##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(MARK ONE)



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



FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2003



OR



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



FOR THE TRANSITION PERIOD FROM
 TO



COMMISSION FILE NO. 000-25285



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SERENA SOFTWARE, INC.

(Exact name of registrant as specified in its charter)



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



2755 CAMPUS DRIVE,
3rdFLOOR, SAN MATEO, CALIFORNIA 94403-2538

(Address of principal executive offices, including zip code)



650-522-6600

(Registrants
telephone number, including area code)



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



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



The number of shares of the
registrants Common Stock, par value $0.001, outstanding as of November 30, 2003 was 39,256,543.



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##### Table of Contents

INDEX



|                             |  |                                                                                                                                           |  | Page
|---------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|PART I FINANCIAL INFORMATION |  |                                                                                                                                          
|                             |  |                                                                                                                                          
|Item 1                       |  | Financial Statements:                                                                                                                     |  |     
|                             |  |                                                                                                                                          
|                             |  | Condensed Consolidated Balance Sheets as of October 31, 2003 and January 31, 2003                                                         |  | 3   
|                             |  |                                                                                                                                          
|                             |  | Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Nine Months Ended October 31, 2003 and 2002 |  | 4   
|                             |  |                                                                                                                                          
|                             |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2003 and 2002                                       |  | 5   
|                             |  |                                                                                                                                          
|                             |  | Notes to Condensed Consolidated Financial Statements                                                                                      |  | 6   
|                             |  |                                                                                                                                          
|Item 2                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                     |  | 16  
|                             |  |                                                                                                                                          
|Item 3                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                |  | 35  
|                             |  |                                                                                                                                          
|Item 4                       |  | Controls and Procedures                                                                                                                   |  | 35  
|                             | 
|PART II OTHER INFORMATION    |  |                                                                                                                                          
|                             |  |                                                                                                                                          
|Item 1                       |  | Legal Proceedings                                                                                                                         |  | 36  
|                             |  |                                                                                                                                          
|Item 2                       |  | Change in Securities and Use of Proceeds                                                                                                  |  | 36  
|                             |  |                                                                                                                                          
|Item 3                       |  | Defaults Upon Senior Securities                                                                                                           |  | 36  
|                             |  |                                                                                                                                          
|Item 4                       |  | Submission of Matters to a Vote of Security Holders                                                                                       |  | 36  
|                             |  |                                                                                                                                          
|Item 5                       |  | Other Information                                                                                                                         |  | 36  
|                             |  |                                                                                                                                          
|Item 6                       |  | Exhibits and Reports on Form 8-K                                                                                                          |  | 36  
|                             | 
|SIGNATURES                   |  | 37                                                                                                                                       
|                             | 
|CERTIFICATIONS               |  |                                                                                                                                          





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##### Table of Contents

PART IFINANCIAL INFORMATION



ITEM 1.    FINANCIAL STATEMENTS



SERENA SOFTWARE, INC.



Condensed
Consolidated Balance Sheets



(In thousands, except share
data)

(Unaudited)



|                                                                                                                                                                       |  | October 31,2003 |         |   | January 31,2003 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | --------------- | -
|ASSETS                                                                                                                                                                 |  |                 |         |   |                 |  
|Current assets:                                                                                                                                                        |  |                 |         |   |                 |  
|Cash and cash equivalents                                                                                                                                              |  | $               | 105,297 |   |                 | $
|Short-term investments                                                                                                                                                 |  |                 | 18,392  |   |                 |  
|Accounts receivable, net of allowance of $868 and $869 at October 31 and January 31, 2003, respectively                                                                |  |                 | 15,296  |   |                 |  
|Deferred taxes, net of liabilities                                                                                                                                     |  |                 | 4,862   |   |                 |  
|Prepaid expenses and other current assets                                                                                                                              |  |                 | 965     |   |                 |  
|                                                                                                                                                                       |  |                 |         |   |                 |  
|Total current assets                                                                                                                                                   |  |                 | 144,812 |   |                 |  
|Long-term investments                                                                                                                                                  |  |                 | 39,753  |   |                 |  
|Property and equipment, net                                                                                                                                            |  |                 | 3,269   |   |                 |  
|Deferred taxes, net of liabilities                                                                                                                                     |  |                 | 259     |   |                 |  
|Goodwill and other intangible assets, net                                                                                                                              |  |                 | 61,632  |   |                 |  
|Other assets                                                                                                                                                           |  |                 | 280     |   |                 |  
|                                                                                                                                                                       |  |                 |         |   |                 |  
|TOTAL ASSETS                                                                                                                                                           |  | $               | 250,005 |   |                 | $
|                                                                                                                                                                       |  |                 |         |   |                 |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                   |  |                 |         |   |                 |  
|Current liabilities:                                                                                                                                                   |  |                 |         |   |                 |  
|Accounts payable                                                                                                                                                       |  | $               | 1,251   |   |                 | $
|Income taxes payable                                                                                                                                                   |  |                 | 4,014   |   |                 |  
|Accrued expenses                                                                                                                                                       |  |                 | 7,020   |   |                 |  
|Deferred revenue                                                                                                                                                       |  |                 | 26,294  |   |                 |  
|                                                                                                                                                                       |  |                 |         |   |                 |  
|Total current liabilities                                                                                                                                              |  |                 | 38,579  |   |                 |  
|Deferred revenue, net of current portion                                                                                                                               |  |                 | 9,254   |   |                 |  
|                                                                                                                                                                       |  |                 |         |   |                 |  
|Total liabilities                                                                                                                                                      |  |                 | 47,833  |   |                 |  
|                                                                                                                                                                       |  |                 |         |   |                 |  
|Commitments and contingencies                                                                                                                                          |  |                 |         |   |                 |  
|Stockholders equity:                                                                                                                                                  |  |                 |         |   |                 |  
|Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding                                                                       |  |                 |        |   |                 |  
|Common stock, $0.001 par value; 90,000,000 shares authorized; 39,162,539 and 40,645,508 shares issued and outstanding at October
31 and January 31, 2003, respectively |  |                 | 39      |   |                 |  
|Additional paid-in capital                                                                                                                                             |  |                 | 93,102  |   |                 |  
|Notes receivable from stockholders                                                                                                                                     |  |                 | (1,211  | ) |                 |  
|Accumulated other comprehensive income                                                                                                                                 |  |                 | 134     |   |                 |  
|Retained earnings                                                                                                                                                      |  |                 | 110,108 |   |                 |  
|                                                                                                                                                                       |  |                 |         |   |                 |  
|Total stockholders equity                                                                                                                                             |  |                 | 202,172 |   |                 |  
|                                                                                                                                                                       |  |                 |         |   |                 |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                             |  | $               | 250,005 |   |                 | $
|                                                                                                                                                                       |  |                 |         |   |                 |  



See accompanying notes
to condensed consolidated financial statements.



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##### Table of Contents

SERENA SOFTWARE, INC.



Condensed
Consolidated Statements of Income and Comprehensive Income



For the Three Months and Nine Months Ended October 31, 2003 and 2002



(In thousands, except per share data)

(Unaudited)



|                                                        |  | Three Months EndedOctober 31, |        | Nine Months EndedOctober 31,
|------------------------------------------------------- |  | ----------------------------- | ------ | ----------------------------
|                                                        |  | 2003                          |        |                             
|Revenue:                                                |  |                               |        |                             
|Software licenses                                       |  | $                             | 10,963 |                             
|Maintenance                                             |  |                               | 13,121 |                             
|Professional services                                   |  |                               | 2,571  |                             
|                                                        |  |                               |        |                             
|Total revenue                                           |  |                               | 26,655 |                             
|                                                        |  |                               |        |                             
|Cost of revenue:                                        |  |                               |        |                             
|Software licenses                                       |  |                               | 129    |                             
|Maintenance                                             |  |                               | 1,606  |                             
|Professional services                                   |  |                               | 2,462  |                             
|                                                        |  |                               |        |                             
|Total cost of revenue                                   |  |                               | 4,197  |                             
|                                                        |  |                               |        |                             
|Gross profit                                            |  |                               | 22,458 |                             
|                                                        |  |                               |        |                             
|Operating expenses:                                     |  |                               |        |                             
|Sales and marketing                                     |  |                               | 7,341  |                             
|Research and development                                |  |                               | 3,671  |                             
|General and administrative                              |  |                               | 1,881  |                             
|Stock-based compensation                                |  |                               |       |                             
|Amortization of intangible assets                       |  |                               | 2,664  |                             
|                                                        |  |                               |        |                             
|Total operating expenses                                |  |                               | 15,557 |                             
|                                                        |  |                               |        |                             
|Operating income                                        |  |                               | 6,901  |                             
|Interest and other income, net                          |  |                               | 677    |                             
|                                                        |  |                               |        |                             
|Income before income taxes                              |  |                               | 7,578  |                             
|Income taxes                                            |  |                               | 2,728  |                             
|                                                        |  |                               |        |                             
|Net income                                              |  | $                             | 4,850  |                             
|                                                        |  |                               |        |                             
|Comprehensive income:                                   |  |                               |        |                             
|Net income                                              |  | $                             | 4,850  |                             
|Other comprehensive (loss) income:                      |  |                               |        |                             
|Foreign currency translation adjustment                 |  |                               | (59    | )                           
|Unrealized (loss) gain on marketable securities         |  |                               | (44    | )                           
|                                                        |  |                               |        |                             
|Other comprehensive (loss) income                       |  |                               | (103   | )                           
|                                                        |  |                               |        |                             
|Total comprehensive income                              |  | $                             | 4,747  |                             
|                                                        |  |                               |        |                             
|Net income per share:                                   |  |                               |        |                             
|Basic                                                   |  | $                             | 0.12   |                             
|                                                        |  |                               |        |                             
|Diluted                                                 |  | $                             | 0.12   |                             
|                                                        |  |                               |        |                             
|Weighted average shares used in per share calculations: |  |                               |        |                             
|Basic                                                   |  |                               | 39,545 |                             
|                                                        |  |                               |        |                             
|Diluted                                                 |  |                               | 40,173 |                             
|                                                        |  |                               |        |                             



See accompanying notes
to condensed consolidated financial statements.



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##### Table of Contents

SERENA SOFTWARE, INC.



