##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(MARK ONE)



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

FOR THE QUARTERLY PERIOD ENDED JULY 31, 2009

OR



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

FOR THE TRANSITION PERIOD FROM
 TO

COMMISSION FILE NO. 000-25285







SERENA SOFTWARE, INC.

(Exact name of registrant as specified in its charter)







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

1900 SEAPORT BOULEVARD, REDWOOD CITY, CALIFORNIA 94063-5587

(Address of principal executive offices, including zip code)

650-481-3400

(Registrants telephone number, including area code)





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

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

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



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

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

As of August 31, 2009, 98,481,641 shares of the registrants common stock, $0.01 par value per share, were outstanding.









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##### Table of Contents

INDEX



|                             |  |                                                                                                                  |  |     
|---------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|                             |  |                                                                                                                  |  | Page
|PART I FINANCIAL INFORMATION
|                             |  |                                                                                                                 
|Item 1                       |  | Financial Statements:                                                                                            |  |     
|                             |  |                                                                                                                 
|                             |  | Condensed Consolidated Balance Sheets as of July 31, 2009 and January 31, 2009                                   |  | 3   
|                             |  |                                                                                                                 
|                             |  | Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended July 31, 2009 and 2008 |  | 4   
|                             |  |                                                                                                                 
|                             |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2009 and 2008                  |  | 5   
|                             |  |                                                                                                                 
|                             |  | Notes to Condensed Consolidated Financial Statements                                                             |  | 6   
|                             |  |                                                                                                                 
|Item 2                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 21  
|                             |  |                                                                                                                 
|Item 3                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 36  
|                             |  |                                                                                                                 
|Item 4                       |  | Controls and Procedures                                                                                          |  | 37  
|                            
|PART II OTHER INFORMATION   
|                             |  |                                                                                                                 
|Item 1                       |  | Legal Proceedings                                                                                                |  | 38  
|                             |  |                                                                                                                 
|Item 1A                      |  | Risk Factors                                                                                                     |  | 38  
|                             |  |                                                                                                                 
|Item 2                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 38  
|                             |  |                                                                                                                 
|Item 3                       |  | Defaults Upon Senior Securities                                                                                  |  | 38  
|                             |  |                                                                                                                 
|Item 4                       |  | Submission of Matters to a Vote of Security Holders                                                              |  | 38  
|                             |  |                                                                                                                 
|Item 5                       |  | Other Information                                                                                                |  | 38  
|                             |  |                                                                                                                 
|Item 6                       |  | Exhibits                                                                                                         |  | 38  
|                             | 
|SIGNATURES                   |  | 39                                                                                                              



2



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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)



|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | --------------- | - | -------- | -
|                                                                                                                                                                          |  | July 31,2009 |          |   | January 31,2009 |  
|ASSETS                                                                                                                                                                    |  |              |          |   |                 |   |          |  
|Current assets                                                                                                                                                            |  |              |          |   |                 |   |          |  
|Cash and cash equivalents                                                                                                                                                 |  | $            | 97,952   |   |                 | $ | 115,044  |  
|Accounts receivable, net of allowance of $1,043 and $649 at July 31, 2009 and January 31, 2009, respectively                                                              |  |              | 19,334   |   |                 |   | 30,461   |  
|Deferred taxes, net                                                                                                                                                       |  |              | 5,192    |   |                 |   | 5,301    |  
|Prepaid expenses and other current assets                                                                                                                                 |  |              | 6,172    |   |                 |   | 5,487    |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|Total current assets                                                                                                                                                      |  |              | 128,650  |   |                 |   | 156,293  |  
|Property and equipment, net                                                                                                                                               |  |              | 4,268    |   |                 |   | 5,084    |  
|Goodwill                                                                                                                                                                  |  |              | 464,173  |   |                 |   | 462,042  |  
|Other intangible assets, net                                                                                                                                              |  |              | 232,400  |   |                 |   | 270,044  |  
|Other assets                                                                                                                                                              |  |              | 6,732    |   |                 |   | 8,069    |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|TOTAL ASSETS                                                                                                                                                              |  | $            | 836,223  |   |                 | $ | 901,532  |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                      |  |              |          |   |                 |   |          |  
|Current liabilities:                                                                                                                                                      |  |              |          |   |                 |   |          |  
|Accounts payable                                                                                                                                                          |  | $            | 1,857    |   |                 | $ | 2,254    |  
|Income taxes payable                                                                                                                                                      |  |              | 7,655    |   |                 |   | 12,173   |  
|Accrued expenses                                                                                                                                                          |  |              | 23,328   |   |                 |   | 21,812   |  
|Accrued interest on term loan and subordinated notes                                                                                                                      |  |              | 8,890    |   |                 |   | 9,276    |  
|Deferred revenue                                                                                                                                                          |  |              | 67,676   |   |                 |   | 74,499   |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|Total current liabilities                                                                                                                                                 |  |              | 109,406  |   |                 |   | 120,014  |  
|Deferred revenue, net of current portion                                                                                                                                  |  |              | 7,871    |   |                 |   | 7,526    |  
|Long-term liabilities                                                                                                                                                     |  |              | 6,779    |   |                 |   | 12,756   |  
|Deferred taxes                                                                                                                                                            |  |              | 70,286   |   |                 |   | 85,193   |  
|Term loan                                                                                                                                                                 |  |              | 318,000  |   |                 |   | 320,000  |  
|Revolving term credit facility                                                                                                                                            |  |              | 65,000   |   |                 |   | 65,000   |  
|Senior subordinated notes                                                                                                                                                 |  |              | 142,952  |   |                 |   | 167,383  |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|Total liabilities                                                                                                                                                         |  |              | 720,294  |   |                 |   | 777,872  |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|Commitments and contingencies:                                                                                                                                            |  |              |          |   |                 |   |          |  
|Stockholders equity:                                                                                                                                                     |  |              |          |   |                 |   |          |  
|Preferred stock, $0.01 par value; 10,000,000 shares authorized and no shares issued and outstanding at July 31, 2009 and January 31,
2009                                 |  |              |         |   |                 |   |         |  
|Series A Preferred stock, $0.01 par value; 1 share authorized, issued and outstanding at July 31, 2009 and January 31,
2009                                               |  |              |         |   |                 |   |         |  
|Common stock, $0.01 par value; 200,000,000 shares authorized; 98,481,641 and 98,537,147 shares issued and outstanding at July 31, 2009
and January 31, 2009, respectively |  |              | 985      |   |                 |   | 985      |  
|Additional paid-in capital                                                                                                                                                |  |              | 510,448  |   |                 |   | 510,379  |  
|Accumulated other comprehensive loss                                                                                                                                      |  |              | (82      | ) |                 |   | 1,408    |  
|Accumulated deficit                                                                                                                                                       |  |              | (395,422 | ) |                 |   | (389,112 | )
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|Total stockholders equity                                                                                                                                                |  |              | 115,929  |   |                 |   | 123,660  |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                |  | $            | 836,223  |   |                 | $ | 901,532  |  
|                                                                                                                                                                          |  |              |          |   |                 |   |          |  

See accompanying notes to condensed consolidated financial statements.



