounts outstanding under our senior secured credit agreement could be declared to be (or could automatically become) immediately due and payable and all commitments to extend further credit could be terminated.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is a non-GAAP financial measure used to determine our
compliance with certain covenants contained in our senior secured credit agreement. Adjusted EBITDA represents EBITDA further adjusted to exclude certain defined unusual items and other adjustments permitted in calculating covenant compliance under
our senior secured credit agreement. We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors regarding our compliance with the financial covenants under our senior secured credit agreement.

The breach of financial covenants in our senior secured credit agreement (i.e., those that require the maintenance of ratios
based on Adjusted EBITDA) would force us to seek a waiver or amendment with the lenders under our senior secured credit agreement, and no assurance can be given that we will be able to obtain any necessary waivers or amendments on satisfactory
terms, if at all. The lenders would likely condition any waiver or amendment, if given, on additional consideration from us, such as a consent fee, a higher interest rate, principal repayment or more restrictive covenants and limitations on our
business. Any such breach, if not waived by the lenders, would result in an event of default under that agreement, in which case the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a
default under the indenture governing the senior subordinated notes. Additionally, under our debt agreements, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to
ratios based on Adjusted EBITDA.

Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those
terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service
requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges
resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, the definition of Adjusted EBITDA in the senior secured credit agreement allows us to add back certain defined non-cash, extraordinary,
unusual or non-recurring charges that are deducted in calculating GAAP net income (loss). Our senior secured credit agreement requires that Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, Adjusted EBITDA can be
disproportionately affected by a particularly strong or weak quarter and may not be comparable to Adjusted EBITDA for any subsequent four-quarter period or any complete fiscal year.



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The following is a reconciliation of net loss, a GAAP measure of our operating results, to
Adjusted EBITDA as defined in our debt agreements.



|                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |  
|                                                |  | 2010                       |        |   | 2009                     |   |        | 2010 |  |   | 2009   |  
|Net loss(1)                                     |  | $                          | (3,496 | ) |                          | $ | (1,495 | )    |  | $ | (7,657 | ) |  | $ | (6,310 | )
|Interest expense (income), net(2)               |  |                            | 6,399  |   |                          |   | 7,060  |      |  |   | 12,356 |   |  |   | 12,167 |  
|Income tax benefit                              |  |                            | (3,008 | ) |                          |   | (5,081 | )    |  |   | (7,227 | ) |  |   | (9,398 | )
|Depreciation and amortization expense(3)        |  |                            | 19,090 |   |                          |   | 19,667 |      |  |   | 38,923 |   |  |   | 38,450 |  
|Goodwill impairment                             |  |                            | 1,433  |   |                          |   |       |      |  |   | 1,433  |   |  |   |       |  
|                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|EBITDA                                          |  |                            | 20,418 |   |                          |   | 20,151 |      |  |   | 37,828 |   |  |   | 34,909 |  
|Deferred maintenance writedown(1)               |  |                            | 37     |   |                          |   | 32     |      |  |   | 74     |   |  |   | 67     |  
|Restructuring, acquisition and other charges(4) |  |                            | 452    |   |                          |   | 364    |      |  |   | 2,622  |   |  |   | 2,215  |  
|                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Adjusted EBITDA(1)                              |  | $                          | 20,907 |   |                          | $ | 20,547 |      |  | $ | 40,524 |   |  | $ | 37,191 |  
|                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



|(1) | Net loss for the periods presented includes the periodic effect of the deferred maintenance step-down associated with the Merger. This unrecognized maintenance revenue
is added back in calculating Adjusted EBITDA for purposes of the indenture governing the senior subordinated notes and the senior secured credit agreement.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Interest expense (income), net includes interest income, interest expense, the change in the fair value of derivative instruments, amortization and write-off of debt
issuance costs and gain on early extinguishment of debt.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Depreciation and amortization expense includes depreciation of fixed assets, amortization of leasehold improvements, amortization of acquired technologies, amortization
of other intangible assets and amortization of stock-based compensation. See Note 2 of notes to our unaudited condensed consolidated financial statements for additional information related to stock-based compensation.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Restructuring, acquisition and other charges include employee payroll, severance and other employee related costs associated with transitional activities that are not
expected to be part of our ongoing operations, and travel and other direct costs associated with the Merger. See Note 3 of notes to our unaudited condensed consolidated financial statements for additional information related to restructuring charges
and accruals.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial
instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable, term loan and secured indebtedness. We consider investments in highly liquid instruments purchased with an original maturity of 90 days or less to be cash
equivalents. All of our cash equivalents principally consist of money market funds, and are classified as available-for-sale as of July 31, 2010. We are subject to interest rate risk on the variable interest rate of the secured term loan. We do
not believe that a hypothetical 25% fluctuation in the variable interest rate would have a material impact on our consolidated financial position or results of operations.

Interest Rate Risk.    Historically, our exposure to market risk for changes in interest rates relates
primarily to our short and long-term investments and short and long-term debt obligations.