Condensed
Consolidated Statements of Cash Flows



For the Nine
Months Ended October 31, 2003 and 2002



(In thousands)

(Unaudited)



|                                                                                  |  | Nine Months EndedOctober 31, |        
|--------------------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                                  |  | 2003                         |        
|Cash flows from operating activities:                                             |  |                              |        
|Net income                                                                        |  | $                            | 15,384 
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |        
|Depreciation                                                                      |  |                              | 1,170  
|Provision in allowance for bad debts                                              |  |                              | 254    
|Gain on disposal of property and equipment                                        |  |                              | (2     
|Accrued interest on notes receivable from stockholders, net of cash received      |  |                              | 1,281  
|Amortization of deferred stock-based compensation                                 |  |                              |       
|Amortization of intangible assets                                                 |  |                              | 5,881  
|Changes in operating assets and liabilities:                                      |  |                              |        
|Accounts receivable                                                               |  |                              | 2,526  
|Prepaid expenses and other assets                                                 |  |                              | (32    
|Accounts payable                                                                  |  |                              | 594    
|Income taxes payable                                                              |  |                              | (3,935 
|Accrued expenses                                                                  |  |                              | (2,244 
|Deferred revenue                                                                  |  |                              | (1,161 
|                                                                                  |  |                              |        
|Net cash provided by operating activities                                         |  |                              | 19,716 
|                                                                                  |  |                              |        
|Cash flows used in investing activities:                                          |  |                              |        
|Purchases of property and equipment                                               |  |                              | (843   
|Sales (purchases) of short-term and long-term investments                         |  |                              | 27,340 
|Cash paid for UltiMIS Corporation earn-out                                        |  |                              |       
|Cash paid for TeamShare Inc., net of cash received                                |  |                              | (19,425
|                                                                                  |  |                              |        
|Net cash provided by (used in) investing activities                               |  |                              | 7,072  
|                                                                                  |  |                              |        
|Cash flows from financing activities:                                             |  |                              |        
|Exercise of stock options under the employee stock option plan                    |  |                              | 4,251  
|Sale of common stock under the employee stock purchase plan                       |  |                              | 779    
|Payment of principal on notes receivable from stockholders                        |  |                              | 6,026  
|Common stock repurchased under the stock repurchase plan                          |  |                              | (37,935
|                                                                                  |  |                              |        
|Net cash (used in) provided by financing activities                               |  |                              | (26,879
|                                                                                  |  |                              |        
|Effect of exchange rate changes on cash                                           |  |                              | (14    
|                                                                                  |  |                              |        
|Net (decrease) increase in cash and cash equivalents                              |  |                              | (105   
|Cash and cash equivalents at beginning of period                                  |  |                              | 105,402
|                                                                                  |  |                              |        
|Cash and cash equivalents at end of period                                        |  | $                            | 105,297
|                                                                                  |  |                              |        
|Supplemental disclosures of cash flow information:                                |  |                              |        
|Income taxes paid                                                                 |  | $                            | 13,199 
|                                                                                  |  |                              |        
|Non-cash investing and financing activity:                                        |  |                              |        
|Unrealized (loss) gain on marketable securities                                   |  | $                            | (561   
|                                                                                  |  |                              |        
|Contingent consideration accrued for the UltiMIS acquisition, net                 |  | $                            |       
|                                                                                  |  |                              |        



See accompanying notes
to condensed consolidated financial statements.



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##### Table of Contents

SERENA SOFTWARE, INC.



NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



SERENA Software, Inc. (SERENA or the
Company) is the Enterprise Change Management (ECM) industry leader providing solutions that help companies automate change to the applications that run their businesses. The Companys solutions take a cross-platform and
cross-organizational view of enterprise applications, allowing customers to define, enforce and automate application lifecycle processes. Its principal markets are North America, and to a lesser extent, Europe.



The accompanying unaudited condensed consolidated financial statements have
been prepared on substantially the same basis as the audited consolidated financial statements, and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, except as otherwise noted, necessary for their
fair presentation. These unaudited condensed consolidated financial statements and the notes thereto have been prepared in accordance with the Instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
disclosures required by accounting principles generally accepted in the United States of America and Regulation S-X for annual financial statements. For these additional disclosures, readers should refer to the Companys annual report on Form
10-K for the fiscal year ended January 31, 2003. The interim results presented are not necessarily indicative of results for any subsequent quarter or for the fiscal year ending January 31, 2004.



Reclassifications



Certain reclassifications have been made to the January 31, 2003 balances in
order to conform to the October 31, 2003 presentation.



(1) Stock-Based
Compensation



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



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##### Table of Contents

SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



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



|                                                                                                                            |  | Three Months EndedOctober 31, |        |   | Nine Months Ended October 31, |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------ | - | ----------------------------- | -
|                                                                                                                            |  | 2003                          |        |   | 2002                          |  
|Net income, as reported                                                                                                     |  | $                             | 4,850  |   |                               | $
|Add: stock-based employee compensation expense included in reported net income, net of tax                                  |  |                               |       |   |                               |  
|Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of
tax |  |                               | (2,205 | ) |                               |  
|                                                                                                                            |  |                               |        |   |                               |  
|Pro forma net income                                                                                                        |  | $                             | 2,645  |   |                               | $
|                                                                                                                            |  |                               |        |   |                               |  
|Basic net income per share:                                                                                                 |  |                               |        |   |                               |  
|As reported                                                                                                                 |  | $                             | 0.12   |   |                               | $
|                                                                                                                            |  |                               |        |   |                               |  
|Pro forma                                                                                                                   |  | $                             | 0.07   |   |                               | $
|                                                                                                                            |  |                               |        |   |                               |  
|Diluted net income per share:                                                                                               |  |                               |        |   |                               |  
|As reported                                                                                                                 |  | $                             | 0.12   |   |                               | $
|                                                                                                                            |  |                               |        |   |                               |  
|Pro forma                                                                                                                   |  | $                             | 0.07   |   |                               | $
|                                                                                                                            |  |                               |        |   |                               |  



For the pro forma
amounts determined under SFAS No. 123, as set forth above, the fair value of each stock option grant under the stock option plans and the fair value of the employees purchase rights under the employee stock purchase plan (ESPP) are
estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the three and nine months ended October 31, 2003 and 2002.



|                         |  | Stock OptionPlans              |  | ESPP                          |  | Stock OptionPlans |  | ESPP
|------------------------ |  | ------------------------------ |  | ----------------------------- |  | ----------------- |  | ----
|                         |  | Three Months Ended October 31, |  | Nine Months Ended October 31,
|                         |  | 2003                           |  | 2002                          |  | 2003              |  | 2002
|Expected life (in years) |  | 4.5                            |  | 4.5                           |  | 0.5               |  | 0.5 
|Risk-free interest rate  |  | 2.9%                           |  | 2.8%                          |  | 1.1%              |  | 1.1%
|Volatility               |  | 101%                           |  | 109%                          |  | 49%               |  | 89% 
|Dividend yield           |  | none                           |  | none                          |  | none              |  | none



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



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##### Table of Contents

SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



highly subjective assumptions including the expected stock price volatility. We used historical volatility rates. Because our employee stock options have
characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of our options.



(2)    Net Income Per Share



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



The following is a reconciliation of the shares used in the computation of basic and diluted net income per share (in thousands):



|                                                                                |  | Three MonthsEnded October 31, |  | Nine Months Ended October 31,
|------------------------------------------------------------------------------- |  | ----------------------------- |  | -----------------------------
|                                                                                |  | 2003                          |  | 2002                         
|Basic net income per shareweighted average number of common shares outstanding |  | 39,545                        |  | 40,420                       
|Effect of potentially dilutive securities outstandingstock options             |  | 628                           |  | 580                          
|                                                                                |  |                               |  |                              
|Shares used in diluted net income per share computation                         |  | 40,173                        |  | 41,000                       
|                                                                                |  |                               |  |                              



Options to purchase
shares of common stock at a share price which is greater than the average closing market price of the shares for the quarter are not included in the computation of diluted earnings per share because the effect of their inclusion would be
anti-dilutive. For both the three and nine month periods ended October 31, 2003, 1,724,562 options to purchase shares of common stock at an average share price of $23.96 were excluded from the computation of diluted EPS. For the same three and nine
month periods a year ago, 3,141,666 options to purchase shares of common stock at an average share price of $20.86 were excluded from the computation of diluted EPS.



(3)    Recent Accounting Pronouncements



In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143
requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. SFAS No. 143 also requires an
enterprise to record a corresponding amount to the liability as an increase in the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) and to depreciate that cost over the remaining useful life of the asset.
The amount of the asset retirement obligation is revised at the end of each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. The Company
adopted the provisions of SFAS No. 143 as of February 1, 2003, and the adoption did not have a material impact on the Companys consolidated financial position or results of operations.



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##### Table of Contents

SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS No. 146 eliminates Emerging Issues Task Force, or EITF, Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring). Under SFAS No. 146, liabilities for costs associated with an exit or disposal activity are recognized when the liabilities are incurred, as opposed to being recognized at the date of entitys commitment to an exit
plan under EITF No. 94-3. Furthermore, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liabilities. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002.



In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Interpretation No. 45 requires a guarantor to include disclosure of certain obligations, and if
applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31,
2002 and did not have a material impact on the Company.



The
following is a summary of our agreements that the Company has determined are within the scope of Interpretation No. 45, or FIN 45, which are separately grandfathered because the guarantees were in effect prior to December 31, 2002. Accordingly, the
Company has no liabilities recorded for these agreements as of October 31, 2003.



As permitted under Delaware law and our by-laws and certificate of incorporation, the Company has agreements whereby the Company indemnifies our officers and directors for certain events or occurrences while the
officer or director is, or was serving, at our request in such capacity. The term of the indemnification period is for the officers or directors lifetime. The maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is unlimited; however, the Company has a directors and officers insurance policy that may enable the Company to recover a portion of any future amounts paid. Assuming the applicability of
coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and other policy provisions, the Company believes the estimated fair value of this indemnification obligation is not material. However, no
assurances can be given that the insurers will not attempt to dispute the validity, applicability or amount of coverage, which attempts may result in expensive and time-consuming litigation against the insurers.



When, as part of an acquisition, the Company acquires all of the stock or all
of the assets and liabilities of a company, the Company assumes the liability for certain events or occurrences that took place prior to the date of acquisition. The maximum potential amount of future payments the Company could be required to make
for such obligations is undeterminable at this time. Accordingly, the Company has no liabilities recorded for these types of agreements as of October 31, 2003.