3



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SERENA SOFTWARE, INC.

Condensed Consolidated Statements of Operations

For the Three Months and Six Months Ended July 31, 2009 and 2008

(In thousands)

(Unaudited)



|                                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                  |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |  
|                                                  |  | 2009                       |        |   | 2008                     |   |         | 2009 |  |   | 2008    |  
|Revenue:                                          |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Software licenses                                 |  | $                          | 11,017 |   |                          | $ | 19,874  |      |  | $ | 20,484  |   |  | $ | 34,414  |  
|Maintenance                                       |  |                            | 38,531 |   |                          |   | 41,820  |      |  |   | 75,260  |   |  |   | 81,690  |  
|Professional services                             |  |                            | 5,633  |   |                          |   | 8,388   |      |  |   | 12,221  |   |  |   | 16,941  |  
|                                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total revenue                                     |  |                            | 55,181 |   |                          |   | 70,082  |      |  |   | 107,965 |   |  |   | 133,045 |  
|                                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Cost of revenue:                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Software licenses                                 |  |                            | 808    |   |                          |   | 516     |      |  |   | 1,438   |   |  |   | 956     |  
|Maintenance                                       |  |                            | 3,220  |   |                          |   | 4,259   |      |  |   | 6,436   |   |  |   | 8,270   |  
|Professional services                             |  |                            | 5,441  |   |                          |   | 8,145   |      |  |   | 11,583  |   |  |   | 16,420  |  
|Amortization of acquired technology               |  |                            | 8,747  |   |                          |   | 8,704   |      |  |   | 17,093  |   |  |   | 17,496  |  
|                                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total cost of revenue                             |  |                            | 18,216 |   |                          |   | 21,624  |      |  |   | 36,550  |   |  |   | 43,142  |  
|                                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                      |  |                            | 36,965 |   |                          |   | 48,458  |      |  |   | 71,415  |   |  |   | 89,903  |  
|                                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Operating expenses:                               |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Sales and marketing                               |  |                            | 14,367 |   |                          |   | 22,000  |      |  |   | 29,343  |   |  |   | 42,582  |  
|Research and development                          |  |                            | 7,961  |   |                          |   | 9,009   |      |  |   | 16,321  |   |  |   | 17,779  |  
|General and administrative                        |  |                            | 4,586  |   |                          |   | 5,359   |      |  |   | 8,671   |   |  |   | 10,805  |  
|Amortization of intangible assets                 |  |                            | 9,203  |   |                          |   | 9,203   |      |  |   | 18,406  |   |  |   | 18,406  |  
|Restructuring, acquisition and other charges      |  |                            | 364    |   |                          |   | 329     |      |  |   | 2,215   |   |  |   | 2,268   |  
|                                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                          |  |                            | 36,481 |   |                          |   | 45,900  |      |  |   | 74,956  |   |  |   | 91,840  |  
|                                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Operating income (loss)                           |  |                            | 484    |   |                          |   | 2,558   |      |  |   | (3,541  | ) |  |   | (1,937  | )
|Interest income                                   |  |                            | 134    |   |                          |   | 342     |      |  |   | 347     |   |  |   | 774     |  
|Gain on early extinguishment of debt              |  |                            | 1,038  |   |                          |   | 628     |      |  |   | 4,602   |   |  |   | 628     |  
|Interest expense                                  |  |                            | (8,591 | ) |                          |   | (10,240 | )    |  |   | (17,257 | ) |  |   | (21,495 | )
|Change in the fair value of derivative instrument |  |                            | 1,033  |   |                          |   | 1,627   |      |  |   | 1,447   |   |  |   | 2,866   |  
|Amortization and write-off of debt issuance costs |  |                            | (674   | ) |                          |   | (655    | )    |  |   | (1,306  | ) |  |   | (840    | )
|                                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Loss before income taxes                          |  |                            | (6,576 | ) |                          |   | (5,740  | )    |  |   | (15,708 | ) |  |   | (20,004 | )
|Income tax benefit                                |  |                            | (5,081 | ) |                          |   | (2,719  | )    |  |   | (9,398  | ) |  |   | (8,479  | )
|                                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                          |  | $                          | (1,495 | ) |                          | $ | (3,021  | )    |  | $ | (6,310  | ) |  | $ | (11,525 | )
|                                                  |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



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SERENA SOFTWARE, INC.

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended July 31, 2009 and 2008

(In thousands)

(Unaudited)