As of July 31, 2010, we had
$316.0 million of debt under our senior secured credit agreement. A 1% increase in these floating rates would increase annual interest expense by $3.2 million. We have had limited exposure to interest rate fluctuations historically. As a result we
have not used interest rate hedging strategies in the past. However, given our increased exposure to volatility in floating rates after the acquisition transactions, we continue to evaluate hedging opportunities and may enter into hedging
transactions in the future.

Under our senior secured credit agreement, we were required, within 90 days after the closing
date, to fix the interest rate of at least 50% of the aggregate principal amount of indebtedness under our term loan through



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swaps, caps, collars, future or option contracts or similar agreements. We were also required to maintain this interest rate protection for a minimum of two years.

Consequently, in the second fiscal quarter ended July 31, 2006, we entered into an interest rate swap transaction to effectively
convert the variable interest rate on a portion of the $400.0 million senior secured term loan to a fixed rate. The swap, which expired on April 10, 2010, was recorded on our consolidated balance sheet at fair value. The swap was not
designated as an accounting hedge and, accordingly, changes in the fair value of the derivative were recognized in the consolidated statement of operations. The notional amount of the swap was $250.0 million initially and amortized down over
time to $126.0 million at the time the swap transaction expired on April 10, 2010. Under the terms of the swap, we made interest payments based on a fixed rate equal to 5.38% and received interest payments based on the LIBOR setting rate,
set in arrears. In the quarter ended April 30, 2010, which was the final quarter for our interest rate swap contract, we recorded $1.6 million in income related to the changes in the fair value of the derivative, as compared to $1.0 million and
$1.4 million in income related to the changes in the fair value of the derivative in the quarter and six months ended July 31, 2009, respectively. We do not expect to enter into a similar interest rate swap in fiscal year 2011.

Foreign Exchange Risk.    Sales to foreign countries accounted for approximately 33% of the total sales in
both the quarter and six months ended July 31, 2010, as compared to 32% in both the same quarter and six months a year ago. Because we invoice certain foreign sales in currencies other than the United States dollar, predominantly the British
pound sterling and euro, and do not hedge these transactions, fluctuations in exchange rates could adversely affect the translated results of operations of our foreign subsidiaries. Therefore, foreign exchange fluctuations could create a risk of
significant balance sheet gains or losses in our consolidated financial statements. In addition, in the past several years we have benefited from the weakness of the U.S. dollar against other currencies, increasing our net revenues derived from
international operations. In more recent quarters, the U.S. dollar appreciated against these foreign currencies, negatively affecting our net revenues. If the U.S. dollar continues to strengthen against foreign currencies, our future net revenues
could be adversely affected. However, given our foreign subsidiaries net book values as of July 31, 2010 and net cash flows for the most recent fiscal six months ended July 31, 2010, we do not believe that a hypothetical 25%
fluctuation in foreign currency exchange rates would have a material impact on our consolidated financial position or results of operations.



|ITEM 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and Procedures.    Our Chief Executive Officer and Chief Financial Officer,
with the assistance of senior management personnel, have conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange
Act)) as of July 31, 2010. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our annual and quarterly reports filed under the
Exchange Act. 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 were effective as of July 31, 2010.

Changes in Internal Control over Financial Reporting.    There were no changes in our internal
control over financial reporting during the quarter ended July 31, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls.    Our management, including our Chief Executive Officer and the
Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors 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, and 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, have been or will be detected.



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PART IIOTHER INFORMATION



|ITEM 1. | Legal Proceedings
|------- | -----------------

Information with respect to this Item may be found in Note 10 of notes to our unaudited condensed consolidated financial statements in
Part I, Item I of this quarterly report, which information is incorporated into this Item 1 by reference.



|ITEM 1A. | Risk Factors
|-------- | ------------

There have
been no material changes from the risk factors associated with our business, financial condition and results of operations as set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31,
2010.



|ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

On May 8, 2010, one of our current employees exercised a stock option to acquire 5,200 shares of our common stock for an aggregate
exercise price of $6,500.00. The exercise of the stock option was effected through the net exercise of the stock option, with 2,111 shares applied to the payment of the aggregate exercise price, 1,359 shares applied to the payment of applicable
taxes and withholdings and 1,730 shares issued to the employee. The shares of common stock were issued under an exemption from registration requirements pursuant to Rule 701 of the Securities Act of 1933, which provides an exemption for offers and
sales of securities pursuant to certain compensatory benefit plans.



|ITEM 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not Applicable



|ITEM 4. | (Removed and Reserved)
|------- | ----------------------



|ITEM 5. | Other Information
|------- | -----------------

Not
Applicable



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|ITEM 6. | Exhibits
|------- | --------



|            |  |                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Description                                                                               
|31.01      |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|31.02      |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|32.01      |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            | 
|32.02      |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



| | Exhibit is filed herewith.
|- | --------------------------

| | Exhibit is furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

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



SERENA SOFTWARE, INC.By:

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


Date: September 14, 2010



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EXHIBIT INDEX



|            |  |                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Description                                                                               
|31.01      |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|31.02      |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|32.01      |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            | 
|32.02      |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



| | Exhibit is filed herewith.
|- | --------------------------

| | Exhibit is furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



40