From time to time, the Company engages various professional service firms which require as a condition of their engagement that the Company undertake
to indemnify them for all claims and damages arising out of their engagement. In the recent past, the Company has not been subject to any significant claims for such losses and has not incurred any material costs in defending or settling claims
related to these indemnification obligations. Accordingly, the Company believes the estimated fair value of these obligations is not material.



The Company undertakes indemnification obligations in our ordinary course of business in connection with, among other things, the licensing of our
products and the provision by the Company of consulting services.



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



Pursuant to these agreements, the Company may indemnify the other party for certain losses suffered or incurred by the indemnified party, generally our
business partners or customers, in connection with various types of claims, which may include, without limitation, claims of intellectual property infringement, certain tax liabilities, negligence and intentional acts in the performance of services
and violations of laws. The term of these indemnification obligations is generally perpetual. In general, the Company attempts to limit the maximum potential amount of future payments the Company could be required to make under these indemnification
obligations to the purchase price paid, but in some cases the obligation may not be so limited. In addition, the Company may, in certain situations, warrant that, for a certain period of time from the date of delivery, our software products will be
free from defects in media or workmanship. From time to time, the Company may also warrant that our professional services will be performed in a good and workmanlike manner. In addition, it is the Companys standard policy to seek to disclaim
most warranties, including any implied or statutory warranties such as warranties of merchantability, fitness for a particular purpose, quality and non-infringement, as well as any liability with respect to incidental, consequential, special
exemplary, punitive or similar damages. In some states, such disclaimers may not be enforceable. If necessary, the Company would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history. In
the recent past, the Company has not been subject to any significant claims for such losses and has not incurred any material costs in defending or settling claims related to these indemnification obligations. Accordingly, the Company believes the
estimated fair value of these agreements is not material.



In
November 2002, the EITF reached a consensus on EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will
perform multiple revenue-generating activities. EITF No. 00-21 became effective for interim periods beginning after June 15, 2003, which is the Companys third quarter of fiscal 2004. The effect of adopting EITF 00-21 this quarter did not have
a material impact on the Companys consolidated financial position or results of operations.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure.SFAS No. 148
amends SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the
reported results. The disclosure provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148.



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



(4)    Restructuring Costs



On August 6, 2001, in response to the general weakening of the worldwide economy and resulting IT spending slowdown, the
Company announced and began to execute its plan to reduce workforce by approximately 12% or 45 positions affecting all parts of the organization and incur costs associated with the closure of facilities. The Company recorded a restructuring charge
in the third quarter of fiscal 2002 consisting principally of severance, payroll taxes and other employee benefits totaling $1.5 million and facilities closures totaling $1.0 million. The Company has realized and expects to continue to realize cost
savings going forward as a result of this reduction and other cost savings initiatives implemented. The Companys restructuring is substantially complete with these actions. The nature of the restructuring charges and the amounts paid through
and accrued as of October 31, 2003 are summarized as follows (in thousands):



|                                                     |  |       |       | As of October 31, 2003
|---------------------------------------------------- |  | ----- | ----- | ----------------------
|                                                     |  | Total |       | Paid                  
|Severance, payroll taxes and other employee benefits |  | $     | 1,483 |                       
|Facilities closures                                  |  |       | 875   |                       
|Legal and other miscellaneous                        |  |       | 70    |                       
|                                                     |  |       |       |                       
|Total restructuring accrual                          |  |       | 2,428 |                       
|                                                     |  |       |       |                       
|Fixed asset impairment                               |  |       | 101   |                       
|                                                     |  |       |       |                       
|Total restructuring charges                          |  | $     | 2,529 |                       
|                                                     |  |       |       |                       



(5)    Goodwill
and Other Intangibles



In July 2001, the FASB approved the
issuance of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 provides guidance on how to account for goodwill and certain intangible assets after an acquisition is completed. The most substantive change is that
goodwill and other indefinite life intangible assets can no longer be amortized but instead should be periodically tested for impairment. In the fiscal quarter ended April 30, 2002, the Company reevaluated its intangible asset lives and no
adjustment to any of the useful lives was determined to be necessary. In the fiscal quarter ended July 31, 2002 and in accordance with Statement No. 142, the Company completed its initial transitional goodwill impairment test and concluded that
there was no impairment of goodwill as of February 1, 2002. With the annual impairment test in the fourth quarter of fiscal 2003, the Company concluded that there was no impairment of goodwill as of January 31, 2003.



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



Goodwill and other intangible assets consisted of the following (in thousands):



|                                              |  | As of October 31,2003 |         |   | As ofJanuary 31,2003 |  
|--------------------------------------------- |  | --------------------- | ------- | - | -------------------- | -
|Goodwill                                      |  | $                     | 35,980  |   |                      | $
|                                              |  |                       |         |   |                      |  
|Other intangible assets:                      |  |                       |         |   |                      |  
|Non-compete agreements                        |  |                       | 1,634   |   |                      |  
|Acquired technology                           |  |                       | 37,476  |   |                      |  
|Maintenance service contracts                 |  |                       | 1,800   |   |                      |  
|Trademark/Trade name portfolio                |  |                       | 200     |   |                      |  
|Customer relationships                        |  |                       | 2,510   |   |                      |  
|                                              |  |                       |         |   |                      |  
|                                              |  |                       | 43,620  |   |                      |  
|Accumulated amortization                      |  |                       | (17,968 | ) |                      |  
|                                              |  |                       |         |   |                      |  
|                                              |  | $                     | 25,652  |   |                      | $
|                                              |  |                       |         |   |                      |  
|Aggregate amortization expense:               |  |                       |         |  
|Nine Months Ended October 31, 2003            |  | $                     | 5,881   |  
|                                              |  |                       |         |  
|Estimated intangible amortization expense:    |  |                       |         |  
|For the remaining three months of Fiscal 2004 |  | $                     | 2,664   |  
|For year ended January 31, 2005               |  |                       | 9,216   |  
|For year ended January 31, 2006               |  |                       | 7,748   |  
|For year ended January 31, 2007               |  |                       | 4,398   |  
|For year ended January 31, 2008               |  |                       | 1,626   |  
|Thereafter                                    |  |                       |        |  
|                                              |  |                       |         |  
|Total                                         |  | $                     | 25,652  |  
|                                              |  |                       |         |  



The weighted average
remaining amortization period for acquired technology is 37 months, trademark/trade name portfolio and customer relationships is 31 months, non-compete agreements is 19 months, and maintenance service contracts is 7 months. The total weighted
average remaining amortization period for all intangible assets is 35 months. The aggregate amortization expense of intangible assets was $2.7 million and $5.9 million for the three and nine months ended October 31, 2003, respectively, and $1.1
million and $3.4 million for the same periods a year ago.



The
changes in the net carrying amount of goodwill for the nine months ended October 31, 2003 are as follows (in thousands):



|Balance as of January 31, 2003                        |  | $ | 28,877
|----------------------------------------------------- |  | - | ------
|Activity during the first nine months of fiscal 2004: |  |   |       
|Goodwill acquired in TeamShare acquisition            |  |   | 7,103 
|Impairment losses recognized                          |  |   |      
|                                                      |  |   |       
|Balance as of October 31, 2003                        |  | $ | 35,980
|                                                      |  |   |       



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



(6)    Stock Repurchase Programs and Repurchase of Common Stock



In February 2003, the Board of Directors authorized the repurchase of up to
1.0 million shares of the Companys Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee
stock programs and general corporate purposes. Under this program and at various times from February 25, 2003 through April 1, 2003, the Company repurchased in aggregate a total of 484,800 shares of its common stock for cash at an average price of
$15.18 per share.



In May 2003, the Board of Directors
authorized the repurchase of up to 1.0 million shares of the Companys Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for
reissuance in connection with employee stock programs and general corporate purposes. Under this program and at various times from June 9, 2003 through July 1, 2003, the Company repurchased in aggregate a total of 634,500 shares of its common stock
for cash at an average price of $20.78 per share.



In August
2003, the Board of Directors authorized the repurchase of up to 1.0 million shares of the Companys Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares
under this program for reissuance in connection with employee stock programs and general corporate purposes. Under this program and at various times from August 27, 2003 through October 1, 2003, the Company repurchased in aggregate a total of
905,800 shares of its common stock for cash at an average price of $19.20 per share.



In November 2003, the Board of Directors authorized the repurchase of up to 1.0 million shares of the Companys Common Stock from time to time in the open market or in privately negotiated block transactions. The
Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes. The timing and size of any future stock repurchases are subject to market conditions, stock
prices, our cash position and other cash requirements going forward.



(7)    Acquisition of TeamShare, Inc.



On June 5, 2003, the Company acquired TeamShare, Inc. (TeamShare), a privately held company specializing in the development of collaborative process and issue management solutions and a leading supplier of
Web-based and team-oriented productivity tools. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of TeamShare are included in the Companys consolidated financial statements
from June 5, 2003.



The acquisition of TeamShare improved the
Companys capabilities and will allow it to compete more effectively in the growing application life cycle management market. The acquisition provides the Company with complimentary request and issue management technology that helps strengthen
its ECM solution offering.



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



The Company acquired 100% of TeamShares outstanding common stock in acquiring all of its assets
and assuming all of its liabilities. The total purchase price was $18.4 million and consisted of cash consideration of $17.9 million, net of in-the-money options proceeds of $0.1 million, and acquisition costs of $0.5 million. The total purchase
price was allocated as follows (in thousands):



|Tangible assets                  |  | $ | 1,601  |  
|-------------------------------- |  | - | ------ | -
|Assumed liabilities              |  |   | (3,814 | )
|Acquired technology              |  |   | 9,850  |  
|Non-compete agreements           |  |   | 690    |  
|Maintenance service contracts    |  |   | 1,800  |  
|Trademark / Trade name portfolio |  |   | 200    |  
|Customer relationships           |  |   | 2,510  |  
|Deferred tax asset               |  |   | 4,491  |  
|Deferred tax liability           |  |   | (6,020 | )
|Goodwill                         |  |   | 7,103  |  
|                                 |  |   |        |  
|Total consideration              |  | $ | 18,411 |  
|                                 |  |   |        |  



Acquired technology,
consisting of current completed technologies at the date of acquisition and valued on the premise of fair market value in continued use under the discounted cash flow approach, is amortized over a three-year period, the period of time the Company
estimates as its economic useful life. Non-compete agreements were entered into with two former TeamShare officers and were valued based on the estimated amount of business that might be lost if these two principals were competing against the
Company and are being amortized over their two-year term. Maintenance service contracts, consisting of existing annual renewable maintenance contracts at the date of acquisition are valued on the premise of fair market value of the total future cash
flows that would be generated from the renewal of such contracts under the discounted cash flow approach and are amortized over a one-year period. Trademark/Trade name portfolio, consisting of the existing TeamTrack trade name at the date of
acquisition is valued on the premise of fair market value of royalties avoided on developed technology revenues under the discounted cash flow approach and is amortized over a three-year period, the period of time the Company estimates as its
economic useful life. Customer relationships, consisting of existing TeamShare customer relationships of varying age and size at the date of acquisition, are valued on the premise of fair market value of future cash flows that would be generated
with existing customer relationships in place net of what would be generated without the existing relationships in place under the discounted cash flow approach and are amortized over a three-year period, the period of time the Company estimates as
its economic useful life. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and is no longer subject to amortization but instead will be measured for impairment annually pursuant to SFAS
No. 142.