|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                        |  | Six Months Ended July 31, |        
|                                                                                                                                                        |  | 2009                      |         |   | 2008 |  
|Cash flows from operating activities:                                                                                                                   |  |                           |         |   |      |   |         |  
|Net loss                                                                                                                                                |  | $                         | (6,310  | ) |      | $ | (11,525 | )
|Adjustments to reconcile net loss to net cash provided by operating activities:                                                                         |  |                           |         |   |      |   |         |  
|Depreciation and amortization of acquired technology and other intangible assets                                                                        |  |                           | 38,109  |   |      |   | 37,726  |  
|Deferred income taxes                                                                                                                                   |  |                           | (13,518 | ) |      |   | (14,270 | )
|Gain on early extinguishment of debt                                                                                                                    |  |                           | (4,602  | ) |      |   | (628    | )
|Interest expense on term credit facility and subordinated notes, net of interest paid                                                                   |  |                           | (386    | ) |      |   | (737    | )
|Fair market value adjustment on the interest rate swap                                                                                                  |  |                           | (1,447  | ) |      |   | (2,866  | )
|Amortization and write off of debt issuance costs                                                                                                       |  |                           | 1,306   |   |      |   | 840     |  
|Stock-based compensation                                                                                                                                |  |                           | 341     |   |      |   | 3,633   |  
|Acquisition, restructuring and other charges                                                                                                            |  |                           |        |   |      |   | (174    | )
|Changes in operating assets and liabilities:                                                                                                            |  |                           |         |   |      |   |         |  
|Accounts receivable                                                                                                                                     |  |                           | 11,127  |   |      |   | 3,076   |  
|Prepaid expenses and other assets                                                                                                                       |  |                           | (652    | ) |      |   | (1,917  | )
|Accounts payable                                                                                                                                        |  |                           | (397    | ) |      |   | 1,130   |  
|Income taxes payable                                                                                                                                    |  |                           | (4,505  | ) |      |   | 3,784   |  
|Accrued expenses                                                                                                                                        |  |                           | (3,023  | ) |      |   | 121     |  
|Deferred revenue                                                                                                                                        |  |                           | (6,478  | ) |      |   | (1,134  | )
|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities                                                                                                               |  |                           | 9,565   |   |      |   | 17,059  |  
|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|Cash flows used in investing activities:                                                                                                                |  |                           |         |   |      |   |         |  
|Capital expenditures                                                                                                                                    |  |                           | (486    | ) |      |   | (3,716  | )
|Capital expenditures for internal use software                                                                                                          |  |                           | (2,379  | ) |      |   | (3,215  | )
|Cash paid in acquisitions, including direct transaction costs and net of cash received                                                                  |  |                           | (200    | ) |      |   | (131    | )
|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|Net cash used in investing activities                                                                                                                   |  |                           | (3,065  | ) |      |   | (7,062  | )
|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|Cash flows used in financing activities:                                                                                                                |  |                           |         |   |      |   |         |  
|Common stock repurchased under stock repurchase plans                                                                                                   |  |                           | (212    | ) |      |   |        |  
|Repurchase of option rights under employee stock option plan                                                                                            |  |                           | (82     | ) |      |   | (382    | )
|Exercise of stock options under employee stock option plan                                                                                              |  |                           | 21      |   |      |   |        |  
|Principal payments and early extinguishments under the term credit facility and senior subordinated notes, net of gains on early
extinguishment of debt |  |                           | (21,829 | ) |      |   | (10,782 | )
|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|Net cash used in financing activities                                                                                                                   |  |                           | (22,102 | ) |      |   | (11,164 | )
|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|Effect of exchange rate changes on cash                                                                                                                 |  |                           | (1,490  | ) |      |   | (278    | )
|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|Net (decrease) in cash and cash equivalents                                                                                                             |  |                           | (17,092 | ) |      |   | (1,445  | )
|Cash and cash equivalents at beginning of period                                                                                                        |  |                           | 115,044 |   |      |   | 48,304  |  
|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                                                                              |  | $                         | 97,952  |   |      | $ | 46,859  |  
|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                                                                                      |  |                           |         |   |      |   |         |  
|Income taxes paid, net of refunds                                                                                                                       |  | $                         | 8,885   |   |      | $ | 1,690   |  
|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|Interest expense paid                                                                                                                                   |  | $                         | 17,596  |   |      | $ | 22,156  |  
|                                                                                                                                                        |  |                           |         |   |      |   |         |  
|Non-cash investing and financing activity:                                                                                                              |  |                           |         |   |      |   |         |  
|Consideration payable to shareholders in acquisitions                                                                                                   |  | $                         | 132     |   |      | $ | 132     |  
|                                                                                                                                                        |  |                           |         |   |      |   |         |  

See accompanying notes to condensed consolidated financial statements.



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SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



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

(a) Description of Business

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

(b) Basis of Presentation

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

(c) Significant Accounting Policies

The Companys significant accounting policies are described in the notes to the Companys consolidated financial statements, included in the
Companys annual report on Form 10-K filed on May 1, 2009. There have been no changes to the Companys significant accounting policies.



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

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

Restricted Stock Purchase Agreements

In connection with the consummation of the merger (the
Merger) of Spyglass Merger Corp. with and into the Company on March 10, 2006, the Company entered into a restricted stock agreement, dated as of March 10, 2006 with Robert Pender, the Companys Chief Financial Officer.
Pursuant to this agreement, Mr. Pender was issued 307,200 shares of the Companys common stock. The award to Mr. Pender is unvested and subject to the executives continued employment with the Company through June 16, 2010.
In addition, if the Company is subject to a change in control (as defined in the agreement) while Mr. Pender remains an employee of the Company, his remaining unvested shares will immediately vest in full.

2006 Stock Incentive Plan

Following
the completion of the Merger on March 10, 2006, the Company established a new stock incentive plan, the 2006 Stock Incentive Plan (the 2006 Plan), which governs, among other things, the grant of options, restricted stock bonuses,
and other forms of share-based payments covering shares of the Companys common



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SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



stock to our employees (including officers), directors and consultants. The Companys common stock representing 12% of outstanding common stock on a
fully diluted basis as of the date of the Merger is reserved for issuance under the 2006 Plan. Each award under the 2006 Plan will specify the applicable exercise or vesting period, the applicable exercise or purchase price, and such other terms and
conditions as deemed appropriate. Stock options granted under the 2006 Plan are either time options that will vest and become exercisable over a four-year period or time and performance options that will vest based on the
achievement of certain performance targets over a five-year period following the date of grant. All options granted under the 2006 Plan will expire not later than ten years from the date of grant, but generally will terminate earlier upon
termination of employment. In the event of a sale of substantially all of the assets of the Company, or a merger or acquisition of the Company, the Board of Directors may provide that awards granted under the 2006 Plan will be cashed out, continued,
replaced with new awards that substantially preserve the terms of the original awards, or terminated, with acceleration of vesting of the original awards determined at the discretion of the Board of Directors.

As of July 31, 2009, a total of 13,515,536 shares of common stock were reserved for issuance upon the exercise of stock options and for the future
grant of stock options or awards under the 2006 Plan.

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

As of July 31, 2009, total unrecognized compensation costs related to unvested stock options and the restricted stock award was $9.2 million.
Unvested stock options are expected to be recognized over a period of 4 to 5 years and the restricted stock award is expected to be recognized over a period of 4 years from grant date.

The fair value of each stock option grant under the stock option plans is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in the three months and six months ended July 31, 2009 and 2008.



|                         |  |                            |  |                          |  |              |  |             
|------------------------ |  | -------------------------- |  | ------------------------ |  | ------------ |  | ------------
|                         |  | Three Months EndedJuly 31, |  | Six Months EndedJuly 31,
|                         |  | 2009                       |  | 2008                     |  | 2009         |  | 2008        
|Expected life (in years) |  | 4.0 to 5.0                 |  | 4.0 to 5.0               |  | 4.0 to 5.0   |  | 4.0 to 5.0  
|Risk-free interest rate  |  | 2.0% to 2.4%               |  | 2.8% to 3.0%             |  | 1.6% to 2.4% |  | 2.5% to 3.0%
|Volatility               |  | 31% to 32%                 |  | 26% to 31%               |  | 31% to 32%   |  | 26% to 33%  

The Black-Scholes option-pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility.

With respect to the amounts set forth above, the Companys expected volatility is based on the combination of historical volatility of the
Companys common stock and the Companys peer groups common stock over the period commensurate with the expected life of the options and the mean historical implied volatility from traded options. To assist management in determining
the estimated fair value of the Companys common stock, the Company engaged a third-party valuation specialist to perform a valuation as of July 31, 2009. The valuation is generally performed on a semi-annual basis as of January 31
and July 31. In estimating the fair value of the Companys common stock as of July 31, 2009, the independent valuation firm employed a two-step approach that first estimated the fair value of the Company as a whole, and then allocated
the enterprise value to the



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(Unaudited)



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

General Stock Option Information

The
following table sets forth the summary of option activity under our stock option programs for the six months ended July 31, 2009:



|                                |  |                           |   |  |                             |   |  |                               |     
|------------------------------- |  | ------------------------- | - |  | --------------------------- | - |  | ----------------------------- | ----
|                                |  | OptionsAvailable forGrant |   |  | Number ofOptionsOutstanding |   |  | WeightedAverageExercise Price
|Balances as of January 31, 2009 |  | 2,106,014                 |   |  | 12,777,404                  |   |  | $                             | 4.58
|Granted                         |  | (195,000                  | ) |  | 195,000                     |   |  | $                             | 3.45
|Exercised                       |  |                          |   |  | (504,752                    | ) |  | $                             | 4.31
|Cancelled                       |  | 521,066                   |   |  | (521,066                    | ) |  | $                             | 4.80
|                                |  |                           |   |  |                             |   |  |                               |     
|Balances as of July 31, 2009    |  | 2,432,080                 |   |  | 11,946,586                  |   |  | $                             | 4.56
|                                |  |                           |   |  |                             |   |  |                               |     

Information regarding the stock options outstanding at July 31, 2009 is summarized as
follows:



|                        |  |                   |  |                                          |  |                               |      |                   |           |                               |   |     
|----------------------- |  | ----------------- |  | ---------------------------------------- |  | ----------------------------- | ---- | ----------------- | --------- | ----------------------------- | - | ----
|Range of Exercise Price |  | NumberOutstanding |  | WeightedAverageRemainingContractual Life |  | WeightedAverageExercise Price |      | NumberExercisable |           | WeightedAverageExercise Price
|$1.25                   |  | 1,599,809         |  | 3.94 years                               |  | $                             | 1.25 |                   | 1,599,809 |                               | $ | 1.25
|$3.45                   |  | 85,000            |  | 9.70 years                               |  | $                             | 3.45 |                   |          |                               |   |    
|$5.00                   |  | 5,355,539         |  | 6.61 years                               |  | $                             | 5.00 |                   | 2,219,223 |                               | $ | 5.00
|$5.09                   |  | 187,500           |  | 7.32 years                               |  | $                             | 5.09 |                   | 62,311    |                               | $ | 5.09
|$5.15                   |  | 4,159,239         |  | 7.73 years                               |  | $                             | 5.15 |                   | 875,735   |                               | $ | 5.15
|$5.20                   |  | 284,499           |  | 8.32 years                               |  | $                             | 5.20 |                   | 58,335    |                               | $ | 5.20
|$5.78                   |  | 275,000           |  | 9.07 years                               |  | $                             | 5.78 |                   |          |                               |   |    
|                        |  |                   |  |                                          |  |                               |      |                   |           |                               |   |     
|                        |  | 11,946,586        |  | 6.77 years                               |  | $                             | 4.56 |                   | 4,815,413 |                               | $ | 3.79
|                        |  |                   |  |                                          |  |                               |      |                   |           |                               |   |     

The aggregate intrinsic value for options both outstanding and options exercisable as of
July 31, 2009 was $2.8 million.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



Stock-based compensation expense for the three months and six months ended July 31, 2009 and
2008 is categorized as follows (in thousands):



|                                                              |  |                            |     |                          |      |   |       |  |   |      |   |  |   |      
|------------------------------------------------------------- |  | -------------------------- | --- | ------------------------ | ---- | - | ----- |  | - | ---- | - |  | - | -----
|                                                              |  | Three Months EndedJuly 31, |     | Six Months EndedJuly 31,
|                                                              |  | 2009                       |     |                          | 2008 |   | 2009  |  |   | 2008
|Cost of maintenance                                           |  | $                          | 1   |                          |      | $ | 18    |  | $ | 8    |   |  | $ | 44   
|Cost of professional services                                 |  |                            | (14 | )                        |      |   | 27    |  |   | (13  | ) |  |   | 65   
|                                                              |  |                            |     |                          |      |   |       |  |   |      |   |  |   |      
|Stock-based compensation (benefit) expense in cost of revenue |  |                            | (13 | )                        |      |   | 45    |  |   | (5   | ) |  |   | 109  
|                                                              |  |                            |     |                          |      |   |       |  |   |      |   |  |   |      
|Sales and marketing                                           |  |                            | 54  |                          |      |   | 447   |  |   | (26  | ) |  |   | 1,047
|Research and development                                      |  |                            | 81  |                          |      |   | 90    |  |   | 80   |   |  |   | 439  
|General and administrative                                    |  |                            | 220 |                          |      |   | 513   |  |   | 292  |   |  |   | 2,038
|                                                              |  |                            |     |                          |      |   |       |  |   |      |   |  |   |      
|Stock-based compensation expense in operating expense         |  |                            | 355 |                          |      |   | 1,050 |  |   | 346  |   |  |   | 3,524
|                                                              |  |                            |     |                          |      |   |       |  |   |      |   |  |   |      
|Total stock-based compensation expense                        |  | $                          | 342 |                          |      | $ | 1,095 |  | $ | 341  |   |  | $ | 3,633
|                                                              |  |                            |     |                          |      |   |       |  |   |      |   |  |   |      

On September 4, 2009, Serena announced its intention to launch a tender offer to permit all
eligible employees and its independent directors to exchange, on a one-for-one basis, stock options granted under Serenas 2006 Stock Incentive Plan for new stock options having a lower exercise price and different vesting terms. See Note 11 of
notes to our unaudited condensed consolidated financial statements for further discussion regarding the tender offer.