With respect to acquired TeamShare intangibles,
the weighted average remaining amortization period for acquired technology, trademark/trade name portfolio and customer relationships is 31 months, non-compete agreements is 19 months, and maintenance service contracts is 7 months. The total
weighted average remaining amortization period for all acquired TeamShare intangible assets is 28 months. All identified intangible assets will be amortized on a straight-line basis over their useful lives. Amortization expense for the current
fiscal quarter and fiscal nine months ended October 31, 2003 was $1.6 million and $2.6 million, respectively. The estimated total amortization expense associated with acquired TeamShare intangible assets is $1.6 million for the remaining three
months of fiscal 2004, $5.1 million for fiscal 2005, $4.3 million for fiscal 2006, and $1.4 million for fiscal 2007.



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In accordance with generally accepted accounting principles of the United States of America, we recorded
a deferred tax asset of $4.5 million for the acquired deferred tax assets relating to net operating loss tax credit carryforwards for tax purposes acquired in the transaction. In addition, a deferred tax liability of $6.0 million was recorded for
the difference between the assigned values and the tax bases of the intellectual property assets acquired in the transaction.



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



This report contains forward-looking statements under the Private Securities Litigation Reform Act of 1995. Certain statements under the captions
Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are forward-looking statements. These forward-looking statements include, but are not limited to,
statements about our plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts. When used in this report, the words expects, anticipates, intends,
plans, believes, seeks, estimates and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under
Factors That May Affect Future Results under Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in, or incorporated by reference into, this report. Factors that could
cause or contribute to such differences include but are not limited to, our reliance on our mainframe products for revenue; the percentage of license revenue typically closed at the end of each quarter making estimation of operating results prior to
the end of the quarter extremely uncertain; weak economic conditions worldwide which may continue to affect the overall demand for software and services, which has resulted in and could continue to result in decreased revenues or lower revenue
growth rates; our ability to successfully integrate our recent acquisition; changes in revenue mix and seasonality; our ability to deliver our products on the distributed systems platform; dependence on revenues from our installed base; continued
demand for additional mainframe MIPS capacity; expansion of our international organizations; and our ability to manage our growth. We assume no obligation to update the forward-looking information contained in this report. It is important that the
discussion below be read together with the attached condensed consolidated financial statements and notes thereto, with the discussion of such risks and uncertainties and with the audited financial statements and notes thereto, and the
Managements Discussion and Analysis of Financial Condition and Results of Operations, contained in the Companys Form 10-K for fiscal 2003.



Overview



SERENA is a leading provider of Enterprise Change Management (ECM) industry leader providing infrastructure software to help companies
automate change to the applications that run their businesses. The Companys solutions take a cross-platform and cross-organizational view of enterprise applications, allowing customers to define, enforce and automate application lifecycle
processes. Our products and services are used to manage and control application change for organizations whose business operations are dependent on managing information technology, or IT. In our 23 year history, we have developed highly effective
solutions for managing software change that enable our customers to improve their return on IT investments by improving application availability, accelerating time to market, and increasing programmer productivity while reducing application
development and IT infrastructure maintenance costs. All large companies have a process for managing change to their internally developed applications, including new version releases, bug fixes, upgrades and application introductions.
Our products help IT managers manage changes to applications by automating and enforcing the process throughout the application life cycle. Our consulting services help companies improve their process by identifying where their current practices
deviate from standard practices and making appropriate recommendations. As of October 31, 2003, our products have been installed in over 3,600 customer sites worldwide and our customers include 43 of the Fortune 50 companies.



In the current fiscal quarter and fiscal nine months ended October 31, 2003,
SERENA experienced increases in total revenues of 8% and 9%, respectively, as total revenues for the quarter were $26.7 million versus $24.6 million in the third quarter of fiscal 2003, and total revenues for the nine months were $75.9 million
versus $69.7 million in the first nine months of fiscal 2003. However, in the most recent completed fiscal year ended January 31, 2003, SERENA experienced a decrease in total revenue as total annual revenues were $95.8 million in fiscal 2003 versus
$98.6 million in fiscal 2002 and $103.6 million in fiscal 2001. The overall demand for the Companys software depends in large part on general and economic business conditions. The recent general



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weakening of the worldwide economy and resulting slowdown in IT spending contributed to the overall decrease in total revenues.



Prior to fiscal 2002, SERENA had grown rapidly as total revenue increased
incrementally from $32.1 million in fiscal 1998 to $103.6 million in fiscal 2001. The growth in total revenue was primarily attributable to increased demand for our mainframe products, and to a lesser extent beginning in the second half of fiscal
2000, the introduction of our distributed systems products, primarily ChangeMan DS, into the marketplace. In general, demand had been increasing as a result of greater awareness of and need for automated third party ECM solutions. We derive
our revenue from software licenses, maintenance and professional services.



Critical Accounting Policies



Managements Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an ongoing basis, management evaluates its estimates and judgements, including those related to revenue recognition, trade accounts receivable and allowance for doubtful accounts, impairment or disposal of long-lived assets, and
employee stock-based compensation.



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



Persuasive evidence of an arrangement exists. It is
SERENAs customary practice to have a written contract, which is signed by both the customer and SERENA, or a purchase order from those customers who have previously negotiated a standard license arrangement with SERENA. In cases where click
wrap licenses apply, the Company accepts purchase orders as persuasive evidence of an arrangement.



Delivery has occurred. SERENAs software is physically delivered to the customer. If an arrangement includes undelivered products or services that
are essential to the functionality of the delivered product, delivery is not considered to have occurred until these products or services are delivered.



The fee is fixed or determinable. SERENAs policy is to not provide customers the right to a refund of any portion of their license fees paid. SERENA
may agree to extended payment terms with a foreign customer based on local customs. Generally, at least 80% of the arrangement fees are due within one year or less. Arrangements with payment terms extending beyond these customary payment terms are
considered not to be fixed or determinable, and revenues from such arrangements are recognized as payments become due and payable.



Collectibility is probable. Collectibility is assessed on a customer-by-customer basis. SERENA typically sells to customers for whom there is a history of
successful collection. If it is determined from the outset of an arrangement that collectibility is not probable, revenues are recognized as cash is collected.



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



The Company sells
its products to its end users and distributors under license agreements. Each new mainframe license includes maintenance, which includes the right to receive telephone support, bug fixes and unspecified upgrades and enhancements, for a
specified duration of time, usually one year. The fee associated



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with such agreements is allocated between software license revenue and maintenance revenue based on the residual method. Software license revenue from these
agreements is recognized upon receipt and acceptance of a signed contract and delivery of the software, provided the related fee is fixed and determinable, collectibility of the revenue is probable and the arrangement does not involve significant
customization of the software. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period, as defined in the applicable software license agreement.



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



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



Trade Accounts Receivable and Allowance for Doubtful
Accounts.    Trade accounts receivable are recorded net of allowance for doubtful accounts. We regularly review the adequacy of our allowance for doubtful accounts through identification of specific receivables where we
expect that payment will likely not be received, and we have established a general reserve policy that is applied to all amounts that are not specifically identified. In determining specific receivables where collection may not be received, we
review past due receivables and give consideration to prior collection history, changes in the customers overall business condition, the potential risk associated with the customers industry or political and economic environment among
other factors. We establish a general reserve for all receivable amounts that have not been specifically identified, by applying a graduated percentage to each invoices relative aging category. The graduated percentage is based on our
historical receivable write-off experience. The allowance for doubtful accounts reflects our best estimate as of the reporting dates. Changes may occur in the future, which may make us reassess the collectibility of amounts and at which time we may
need to provide additional allowances in excess of that currently provided.



Impairment or Disposal of Long-Lived Assets.    The Company reviews its goodwill for impairment when events indicate that its carrying amount may not be recoverable or, at least once a year.
The Company is required to test goodwill for impairment at the reporting unit level. The Company has determined that it has only one reporting unit. The test for impairment is a two-step process:



Step 1:    The Company compares the carrying amount of
its reporting unit, which is the book value of the entire Company, to the fair value of its reporting unit, which corresponds to our market capitalization. If the carrying amount of our reporting unit exceeds its fair value, the Company is required
to perform the second step of the process. If not, no further work is needed.



Step 2:    The Company compares the implied fair value of its reporting unit to its carrying amount. If the carrying amount of our reporting units goodwill exceeds its fair value, an
impairment loss will be recognized in an amount equal to that excess.



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The Company completed Step 1 of this test during the fourth quarter of fiscal 2003 and the Company was
not required to record an impairment loss on goodwill.



The
Company reviews its long-lived assets, including property and equipment and other intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Such comparisons are done when the Company determines that one
or more impairment indicators are present for an asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. If an
asset is to be disposed of, it is reported at the lower of the carrying amount or fair value less costs to sell.



Some of the events that the Company considers as impairment indicators for its long-lived assets, including goodwill, are the following:



| |  |  | Significant underperformance of our Company relative to expected operating results;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Our net book value compared to our market capitalization;
| | - |  | ---------------------------------------------------------



| |  |  | Significant adverse economic and industry trends;
| | - |  | -------------------------------------------------



| |  |  | Significant decrease in the market value of the asset;
| | - |  | ------------------------------------------------------



| |  |  | The extent that the Company uses the asset or changes in the manner that the Company uses it; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Significant changes to the asset since the Company acquired it.
| | - |  | ---------------------------------------------------------------



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



Employee Stock-Based
Compensation.    The Company uses the intrinsic value method to account for stock-based compensation. The Company amortizes deferred stock-based compensation on an accelerated basis in accordance with FASB Interpretation No.
28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.



Results of Operations



References to the dollar and percentage increases or decreases set forth below in this discussion and analysis of SERENAs results of operations are
derived from comparisons between SERENAs condensed consolidated statements of income and comprehensive income for the three and nine month periods ended October 31, 2003 to the condensed consolidated statements of income and comprehensive
income for the three and nine month periods ended October 31, 2002. Historical results include the post-acquisition results of TeamShare from June 5, 2003.



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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.



|                                  |  | Percentage of RevenueThree Months EndedOctober 31, |   |  | Percentage of RevenueNine Months EndedOctober 31, |  
|--------------------------------- |  | -------------------------------------------------- | - |  | ------------------------------------------------- | -
|                                  |  | 2003                                               |   |  | 2002                                              |  
|Revenue:                          |  |                                                    |   |  |                                                   |  
|Software licenses                 |  | 41                                                 | % |  | 47                                                | %
|Maintenance                       |  | 49                                                 | % |  | 45                                                | %
|Professional services             |  | 10                                                 | % |  | 8                                                 | %
|                                  |  |                                                    |   |  |                                                   |  
|Total revenue                     |  | 100                                                | % |  | 100                                               | %
|                                  |  |                                                    |   |  |                                                   |  
|Cost of revenue:                  |  |                                                    |   |  |                                                   |  
|Software licenses                 |  | 1                                                  | % |  | 1                                                 | %
|Maintenance                       |  | 6                                                  | % |  | 6                                                 | %
|Professional services             |  | 9                                                  | % |  | 7                                                 | %
|                                  |  |                                                    |   |  |                                                   |  
|Total cost of revenue             |  | 16                                                 | % |  | 14                                                | %
|                                  |  |                                                    |   |  |                                                   |  
|Gross profit                      |  | 84                                                 | % |  | 86                                                | %
|                                  |  |                                                    |   |  |                                                   |  
|Operating expenses:               |  |                                                    |   |  |                                                   |  
|Sales and marketing               |  | 28                                                 | % |  | 27                                                | %
|Research and development          |  | 14                                                 | % |  | 12                                                | %
|General and administrative        |  | 7                                                  | % |  | 7                                                 | %
|Stock-based compensation          |  |                                                   |   |  |                                                  |  
|Amortization of intangible assets |  | 10                                                 | % |  | 5                                                 | %
|                                  |  |                                                    |   |  |                                                   |  
|Total operating expenses          |  | 59                                                 | % |  | 51                                                | %
|                                  |  |                                                    |   |  |                                                   |  
|Operating income                  |  | 25                                                 | % |  | 35                                                | %
|Interest and other income, net    |  | 3                                                  | % |  | 5                                                 | %
|                                  |  |                                                    |   |  |                                                   |  
|Income before income taxes        |  | 28                                                 | % |  | 40                                                | %
|Income taxes                      |  | 10                                                 | % |  | 15                                                | %
|                                  |  |                                                    |   |  |                                                   |  
|Net income                        |  | 18                                                 | % |  | 25                                                | %
|                                  |  |                                                    |   |  |                                                   |  



Revenue



We derive revenue from software licenses, maintenance and professional
services. Our total revenue increased $2.1 million or 8% to $26.7 million in the current fiscal quarter ended October 31, 2003 from $24.6 million in the same quarter a year ago. For the nine months ended October 31, 2003, total revenue increased
$6.2 million or 9% to $75.9 million from $69.7 million in the same nine month period a year ago. International sales represented approximately 20% and 29% of our total revenue in the current fiscal quarter and fiscal nine months ended October 31,
2003, respectively, as compared to 36% and 30% in the same quarter and nine months a year ago. No single customer accounted for 10% or more of total revenue in the first nine months of fiscal 2004, and a single international customer accounted for
16% of total revenue in the first nine months of fiscal 2003.



Software Licenses.    Software licenses revenue as a percentage of total revenue was 41% and 42% in the current fiscal quarter and fiscal nine months ended October 31, 2003, respectively, as compared to 47% and
45% in the same quarter and nine months a year ago. Software licenses revenue decreased $0.5 million or 5% to $11.0 million in the current fiscal quarter from $11.5 million in the same quarter a year ago. For the nine month period ended October 31,
2003, software licenses revenue increased $0.4 million or 1% to $31.9 million from $31.5 million in the same nine months a year ago. For the current fiscal quarter, when compared to the same quarter a



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year ago, the dollar decrease is predominantly due to lower sales from our mainframe StarTool products as a result of the continued slowdown in IT
spending and the fact that we had a large StarTooltransaction with a single international customer in the third fiscal quarter a year ago, all partially offset by higher sales of our core software change management products, and in
particular our distributed systems products, each which grew 11% and 46%, respectively, over the same quarter a year ago. For the current fiscal nine months ended October 31, 2003, when compared to the same nine months a year ago, the dollar
increase is predominantly due to higher sales of our core software change management products, which grew 27% over the first nine months a year ago, and in particular, our distributed systems products, which grew 42% over a year ago, all partially
offset by lower sales of our StarToolproducts as a result of the continued slowdown in IT spending and the fact that we had a large StarTooltransaction with a single international customer in the first nine months of fiscal 2003. In
particular, sales of our core software change management products continue to make up a significant portion of our total software licenses revenue. These products accounted for $7.9 million or 72% and $22.3 million or 70% of total software licenses
revenue in the current fiscal quarter and fiscal nine months ended October 31, 2003, respectively, as compared to $7.1 million or 62% and $17.6 million or 56% in the same quarter and nine months a year ago. The Company expects that its distributed
systems revenues as a percentage of software licenses revenue will increase over time, and that core software change management will continue to account for a substantial portion of software licenses revenue in the future. We may experience a
decrease or little growth in license revenue in the near term.



Maintenance.    Maintenance revenue as a percentage of total revenue was 49% in both the current fiscal quarter and fiscal nine months ended October 31, 2003, as compared to 45% and 47% in the same quarter and
nine months, respectively, a year ago. Maintenance revenue increased $1.9 million or 18% to $13.1 million in the current fiscal quarter from $11.2 million in the same quarter a year ago. For the nine months ended October 31, 2003, maintenance
revenue increased $4.5 million or 14% to $37.5 million from $33.0 million in the same nine months a year ago. For both the quarter and nine months, the dollar increase reflects growth in installed software licenses base, as new licenses generally
include one year of maintenance, renewals of maintenance agreements by existing customers and, to a lesser extent, maintenance price increases; all partially offset by some cancellations in Comparex maintenance contracts particularly
beginning in fiscal 2002 when the general weakening of the economy in the U.S. and abroad caused some customers to reevaluate and restrict IT spending. We expect maintenance revenue to grow slightly in absolute dollars in the near term.



Professional Services.    Professional services
revenue, as a percentage of total revenue was 10% and 9% in the current fiscal quarter and fiscal nine months ended October 31, 2003, respectively, as compared to 8% in both the same quarter and nine months a year ago. Professional services revenue
increased $0.6 million or 31% to $2.6 million in the current fiscal quarter from $2.0 million in the same quarter a year ago. For the nine months ended October 31, 2003, professional services revenue increased $1.3 million or 25% to $6.6 million
from $5.3 million in the same nine months a year ago. For both the quarter and nine months, the dollar increase is predominantly due to an improvement in our consulting business which began in the second quarter of fiscal 2004 fueled in part by a
few large engagements. In general, professional services revenue is attributable to consulting opportunities resulting from our installed customer base and our expanded consulting service capabilities, all partially offset by the continued weak U.S.
economy, price pressures on consulting rates, and the deferral of existing consulting projects. We may experience little or no growth in professional services revenue in the near term.



Cost of Revenue



Cost of revenue, which consists of cost of software licenses, cost of maintenance and cost of professional services, was 16% and 15% of total revenue in
the current fiscal quarter and fiscal nine months ended October 31, 2003, respectively, as compared to 14% in both the same quarter and nine months a year ago. Cost of revenue increased $0.6 million or 18% to $4.2 million in the current fiscal
quarter from $3.6 million in the same quarter a year ago. For the nine months ended October 31, 2003, cost of revenue increased $1.8 million or 19% to $11.7 million from $9.9 million in the same nine months a year ago. For both the current fiscal
quarter and fiscal nine months, in absolute dollar terms, the increase is consistent with the increase in total revenues. As a percentage of



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total revenue, cost of revenue has increased when comparing the current fiscal quarter and fiscal nine months to the same quarter and nine months a year ago,
predominantly due to lower margin professional services revenue being a larger percentage of total revenue, partially offset by the elimination of fees associated with our StarTool FDMproduct beginning in the third quarter of fiscal 2004.



Software Licenses.    Cost of
software licenses consists principally of fees associated with our StarTool FDM products through the second quarter of fiscal 2004 and, to a lesser extent, salaries, bonuses and other costs associated with our product release organization,
and fees associated with integrating third party technology into our ChangeMan DS, ChangeMan ALM and ChangeMan ECP distributed systems products. Cost of software licenses as a percentage of total software licenses revenue was 1% and 2%
in the current fiscal quarter and fiscal nine months ended October 31, 2003, respectively, as compared to 3% in both the same quarter and nine months a year ago. Cost of software licenses decreased $0.3 million or 65% to $0.1 million in the current
fiscal quarter from $0.4 million in the same quarter a year ago. For the nine months ended October 31, 2003, cost of software licenses decreased $0.4 million or 46% to $0.5 million from $0.9 million in the same nine months a year ago. In both
percentage and absolute dollar terms, the decrease is primarily due to decreases in fees associated with our StarTool FDM product as a result of lower revenues, and particularly, the elimination of such fees beginning in the third quarter of
fiscal 2004.



Maintenance.    Cost
of maintenance consists primarily of salaries, bonuses and other costs associated with our customer support organizations. Cost of maintenance as a percentage of total maintenance revenue was 12% and 13% in the current fiscal quarter and fiscal nine
months ended October 31, 2003, respectively, as compared to 13% in both the same quarter and nine months a year ago. Cost of maintenance increased $0.2 million or 14% to $1.6 million in the current fiscal quarter from $1.4 million in the same
quarter a year ago. For the nine months ended October 31, 2003, cost of maintenance increased $0.5 million or 12% to $4.7 million from $4.2 million in the same nine months a year ago. For both the quarter and nine months, the absolute dollar
increase in cost of maintenance is primarily attributable to increases in expenses associated with our customer support organizations as a result of the growth in both maintenance revenue and our installed customer base.