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

On
April 30, 2009, in response to the general weakening of the worldwide economy, an expected continued slowdown in IT spending and a decline in the Companys license revenue, the Company announced and began to execute a plan to reduce its
workforce by approximately 7%, or 50 positions, affecting all parts of the organization. The Company has realized and expects to continue to realize cost savings going forward as a result of this restructuring and other cost saving initiatives. This
restructuring is substantially complete, and in connection with these actions, the Company recorded restructuring charges in the first half of the fiscal year ending January 31, 2010 consisting principally of severance, payroll taxes and other
employee benefits totaling $1.4 million. The nature of all restructuring charges and the amounts paid and accrued as of July 31, 2009 are summarized as follows (in thousands):



|                                                    |  |                                                  |        |   |                             |   |                                        |  |   |        |  
|--------------------------------------------------- |  | ------------------------------------------------ | ------ | - | --------------------------- | - | -------------------------------------- |  | - | ------ | -
|                                                    |  | Severance,payroll taxesand otheremployeebenefits |        |   | Legal andothermiscellaneous |   | Total restructuringcharges andaccruals | 
|Balances as of January 31, 2009                     |  | $                                                | 279    |   |                             | $ |                                       |  | $ | 279    |  
|Activity during the six months ended July 31, 2009: |  |                                                  |        |   |                             |   |                                        |  |   |        |  
|Accrued                                             |  |                                                  | 1,384  |   |                             |   |                                       |  |   | 1,384  |  
|Paid                                                |  |                                                  | (1,370 | ) |                             |   |                                       |  |   | (1,370 | )
|                                                    |  |                                                  |        |   |                             |   |                                        |  |   |        |  
|Balances as of July 31, 2009                        |  | $                                                | 293    |   |                             | $ |                                       |  | $ | 293    |  
|                                                    |  |                                                  |        |   |                             |   |                                        |  |   |        |  

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



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



On September 3, 2009, subsequent to the close of the fiscal quarter ended July 31, 2009,
the Company communicated and began to execute on another workforce reduction and other cost cutting plan. See Note 11 of notes to our unaudited condensed consolidated financial statements for further discussion regarding this workforce reduction and
other cost cutting plan.



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

(a)
Goodwill:

The Company accounts for goodwill and certain intangible assets after an acquisition is completed in accordance with SFAS
No. 142. As such, goodwill and other indefinite life intangible assets are not amortized but instead are periodically tested for impairment. The annual impairment test required by SFAS No. 142 is performed in the fourth fiscal quarter each
year. The Company has concluded that there were no indicators of impairment of goodwill as of July 31, 2009.

The change in the
carrying amount of goodwill for the six months ended July 31, 2009 is as follows (in thousands):



|                                                                                       |  |   |        
|-------------------------------------------------------------------------------------- |  | - | -------
|Balance as of January 31, 2009                                                         |  | $ | 462,042
|Finalization of purchase accounting allocation with respect to the Projity acquisition |  |   | 2,131  
|                                                                                       |  |   |        
|Balance as of July 31, 2009                                                            |  | $ | 464,173
|                                                                                       |  |   |        



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(Unaudited)



(b) Other Intangible Assets:

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



|                                                         |  |                        |         |                         |   |          |                    |  |   |        
|-------------------------------------------------------- |  | ---------------------- | ------- | ----------------------- | - | -------- | ------------------ |  | - | -------
|                                                         |  | As of July 31, 2009   
|                                                         |  | Gross CarryingAmount   |         | AccumulatedAmortization |   |          | Net CarryingAmount
|Amortizing intangible assets:                            |  |                        |         |                         |   |          |                    |  |   |        
|Acquired technology                                      |  | $                      | 178,699 |                         | $ | (123,839 | )                  |  | $ | 54,860 
|Customer relationships                                   |  |                        | 278,900 |                         |   | (118,490 | )                  |  |   | 160,410
|Trademark/Trade name portfolio                           |  |                        | 14,300  |                         |   | (6,083   | )                  |  |   | 8,217  
|Capitalized software                                     |  |                        | 15,197  |                         |   | (6,284   | )                  |  |   | 8,913  
|                                                         |  |                        |         |                         |   |          |                    |  |   |        
|Total                                                    |  | $                      | 487,096 |                         | $ | (254,696 | )                  |  | $ | 232,400
|                                                         |  |                        |         |                         |   |          |                    |  |   |        
|                                                         | 
|                                                         |  | As of January 31, 2009
|                                                         |  | Gross CarryingAmount   |         | AccumulatedAmortization |   |          | Net CarryingAmount
|Amortizing intangible assets:                            |  |                        |         |                         |   |          |                    |  |   |        
|Acquired technology                                      |  | $                      | 181,910 |                         | $ | (106,745 | )                  |  | $ | 75,165 
|Customer relationships                                   |  |                        | 278,900 |                         |   | (100,981 | )                  |  |   | 177,919
|Trademark/Trade name portfolio                           |  |                        | 14,300  |                         |   | (5,185   | )                  |  |   | 9,115  
|Capitalized software                                     |  |                        | 12,818  |                         |   | (4,973   | )                  |  |   | 7,845  
|                                                         |  |                        |         |                         |   |          |                    |  |   |        
|Total                                                    |  | $                      | 487,928 |                         | $ | (217,884 | )                  |  | $ | 270,044
|                                                         |  |                        |         |                         |   |          |                    |  |   |        
|                                                         | 
|                                                         |  | As of July 31, 2009   
|                                                         |  | Gross CarryingAmount   |         | AccumulatedAmortization |   |          | Net CarryingAmount
|Estimated amortization expense:                          |  |                        |         |                         |   |          |                    |  |   |        
|For remaining six months of year ending January 31, 2010 |  |                        |         |                         |   |          |                    |  | $ | 37,386 
|For year ending January 31, 2011                         |  |                        |         |                         |   |          |                    |  |   | 73,479 
|For year ending January 31, 2012                         |  |                        |         |                         |   |          |                    |  |   | 43,439 
|For year ending January 31, 2013                         |  |                        |         |                         |   |          |                    |  |   | 37,893 
|For year ending January 31, 2014                         |  |                        |         |                         |   |          |                    |  |   | 36,300 
|Thereafter                                               |  |                        |         |                         |   |          |                    |  |   | 3,903  
|                                                         |  |                        |         |                         |   |          |                    |  |   |        
|Total                                                    |  |                        |         |                         |   |          |                    |  | $ | 232,400
|                                                         |  |                        |         |                         |   |          |                    |  |   |        

As of July 31, 2009, the weighted average remaining amortization periods for acquired
technology, trademark/trade name portfolio and customer relationships, and capitalized software are 18 months, 55 months and 18 months, respectively. The total weighted average remaining amortization period for all identifiable intangible assets is
40 months. The aggregate amortization expense of acquired technology and other intangible assets was $18.0 million and $17.9 million in the three months ended July 31, 2009 and 2008, respectively, and $35.5 million and $35.9 million in the six
months ended July 31, 2009 and 2008, respectively. There were no impairment charges in the three month and six month periods ended July 31, 2009 and 2008.

Capitalized Software Costs and Impairment.The carrying amount of the Companys capitalized software costs related to its on-demand application services as of July 31, 2009 was $6.7 million. In
accordance with



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (as amended),the Company tests its long-lived assets for
recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. A long-lived asset is not recoverable, and therefore subject to an impairment charge, if its carrying amount exceeds the
undiscounted cash flows associated with it. As a result of the general weakening of the worldwide economy, a continued slowdown in IT spending and a decline in the Companys license revenue, the Company tested its capitalized software costs
related to its on-demand application services for impairment and concluded that no impairment existed as of July 31, 2009 since the estimated undiscounted cash flows expected to result from the capitalized software related to the Companys
on-demand application services exceeded its carrying amount. Factors that could lead to a subsequent recognition of impairment of capitalized software costs include a continued weakening of the worldwide economy, deterioration in sales forecasts
from the Companys on-demand application services, reductions in IT spending by the Companys customers and future declines in the Companys license revenue. It is reasonably possible in the near-term that such factors could arise and
the resulting impairment charge could materially adversely affect the Companys results of operations in the quarter where such determination is reached.



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

The Company reports components
of comprehensive loss in our annual consolidated statements of shareholders equity. Comprehensive loss consists of net loss and foreign currency translation adjustments. Total comprehensive loss for the three months and six months ended
July 31, 2009 and 2008 is as follows (in thousands):



|                                                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                           |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |  
|                                                                           |  | 2009                       |        |   | 2008                     |   |        | 2009 |  |   | 2008   |  
|Comprehensive loss:                                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Net loss                                                                   |  | $                          | (1,495 | ) |                          | $ | (3,021 | )    |  | $ | (6,310 | ) |  | $ | (11,525 | )
|Other comprehensive income (loss)foreign currency translation adjustments |  |                            | (1,070 | ) |                          |   | 24     |      |  |   | (1,490 | ) |  |   | (278    | )
|                                                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Total comprehensive loss                                                   |  | $                          | (2,565 | ) |                          | $ | (2,997 | )    |  | $ | (7,800 | ) |  | $ | (11,803 | )
|                                                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  



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

In
July 2009, the Financial Accounting Standards Board (FASB) released the final version of its new Accounting Standards Codification (Codification) as the single authoritative source for U.S. generally accepted accounting
principles (GAAP). The Codification supercedes all previous GAAP accounting standards as described in Statement of Financial Accounting Standard No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162 (SFAS No. 168). While not intended to change GAAP, the Codification significantly changes the way in which the accounting literature is organized. This SFAS
becomes effective for interim and annual periods ending after September 15, 2009. We will apply the Codification to the third quarter fiscal 2010 interim financial statements. The Company does not believe that the adoption of the Codification
will have an effect on the Companys financial position, results of operations or cash flows.

In May 2009, the FASB issued SFAS
No. 165 Subsequent Events which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are



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(Unaudited)



issued or are available to be issued. In particular, this Statement sets forth: (1) the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This statement is to be applied prospectively and is effective for
interim and annual periods ending after June 15, 2009. The Company has adopted the required provisions of SFAS No. 165 as of May 1, 2009. The adoption of the required provisions of SFAS No. 165 did not have a material impact on
the Companys financial position, results of operations or cash flows. See Note 11 of notes to our unaudited condensed consolidated financial statements for further discussion regarding SFAS No. 165 and subsequent events.

In April 2009, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(FSP FAS 157-4). FSP FAS 157-4 amends SFAS 157 and provides additional
guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not
orderly for fair value measurements. This FSP is to be applied prospectively with retrospective application not permitted. The Company has adopted the required provisions of SFAS No. 157-4 as of May 1, 2009. The adoption of the required
provisions of SFAS No. 157-4 did not have a material impact on the Companys financial position, results of operations or cash flows. See Note 9 of notes to our unaudited condensed consolidated financial statements for further discussion
regarding the adoption of SFAS No. 157-4 and fair value measurements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS
124-2. This FSP amends SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, SFAS 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, and EITF Issue
No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to make the other-than-temporary
impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP will replace the existing requirement that the entitys management assert it has both the intent and
ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost
basis. This FSP provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit
losses, and an aging of securities with unrealized losses. Although this FSP does not result in a change in the carrying amount of debt securities, it does require that the portion of an other-than-temporary impairment not related to a credit loss
for a held-to-maturity security be recognized in a new category of other comprehensive income and be amortized over the remaining life of the debt security as an increase in the carrying value of the security. This FSP is effective for interim and
annual periods ending after June 15, 2009. The Company has adopted the required provisions of this FSP as of May 1, 2009. The adoption of the required provisions of this FSP did not have a material impact on the Companys financial
position, results of operations or cash flows.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and liabilities were only disclosed annually. This FSP applies to all financial instruments within the scope of SFAS 107 and requires all entities to disclose



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



the method(s) and significant assumptions used to estimate the fair value of financial instruments. This FSP is effective for interim periods ending
after June 15, 2009. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after
initial adoption. The Company has adopted the required provisions of this FSP as of May 1, 2009. The adoption of the required provisions of this FSP did not have a material impact on the Companys financial position, results of operations
or cash flows. See Note 9 of notes to our unaudited condensed consolidated financial statements for further discussion regarding the adoption of FSP FAS No. 107-1 and fair value of financial instruments.