Professional Services.    Cost of professional
services consists of salaries, bonuses and other costs associated with supporting our professional services organization. Cost of professional services as a percentage of total professional services revenue was 96% and 99% in the current fiscal
quarter and fiscal nine months ended October 31, 2003, respectively, as compared to 91% and 90% in the same quarter and nine months a year ago. Cost of professional services increased $0.7 million or 37% to $2.5 million in the current fiscal quarter
from $1.8 million in the same quarter a year ago. For the nine months ended October 31, 2003, cost of professional services increased $1.8 million or 38% to $6.5 million from $4.7 million in the same nine months a year ago. For both the quarter and
nine months, the increases as a percentage of total professional services revenue and in absolute dollars, are predominantly due to increases in expenses associated with our professional services organization to support higher professional services
revenue, and increases in third party contractor costs.



Operating
Expenses



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 28% in both the current fiscal quarter and fiscal nine months ended October 31, 2003 as compared to 27% and 28% in the same quarter and nine months, respectively, a year ago. Sales and marketing expenses increased
$0.8 million or 13% to $7.3 million in the current fiscal quarter from $6.5 million in the same quarter a year ago. For the nine months ended October 31, 2003, sales and marketing expenses increased $1.5 million or 8% to $21.0 million from $19.5
million in the same nine months a year ago. For the current fiscal quarter, when compared to the same quarter a year ago, sales and marketing expenses as a percentage of total revenue increased slightly as the rate of growth in total revenue was
less than the rate of growth in sales and marketing expenses, primarily due to infrastructure cost increases associated with our TeamShare acquisition in the second quarter of fiscal 2004 and cost increases associated with higher



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revenues. For the current fiscal nine months, when compared to the same nine months a year ago, sales and marketing expenses as a percentage of total revenue
was slightly lower as the rate of growth in total revenue was slightly greater than the rate of growth in sales and marketing expenses. In absolute dollar terms, we expect sales and marketing expenses to increase as we continue to hire additional
sales and marketing personnel, market our distributed systems products and undertake additional marketing programs.



Research and Development.    Research and development expenses consist primarily of salaries, bonuses, payroll taxes, and
employee benefits and costs attributable to research and development activities. Research and development expenses as a percentage of total revenue were 14% and 13% in the current fiscal quarter and fiscal nine months ended October 31, 2003,
respectively, as compared to 12% and 13% in the same quarter and nine months a year ago. Research and development expenses increased $0.7 million or 23% to $3.7 million in the current fiscal quarter from $3.0 million in the same quarter a year ago.
For the nine months ended October 31, 2003, research and development expenses increased $1.2 million or 14% to $10.1 million from $8.9 million in the same nine months a year ago. For both the current fiscal quarter and fiscal nine months, when
compared to the same quarter and nine months a year ago, the increase in research and development expenses in absolute dollar terms is primarily attributable to increased head count as a result of our acquisition of TeamShare in the second quarter
of fiscal 2004 and continued expansion of our research and development efforts to enhance existing products and develop our distributed systems products. We expect research and development expenses to increase, both in absolute dollar terms and as a
percentage of total revenue, as we continue to hire additional research and development personnel primarily to develop our distributed systems product suite.



General and Administrative.    General and administrative expenses consist primarily of salaries, bonuses, payroll taxes, and
benefits and certain non-allocable administrative costs, including legal and accounting fees and bad debts. General and administrative expenses as a percentage of total revenue were 7% for the current fiscal quarter and fiscal nine months ended
October 31, 2003 and the same quarter and nine months a year ago. General and administrative expenses increased $0.1million or 4% to $1.9 million in the current fiscal quarter from $1.8 million in the same quarter a year ago. For the nine months
ended October 31, 2003, general and adiminstrative expenses increased $0.1 million or 3% to $5.3 million from $5.2 million in the same nine months a year ago. For both the current fiscal quarter and fiscal nine months, when compared to the same
quarter and nine months a year ago, the slight increase in absolute dollars was predominantly due to increases in infrastructure and insurance costs. We expect general and administrative expenses to increase in absolute dollar terms as we expand our
infrastructure and our operations in the future.



Amortization of Intangible Assets.    Amortization of intangible assets are in connection with the Companys acquisitions of Diamond in June 1999, HPS in May 2000, UltiMIS in September 2000 and most recently
TeamShare in June 2003, and the StarToolasset purchase in August 2000. Amortization of intangible assets increased $1.6 million or 139% to $2.7 million in the current fiscal quarter from $1.1 million in the same quarter a year ago. For the
nine months ended October 31, 2003, amortization of intangible assets increased $2.5 million or 73% to $5.9 million from $3.4 million in the same nine months a year ago. For both the current fiscal quarter and fiscal nine months, when compared to
the same quarter and nine months a year ago, the increase is predominantly due to the TeamShare acquisition in the second quarter of fiscal 2004 which added $15.1 million in amortizable intangible assets, and offset to a lesser extent, by the
expiration of non-competes in the third quarter of fiscal 2003 associated with the Companys UltiMIS acquisition. See Notes 5 and 7 of Notes to Condensed Consolidated Financial Statements for additional information related to intangibles
amortization and the TeamShare acquisition.



Interest and Other Income, net



Interest and Other Income,
net.    Interest and other income, net decreased $0.5 million or 45% to $0.7 million in the current fiscal quarter from $1.2 million in the same quarter a year ago. For the nine months ended October 31, 2003, interest and
other income, net decreased $1.1 million or 31% to $2.5 million from $3.6 million in the same nine months a year ago. For both the current fiscal quarter and fiscal nine months, when compared to



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the same quarter and nine months a year ago, the dollar decreases in interest and other income, net are generally due to reduced market interest rates and
decreases in cash balances of $37.9 million and $19.4 million due to the Companys stock repurchase program implemented in the first, second and third quarters of fiscal 2004 and TeamShare acquisition in June 2003, respectively, all partially
offset by increases in balances on interest-bearing accounts, such as cash and cash equivalents, and both short and long-term investments, resulting from accumulation of earnings.



Income Taxes



Income Taxes.    The Companys effective income tax rate was 36% in the second and third quarters of fiscal 2004, as
compared to 38% in all of fiscal 2003 and the first quarter of fiscal 2004. Income taxes in absolute dollars were $2.7 million and $8.9 million in the current fiscal quarter and fiscal nine months ended October 31, 2003, respectively, as compared to
$3.8 million and $10.1 million in the same quarter and nine months a year ago. The decrease in the effective income tax rate was in part due to increases in research and experimentation tax credits as a result of the recent TeamShare acquisition and
changes in pre-tax income projections. For the current fiscal quarter and fiscal nine months, when compared to the same quarter and nine months a year ago, the decrease in income taxes in absolute dollars is due to a decrease in taxable income and,
to a lesser extent, a lower effective tax rate. SERENAs effective income tax rate has historically benefited from the United States research and experimentation tax credit and tax benefits generated from export sales made from the United
States.



Liquidity and Capital Resources



Since SERENAs inception, we have financed our operations and met our
capital requirements through cash flows from operations. As of October 31, 2003, SERENA had $105.3 million in cash and cash equivalents and an additional $18.4 million and $39.8 million in short and long-term investments, respectively, consisting
principally of high-grade commercial paper, certificates of deposit, and short and long-term bonds. Cash flows provided by operating activities were $19.7 million and $18.2 million in the current fiscal nine months ended October 31, 2003 and the
same nine months a year ago, respectively. In the current fiscal nine months, SERENAs cash flows provided by operating activities exceeded net income principally due to the inclusion of non-cash expenses in net income, and a decrease in trade
accounts receivable; all partially offset by decreases in income taxes payable and accrued expenses. In the same nine months a year ago, SERENAs cash flows provided by operating activities exceeded net income principally due to the inclusion
of non-cash expenses in net income and an increase in income taxes payable; all partially offset by an increase in trade accounts receivable and a decrease in accrued expenses. In the current fiscal nine months, SERENAs cash provided by
investing activities were primarily related to the net sale of short and long-term investments totaling $27.3 million; offset by the cash paid for the TeamShare acquisition, net of cash received totaling $19.4 million, and purchases of computer
equipment and office furniture and equipment totaling $0.8 million. In the year ago nine months, cash used in investing activities were primarily related to the net purchase of short and long-term investments totaling $5.0 million, and to a lesser
extent, purchases of computer equipment and office furniture and equipment totaling $1.3 million and cash paid for the UltiMIS earn-out totaling $0.7 million. In the current fiscal nine months, SERENAs cash flows used in financing activities
related to the repurchase of the Companys common stock under the stock repurchase plan totaling $37.9 million; partially offset by payments received on stockholder notes totaling $6.0 million, the exercise of stock options under the employee
stock option plan totaling $4.3 million, and the sale of common stock under the employee stock purchase plan totaling $0.8 million. In the same nine months a year ago, SERENAs cash flows provided by financing activities related to the exercise
of stock options under the employee stock option plan totaling $1.3 million, the sale of common stock under the employee stock purchase plan totaling $0.8 million, and the payment of principal on notes receivable from stockholders totaling $0.6
million; all partially offset by the repurchase of the Companys common stock under the stock repurchase plan totaling $0.8 million.



At October 31, 2003, the Company did not have any material commitments for capital expenditures and had no revolving credit agreements or other term loan
agreements with any banks or other financial institutions.



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At October 31, 2003, the Company had working capital of $106.2 million, trade accounts receivable, net of
allowances, of $15.3 million and total deferred revenues of $35.5 million.



The Company has noncancelable operating lease agreements for office space that expire between calendar 2003 and 2008. Minimum lease payments are as follows (in thousands):



|Fiscal Year Ending January 31, |  |  
|------------------------------ |  | -
|2004 (remaining three months)  |  | $
|2005                           |  |  
|2006                           |  |  
|2007                           |  |  
|2008                           |  |  
|Thereafter                     |  |  
|                               |  |  
|                               |  | $
|                               |  |  



We believe that
current cash and short-term investments, and cash flows from operations will satisfy our working capital and capital expenditure requirements for at least the next twelve months.