In October 2008, the FASB issued an additional FSP that clarifies the application of SFAS No. 157 in a market that is not active. The Company has
adopted the required provisions of SFAS No. 157 beginning in the first quarter of fiscal 2009. The adoption of the required provisions of SFAS No. 157 did not have a material impact on the Companys financial position, results of
operations or cash flows. See Note 9 of notes to our unaudited condensed consolidated financial statements for additional information regarding the adoption of this Statement.

In February 2008, the FASB issued FSP FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related
Interpretive Accounting Pronouncements That Address Leasing Transactions, and FSP FAS 157-2, Effective Date of FASB Statement No. 157. FSP FAS 157-1 removes leasing from the scope of SFAS No. 157, Fair
Value Measurements. FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The Company has adopted the required provisions of SFAS No. 157-2 as of February 1, 2009. The adoption of the required provisions of SFAS No. 157-2 did not have a material impact on
the Companys financial position, results of operations or cash flows. See Note 9 of notes to our unaudited condensed consolidated financial statements for further discussion regarding the adoption of SFAS No. 157-2 and fair value
measurements.

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible
Assets. FSP No. 142-3 amends the guidance in FASB Statement No. 142, Goodwill and Other Intangible Assets (as amended), for estimating useful lives of recognized intangible assets and requires additional
disclosures related to renewing or extending the terms of a recognized intangible asset. In estimating the useful life of a recognized intangible asset, FSP No. 142-3 requires companies to consider their historical experience in renewing or
extending similar arrangements together with the assets intended use, regardless of whether the arrangements have explicit renewal or extension provisions. FSP No. 142-3 is effective for fiscal years beginning after December 15,
2008, and is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements are to be applied prospectively to all intangible assets acquired subsequent to January 31, 2009. The Company adopted
this Statement as of February 1, 2009 and the adoption of this Statement did not have a material effect on the Companys financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB
Statement No. 133. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. This Statement is effective for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this Statement as of February 1, 2009, and its adoption had no effect
on the Companys financial position, results of operations or cash flows.



14



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##### Table of Contents

SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



In December 2007, the FASB issued SFAS No. 141(R), Business
Combinations, (SFAS 141(R)), a revision of Statement of Financial Accounting Standards No. 141 (SFAS 141). This Statement requires assets and liabilities acquired in a business combination, contingent
consideration and certain acquired contingencies, to be measured at their fair value as of the date of acquisition. This Statement also requires that acquisition-related costs and restructuring costs be recognized separately from the business
combination. This Statement is effective for fiscal years beginning after December 15, 2008 and is effective for business combinations entered into on or after January 1, 2009. The Company will apply the guidance of SFAS 141(R) to business
combinations completed on or after January 1, 2009. Its effects on future periods will depend on the nature and significance of any acquisitions subject to this Statement.



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

Debt as of July 31, 2009 and
January 31, 2009 consisted of the following (in thousands):



|                                                                                 |  |              |         |                 |   |        
|-------------------------------------------------------------------------------- |  | ------------ | ------- | --------------- | - | -------
|                                                                                 |  | July 31,2009 |         | January 31,2009
|Senior secured term loan, due March 10, 2013, three-month LIBOR plus 2.00%       |  | $            | 318,000 |                 | $ | 320,000
|Revolving term credit facility, due March 10, 2012, three-month LIBOR plus 2.25% |  |              | 65,000  |                 |   | 65,000 
|Senior subordinated notes, due March 15, 2016, 10.375%                           |  |              | 142,952 |                 |   | 167,383
|                                                                                 |  |              |         |                 |   |        
|Total long-term debt                                                             |  |              | 525,952 |                 |   | 552,383
|Less current portion                                                             |  |              |        |                 |   |       
|                                                                                 |  |              |         |                 |   |        
|Total long-term debt, less current portion                                       |  | $            | 525,952 |                 | $ | 552,383
|                                                                                 |  |              |         |                 |   |        

Senior Secured Credit Agreement

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

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

In the quarters ended July 31, 2006, April 30, 2007, January 31, 2008 and April 30, 2009, the Company made
principal payments on the $400 million senior secured term loan totaling $25 million, $30 million, $25 million and $2 million, respectively.



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SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



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

Senior Subordinated Notes

As of July 31, 2009, the Company has outstanding $143.0 million principal amount of senior subordinated notes, which bear interest at a rate of
10.375%, payable semi-annually on March 15 and September 15, maturing on March 15, 2016. Each of our domestic subsidiaries that guarantees the obligations under the Companys senior secured credit agreement will jointly,
severally and unconditionally guarantee the notes on an unsecured senior subordinated basis. The Company does not have any domestic subsidiaries and, accordingly, there are no guarantors. The notes are the Companys unsecured, senior
subordinated obligations, and the guarantees, if any, will be unsecured, senior subordinated obligations of the guarantors. The notes are subject to redemption at the Companys option under terms and conditions specified in the indenture
related to the notes, and may be redeemed at the option of the holders at 101% of their face amount, plus accrued and unpaid interest, upon certain change of control events.

In the fiscal year ended January 31, 2009, the Company repurchased, in eight separate privately negotiated transactions, an aggregate of $32.6
million of principal amount of its original outstanding $200.0 million senior subordinated notes. The repurchases resulted in a gain of $8.7 million from the extinguishment of debt in the fiscal year ended January 31, 2009.

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

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

Debt Covenants

The senior
subordinated notes and the Credit Facility contain various covenants including limitations on additional indebtedness, capital expenditures, restricted payments, the incurrence of liens, transactions with affiliates and sales of assets. In addition,
the Credit Facility requires the Company to comply with certain financial covenants, including leverage and interest coverage ratios and capital expenditure limitations. The Company was in compliance with all of the covenants of the Credit Facility
as of July 31, 2009, and believes it will be in compliance as of January 31, 2010.

The Companys senior secured credit
agreement requires the Company to maintain a rolling twelve-month consolidated Adjusted EBITDA to consolidated Interest Expense ratio of a minimum of 1.75x at the end of each quarter beginning with the fiscal year ending January 31, 2009 until
it increases to 2.00x at the end of the fiscal year ending January 31, 2010. Consolidated Interest Expense is defined in the senior secured credit agreement as consolidated cash interest expense less cash interest income and is further adjusted
for certain non-cash interest expenses and other items. The Company is also required to maintain a consolidated Total Debt to consolidated Adjusted EBITDA ratio of a maximum of 6.00x at the end of each quarter beginning with the fiscal year ending
January 31, 2009 until it decreases to 5.50x by the end of the fiscal year ending January 31, 2010 and until it



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SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



decreases to 5.00x by the end of the fiscal year ending January 31, 2011. Consolidated Total Debt is defined in the senior secured credit agreement as
total debt other than certain indebtedness and is reduced by the amount of cash and cash equivalents on our consolidated balance sheet in excess of $5.0 million. As of July 31, 2009, our consolidated Total Debt was $433.0 million, consisting of
total debt other than certain indebtedness totaling $526.0 million, net of cash and cash equivalents in excess of $5.0 million totaling $93.0 million. Failure to satisfy these ratio requirements would constitute a default under the senior
secured credit agreement. If the Companys lenders failed to waive any such default, our repayment obligations under the senior secured credit agreement could be accelerated, which would also constitute a default under the indenture governing
the senior subordinated notes.