Effect of Recent Accounting Pronouncements



In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations.SFAS No. 143 requires an enterprise to
record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. SFAS No. 143 also requires an enterprise to record a
corresponding amount to the liability as an increase in the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) and to depreciate that cost over the remaining useful life of the asset. The amount of the
asset retirement obligation is revised at the end of each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. The Company adopted the
provisions of SFAS No. 143 as of February 1, 2003, and the adoption did not have a material impact on the Companys consolidated financial position or results of operations.



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 eliminates Emerging Issues Task Force, or EITF, Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). Under SFAS No. 146, liabilities for costs associated with an exit or disposal activity are recognized when the liabilities are incurred, as opposed to being recognized at the date of entitys commitment to an exit plan
under EITF No. 94-3. Furthermore, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liabilities. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002.



In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.Interpretation No. 45 requires a guarantor to include disclosure of certain obligations, and if
applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31,
2002 and did not have a material impact on the Company. See Note 3 to Condensed Consolidated Financial Statements for a summary of our agreements that we have determined are within the scope of Interpretation No. 45 which are separately
grandfathered because the guarantees were in effect prior to December 31, 2002.



In November 2002, the EITF reached a consensus on EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF No. 00-21 addresses certain aspects of the accounting by a vendor for
arrangements



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under which the vendor will perform multiple revenue-generating activities. EITF No. 00-21 became effective for interim periods beginning after June 15,
2003, which is the Companys third quarter of fiscal 2004. The effect of adopting EITF 00-21 this quarter did not have a material impact on the Companys consolidated financial position or results of operations.



In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure.SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method used on the reported results. The disclosure provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company
has adopted the disclosure provisions of SFAS No. 148.



Factors That
May Affect Future Results



This report, including this
Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements under the Private Securities Reform Act of 1995 and other prospective information relating to future events. These
forward-looking statements and other prospective information are subject to certain risks and uncertainties that could cause results to differ materially from historical results or anticipated results, including but are not limited to, our reliance
on our mainframe products for revenue; the percentage of license revenue typically closed at the end of each quarter making estimation of operating results prior to the end of the quarter extremely uncertain; weak economic conditions worldwide which
may continue to affect the overall demand for software and services, which has resulted in and could continue to result in decreased revenues or lower revenue growth rates; our ability to successfully integrate our recent acquisition; changes in
revenue mix and seasonality; our ability to deliver our products on the distributed systems platform; dependence on revenues from our installed base; continued demand for additional mainframe MIPS capacity; expansion of our international
organizations; our ability to manage our growth; and the following:



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



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



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



Because we do not know when,
or if, our potential customers will place orders and finalize contracts, we cannot accurately predict our revenue and operating results for future quarters. In addition, as a result of the economic slowdown worldwide, a number of customers have
delayed discretionary spending for software and hardware, which has reduced our revenue. Additionally, sales cycles beginning in fiscal 2002 lengthened as customers delayed decisions to purchase our products and increase capacity on mainframe
computers. Historically, a majority of our revenue has been attributable to the licenses of our mainframe software products.



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



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



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



Management personnel identify, track and forecast future revenues, backlog and trends in our business. Our sales personnel monitor the status of all
proposals, such as the estimated date when they estimate that a transaction will close and the potential dollar amount of such sale. We aggregate these estimates periodically in order to generate a sales pipeline and then evaluate the pipeline at
various times to look for trends in our business. While this pipeline analysis provides visibility to our potential customers and the associated revenues for budgeting and planning purposes, these pipeline estimates may not consistently correlate to
revenues in a particular quarter or ever. A slowdown in the economy, domestically and internationally, has caused and may continue to cause customer purchasing decisions to be delayed, reduced in amount or cancelled, all of which have reduced and
could continue to reduce the rate of conversion of the pipeline into contracts. A variation in the pipeline or in the conversion of the pipeline into contracts could cause us to plan or budget improperly and thereby could adversely affect our
business or results of operations. In addition, primarily due to a substantial portion of our software licenses revenue contracts closing in the latter part of a quarter, management may not be able to adjust the Companys cost structure in
response to a variation in the conversion of the pipeline into contracts in a timely manner, and thereby adversely affect our business or results of operations.



We Have Relied and Expect to Continue to Rely on Sales of Our Mainframe Products for Our Revenue



Historically, the majority of our software license revenue has resulted from the sale of our mainframe products. Any factors
adversely affecting the pricing of, demand for or market acceptance of our mainframe products, such as competition or technological change, could materially adversely affect our business and quarterly and annual operating results. Our mainframe
products have been responsible for a significant portion of our revenue. In the current fiscal quarter ended October 31, 2003 and the same quarter a year ago, sales of our mainframe products accounted for approximately 64% and 76% of our total
software licenses revenue. We expect that these products will continue to account for a large portion of our software licenses revenue for the foreseeable future. Our future operating results depend on the continued market acceptance of our
mainframe products, including future enhancements.



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



We depend on our installed customer
base for future revenues from maintenance renewal fees and licenses or upgrades of additional ECM products. If our customers do not purchase additional products, upgrade existing products or cancel or fail to renew their maintenance agreements, this
could materially adversely affect our business and future quarterly and annual operating results. The terms of our standard license arrangements provide for a one-time license fee and a prepayment of one year of software maintenance and support
fees. The



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maintenance agreements are renewable annually at the option of the customers and there are no minimum payment obligations or obligations to license
additional software. Therefore, our current customers may not necessarily generate significant maintenance revenue in future periods. In addition, our customers may not necessarily purchase additional products, upgrades or professional services. Our
professional service revenue and maintenance revenue are also dependent upon the continued use of these services by our installed customer base. Any downturn in our software license revenue would have a negative impact on the growth of our
professional service revenue and maintenance revenue in future quarters.



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



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



| |  |  | Increase our sales and marketing activities, including expanding our United States and international direct sales forces and extending our telesales efforts
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Develop our technology, including our distributed systems products
| | - |  | ------------------------------------------------------------------



| |  |  | Invest in penetrating the systems integrator and federal government marketplaces
| | - |  | --------------------------------------------------------------------------------



| |  |  | Include expenses associated with our TeamShare acquisition
| | - |  | ----------------------------------------------------------



| |  |  | Expand our distribution channels
| | - |  | --------------------------------



| |  |  | Pursue strategic relationships and acquisitions
| | - |  | -----------------------------------------------



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



Our Business Is Dependent on the Continued Market for IBM and IBM-Compatible Mainframes



We are substantially dependent upon the continued use and
acceptance of IBM and IBM-compatible mainframes and the growth of this market. If the role of the mainframe does not increase as we anticipate, or if it in any way decreases, this would materially adversely affect our business, future quarterly and
annual operating results and financial condition. Additionally, if there is a wide acceptance of other platforms or if new platforms emerge that provide enhanced enterprise server capabilities, our business and future operating results may be
materially adversely affected. The majority of our software license revenue to date has been attributable to sales of our mainframe products. We expect that, for the foreseeable future, the majority of our software license revenue will continue to
come from sales of our mainframe products. As a result, future sales of our existing products and associated maintenance revenue and professional service revenue will depend on continued use of mainframes.



Our License Revenues from Products for Distributed Systems May Fluctuate



We introduced our ChangeMan DS product in fiscal 2000, our
ChangeMan ALM and ChangeMan ECP products in fiscal 2001, our ChangeMan WCM product in the first quarter of fiscal 2002 and our ChangeMan ZDD product in the first quarter of fiscal 2003. In the second quarter of fiscal
2004, we acquired the TeamTrack product with our acquisition of TeamShare effective June 5, 2003. While license revenues from our distributed systems products were 36% of total license revenues in the current fiscal quarter ended October 31,
2003, they may fluctuate materially from quarter to quarter and could in fact decline. We are currently developing new



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products and enhancing our product suite to support additional distributed systems products. If we do not successfully develop, market, sell and support our
distributed systems products, this would materially adversely affect our business and our future quarterly and annual operating results. Historically, the majority of our products have been designed for the mainframe platform, and the majority of
our software license revenue, maintenance revenue and professional services revenue to date have been attributable to licenses for these mainframe products. We have limited experience developing, marketing; selling or supporting distributed systems
products. Our sales and marketing organizations have historically focused exclusively on sales of our products for the mainframe and have limited experience marketing and selling distributed systems products. Additionally, we have limited experience
in providing support services for distributed systems products. Many of our competitors have substantially greater experience providing distributed systems compatible software products than we do, and many also have significantly greater financial
and organizational resources.



The License Revenues from our IBM OEM
Relationship May Fluctuate



In January 2002, we entered
into an OEM Agreement with IBM Corporation (IBM) whereby IBM acquired the rights to resell our StarTool APM technology. IBM provides SERENA a quarterly royalty report one month after each of IBMs calendar quarters detailing
licenses and maintenance sold through to end users during the quarter. While license revenues from our IBM OEM relationship were 3% of total license revenues in the third quarter of fiscal 2004, they may fluctuate materially from quarter to quarter
and could in fact decline. We recognized our first revenue from this arrangement in the second quarter of fiscal 2003. Because we have little or no visibility during the quarter on pipelines, sales forecasts, sales volumes or the amount of license
revenue that will be reported, we cannot accurately predict the IBM revenue or our operating results for the quarter or any future quarter. Because the IBM OEM license revenue may be significant to our total license revenue in any fiscal quarter,
any decline in revenue could materially adversely affect our business and our future quarterly and annual operating results.



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



In June 2003, we acquired TeamShare, Inc. and we may acquire or make
investments in other companies and technologies. In the event of any acquisitions or investments, we could:



| |  |  | Issue stock that would dilute the ownership of our then-existing stockholders;
| | - |  | ------------------------------------------------------------------------------



| |  |  | Incur debt;
| | - |  | -----------



| |  |  | Assume liabilities;
| | - |  | -------------------



| |  |  | Incur charges for the impairment of the value of investments or acquired assets; or
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Incur amortization expense related to intangibles assets.
| | - |  | ---------------------------------------------------------



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



| |  |  | Difficulties integrating the acquired operations, technologies or products with ours;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Failure to achieve targeted synergies;
| | - |  | --------------------------------------



| |  |  | Unanticipated costs and liabilities;
| | - |  | ------------------------------------



| |  |  | Diversion of managements attention from our core business;
| | - |  | -----------------------------------------------------------



| |  |  | Adverse effects on our existing business relationships with suppliers and customers or those of the acquired organization;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Difficulties entering markets in which we have no or limited prior experience; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Potential loss of key employees, particularly those of the acquired organizations.
| | - |  | ----------------------------------------------------------------------------------



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



Our sales cycle typically takes six to eighteen
months to complete and varies from product to product. Any delay in the sales cycle of a large license or a number of smaller licenses could result in significant fluctuations in our quarterly operating results. The length of the sales cycle may
vary depending on a number of factors over which we may have little or no control, including the size and complexity of a potential transaction and the level of competition that we encounter in our selling activities. Beginning in fiscal 2002, we
have experienced an overall lengthening of sales cycles as customers delayed purchases or customers reduced budgets as a result of economic conditions. Additionally, the emerging market for ECM products and services contributes to the lengthy sales
process in that during the sales cycle we often have to teach potential customers about the use and benefits of our products. In certain circumstances, we license our software to customers on a trial basis to assist the customers in their evaluation
of our products. Our sales cycle can be further extended for product sales made through third party distributors.



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



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



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



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



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



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



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



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



Risks of International
Operations.    International sales represented 20% and 36% of our total revenue in the current fiscal quarter ended October 31, 2003 and the same quarter a year ago, respectively. Our international revenue is attributable
principally to our European operations. Our international operations are, and any expanded international operations will be, subject to a variety of risks associated with conducting business internationally that could materially adversely affect our
business and future quarterly and annual operating results, including the following:



| |  |  | Difficulties in staffing and managing international operations
| | - |  | --------------------------------------------------------------



| |  |  | Problems in collecting accounts receivable
| | - |  | ------------------------------------------



| |  |  | Longer payment cycles
| | - |  | ---------------------



| |  |  | Fluctuations in currency exchange rates
| | - |  | ---------------------------------------



| |  |  | Inability to control or predict the levels of revenue produced by our international distributors
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Seasonal reductions in business activity during the summer months in Europe and certain other parts of the world
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Recessionary environments in foreign economies
| | - |  | ----------------------------------------------



| |  |  | Increases in tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by foreign countries
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



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



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



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



We may not be able to compete successfully against current or future competitors and such inability would materially adversely affect our business,
quarterly and annual operating results and financial condition. The market for our products is highly competitive and diverse. Moreover, the technology for SCM products may change rapidly. New products are frequently introduced, and existing
products are continually enhanced. Competition may also result in changes in pricing policies by SERENA or our competitors, which could materially adversely affect our business and future quarterly and annual operating results. Competitors vary in
size and in the scope and breadth of the products and services that they offer. Many of our current and potential



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competitors have greater financial, technical, marketing and other resources than we do. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the development, promotion and sale of their products than we can.



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



| |  |  | Customers internal IT departments
| | - |  | ----------------------------------



| |  |  | Providers of SCM products that compete directly with ChangeMan ZMF and Comparex such as Computer Associates, IBM and smaller private companies
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Providers of application development programmer productivity and system management products such as Compuware, IBM and smaller private companies
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



Our success will depend to a significant extent on the continued service of our senior executives and certain other key employees, including certain sales, consulting, technical and marketing personnel. If we lost the
services of one or more of our executives or key employees, including if one or more of our executives or key employees decided to join a competitor or otherwise compete directly or indirectly with SERENA, this could materially adversely affect our
business. In particular, we have historically relied on the experience and dedication of our product authors. With the exception of Douglas D. Troxel, SERENAs founder, Chief Technology Officer and chairman of SERENAs board of directors,
the employment of all of our senior and key



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employees, including key product authors, is at will. Mr. Troxels employment is on a year-to-year basis. In addition, we do not maintain key man life
insurance on our employees and have no plans to do so.



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



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



Our Share
Price Has Been, and Will Likely Continue to Be, Volatile



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



| |  |  | Changes in estimates of our financial performance;
| | - |  | --------------------------------------------------



| |  |  | Shortfalls in revenues or net income expected by securities analysts;
| | - |  | ---------------------------------------------------------------------



| |  |  | Announcements of new products by the Company or its competitors;
| | - |  | ----------------------------------------------------------------



| |  |  | Quarterly fluctuations in the Companys financial results or the results of other software companies, including those of direct competitors of the Company;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in analysts estimates of the Companys financial performance, the financial performance of competitors, or the financial performance of software companies in
general;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General conditions in the software industry;
| | - |  | --------------------------------------------



| |  |  | Changes in the amount the Company receives in royalties from IBM;
| | - |  | -----------------------------------------------------------------



| |  |  | Changes in the Companys license revenue mix among the various platforms;
| | - |  | -------------------------------------------------------------------------



| |  |  | Changes in prices for the Companys products or competitors products;
| | - |  | ----------------------------------------------------------------------



| |  |  | Changes in revenue growth rates for the Company or its competitors;
| | - |  | -------------------------------------------------------------------



| |  |  | Conditions in the financial markets;
| | - |  | ------------------------------------



| |  |  | General market or economic conditions;
| | - |  | --------------------------------------



| |  |  | The gain or loss of a significant customer or strategic relationship;
| | - |  | ---------------------------------------------------------------------



| |  |  | Changes in recommendations from securities analysts regarding our industry, our customers industries; or us
| | - |  | ------------------------------------------------------------------------------------------------------------



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| |  |  | Announcements of technological or competitive developments; and
| | - |  | ---------------------------------------------------------------



| |  |  | Acquisitions or entry into strategic alliances by our competitors or us.
| | - |  | ------------------------------------------------------------------------



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



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



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



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



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



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



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



We may be subject to claims
for damages related to product errors in the future. A material product liability claim could materially adversely affect our business. Our license agreements with our customers typically contain provisions designed to limit exposure to potential
product liability claims. SERENAs standard software licenses provide that if our products fail to perform, we will correct or replace such products. If these corrective measures fail, we may be required to refund the license fee for such
non-performing product. However, our



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standard license agreement limits our liability for non-performing products to the amount of license fee paid, if the license has been in effect for less
than one year, or to the amount of the licensees current annual maintenance fee, if the license is more than one year old. Our standard license also provides that SERENA shall not be liable for indirect or consequential damages caused by the
failure of our products. Such limitation of liability provisions may, however, not be effective under the laws of certain jurisdictions to the extent local laws treat certain warranty exclusions as unenforceable. Although we have not experienced any
product liability claims to date, the sale and support of our products entail the risk of such claims.



ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk



The Company does not have derivative financial instruments in its investment portfolio and has no foreign exchange contracts. Its financial instruments
consist of cash and cash equivalents, short and long-term investments, trade accounts receivable and accounts payable. The Company considers investments in highly liquid instruments purchased with a remaining maturity of 90 days or less to be cash
equivalents. All of the Companys cash equivalents and short and long-term investments principally consist of commercial paper and debt securities, and are classified as available-for-sale as of October 31, 2003. The Companys exposure to
market risk for changes in interest rates relates primarily to its short and long-term investments and short-term obligations, thus, a hypothetical 10% fluctuation in interest rates would not have a material impact on the fair value of these
securities.



Sales to foreign countries accounted for
approximately 20% of the total revenue during the quarter ended October 31, 2003. Because the Company invoices certain of its foreign sales in currencies other than the United States dollar, predominantly the British pound and euro, and does not
hedge these transactions, fluctuations in exchange rates could adversely affect the translated results of operations of the Companys foreign subsidiaries. Therefore, foreign exchange fluctuation could create a risk of significant balance sheet
gains or losses on the Companys consolidated financial statements. However, given the Companys foreign subsidiaries net book values as of October 31, 2003 and net cash flows for the most recent fiscal nine months then ended and
fiscal year ended January 31, 2003, the Company does not believe that a hypothetical 10% fluctuation in foreign currency exchange rates would have a material impact on its financial position or results of operations.



ITEM 4.    Controls and Procedures



Based on their evaluation of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the Companys principal executive
officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q the Companys disclosure controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission.



There were no significant changes in the
Companys internal control over the financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect the Companys internal control
over financial reporting, or in other factors that could significantly affect these controls subsequent to the date of their last evaluation by the Companys principal executive officer and principal financial officer, including any corrective
actions with regard to significant deficiencies and material weaknesses.



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PART IIOTHER INFORMATION



ITEM 1.    Legal Proceedings



Not applicable.



ITEM 2.    Change in Securities and Use of Proceeds



Not applicable.



ITEM 3.    Defaults Upon Senior Securities



Not applicable.



ITEM 4.    Submission of Matters to a Vote of Security Holders



Not applicable.



ITEM 5.    Other Information



Section 10A(i)(2) of the Securities Exchange Act of 1934, as added in Section 202 of the Sarbanes-Oxley Act of 2002, requires us to disclose the approval by our Audit Committee of any non-audit services to be
performed by KPMG LLP, our external auditor. Non-audit services are defined as services other than those provided in connection with an audit or review of the financial statements of a company. The Audit Committee of the Board of Directors of SERENA
has approved the engagement of KPMG LLP for non-audit services including, the performance of certain tax-related services.



ITEM 6.    Exhibits and Reports on Form 8-K



(a) Exhibits



|Exhibit Number |  | Exhibit Title                                                                                                                                                               
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               | 
|3.1A (a)       |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of SERENA (effected in 2001)                                                              
|               | 
|31.1 (a)       |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                          
|               | 
|31.2 (a)       |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                          
|               | 
|32 (a)         |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

---

|(a) |  | filed herewith.
|--- |  | ---------------



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



We furnished the following Current Report on Form 8-K during the quarter ended October 31, 2003:



We furnished a Current Report on Form 8-K dated August 5,
2003, announcing preliminary financial results for the quarter ended July 31, 2003 and attached a press release related thereto. Such report was furnished but not filed with the SEC.



We furnished a Current Report on Form 8-K dated August 21,
2003, announcing financial results for the quarter ended July 31, 2003 and attached a press release related thereto. Such report was furnished but not filed with the SEC.



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant, SERENA Software, Inc., a corporation organized and existing under the laws of the State of Delaware, has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.



SERENA SOFTWARE, INC. (Registrant)By:

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




Date: December 8, 2003



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EXHIBIT INDEX



|Exhibit No. |  | Description                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            | 
|3.1A        |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of SERENA (effected in 2001)                                                              
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                          
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                          
|            | 
|32          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002