The Companys ability to incur additional debt and make certain restricted payments under the
indenture governing the senior subordinated notes, subject to specified exceptions, is tied to an Adjusted EBITDA to Fixed Charges ratio of at least 2.0x, except that we may incur certain debt and make certain restricted payments and certain
permitted investments without regard to the ratio, such as the Companys ability to incur up to an aggregate principal amount of $625.0 million under our senior secured credit agreement (inclusive of amounts outstanding under our senior secured
credit agreement from time to time; as of July 31, 2009, we had $318.0 million outstanding under our term loan and $65.0 million under our revolving credit facility), to acquire persons engaged in a similar business that become restricted
subsidiaries and to make other investments equal to the greater of $25.0 million or 2% of our consolidated assets. Fixed Charges are defined in the indenture governing the senior subordinated notes as consolidated Interest Expense less interest
income, adjusted for acquisitions, and further adjusted for non-cash interest expense.



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

The income tax benefit was
$5.1 million and $9.4 million in the quarter and six months ended July 31, 2009, respectively, as compared to $2.7 million and $8.5 million in the same quarter and six months, respectively, a year ago. The Companys projected
effective income tax benefit rate for fiscal year 2010 is 55%, excluding $0.7 million of discrete items recorded as a tax benefit in the six months ended July 31, 2009. The Companys effective income tax benefit rate for fiscal year 2009
was 3%. The effective income tax benefit rate projected for fiscal 2010 is significantly greater than the effective income tax benefit rate for fiscal 2009 predominantly due to the goodwill impairment charge in the fourth quarter of fiscal 2009
totaling $326.7 million. The Companys effective income tax benefit rate is greater than the statutory rate due to the impacts of permanently reinvested foreign earnings, the domestic production deduction, and the United States research and
experimentation tax credit.

At January 31, 2009, the Company had total federal, state and foreign unrecognized tax benefits of
$10.7 million, including interest of $2.1 million. During the six months ended July 31, 2009 the total unrecognized tax benefit decreased and income tax benefit was favorably affected by $2.6 million due to audit settlements.
During the six months ended July 31, 2009 the Company accrued immaterial amounts in interest and penalties.

The Company files tax
returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The statute of limitations on our federal and major state tax return filings remains open for the years ended January 31, 2006 through January 31, 2009.
The statute of limitations on U.K. income tax filings remains open for the years ended January 31, 1999 through January 31, 2009. Over the next twelve months, we expect a decrease of $1.1 million in our unrecognized tax benefits as a
result of expiring statutes.



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

As described in Note 6 of
notes to our unaudited condensed consolidated financial statements, the Company adopted the provisions of SFAS No. 157 as amended by FSP FAS 157-1 and FSP FAS 157-2 on February 1,



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##### Table of Contents

SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



2008. FSP 157-2 Partial Deferral of the Effective Date of Statement 157 deferred the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008 and the Company adopted FSP 157-2 on February 1, 2009. The adoption of SFAS 157 and SFAS 157-2 did not have a material impact on our
unaudited condensed consolidated financial statements. The Company recorded no change to its opening balance of retained earnings as of February 1, 2008 as it did not have any financial instruments requiring retrospective application under the
provisions of SFAS No. 157.

Fair Value Hierarchy

SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from
independent sources (observable inputs) or reflect the Companys own assumptions of market participant valuation (unobservable inputs). In accordance with SFAS No. 157, these two types of inputs have created the following fair value
hierarchy:



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



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



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

SFAS No. 157 requires the use of observable market data if such data is available without undue cost and effort.

Items Measured at Fair Value on a Recurring Basis

The following table presents the Companys assets and liabilities that are measured at fair value on a recurring basis at July 31, 2009 consistent with the fair value hierarchy provisions of SFAS No. 157 (in thousands):



|                         |  |                                     |                                                             |                                                |                                             |        |                                         |   |       |  |   |  
|------------------------ |  | ----------------------------------- | ----------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------- | ------ | --------------------------------------- | - | ----- |  | - | -
|                         |  | Estimated FairValue atJuly 31, 2009 |                                                             | Fair Value Measurement at Reporting Date Using
|Description              |  |                                     | Quoted Prices inActive Marketsfor Identical Assets(Level 1) |                                                | Significant OtherObservable Inputs(Level 2) |        | SignificantUnobservable Inputs(Level 3)
|Assets:                  |  |                                     |                                                             |                                                |                                             |        |                                         |   |       |  |   |  
|Money market funds       |  | $                                   | 73,198                                                      |                                                | $                                           | 73,198 |                                         | $ |      |  | $ | 
|                         |  |                                     |                                                             |                                                |                                             |        |                                         |   |       |  |   |  
|Total Assets             |  | $                                   | 73,198                                                      |                                                | $                                           | 73,198 |                                         | $ |      |  | $ | 
|                         |  |                                     |                                                             |                                                |                                             |        |                                         |   |       |  |   |  
|Liabilities:             |  |                                     |                                                             |                                                |                                             |        |                                         |   |       |  |   |  
|Derivative instrument(1) |  | $                                   | 4,446                                                       |                                                | $                                           |       |                                         | $ | 4,446 |  | $ | 
|                         |  |                                     |                                                             |                                                |                                             |        |                                         |   |       |  |   |  
|Total Liabilities        |  | $                                   | 4,446                                                       |                                                | $                                           |       |                                         | $ | 4,446 |  | $ | 
|                         |  |                                     |                                                             |                                                |                                             |        |                                         |   |       |  |   |  



|(1) | Included in accrued expenses in the unaudited condensed consolidated balance sheet. See Managements Discussion and Analysis of Financial Condition and Results of
OperationsOther Income (Expense)Change in Fair Value of Derivative Instrument, for further discussion regarding the derivative instrument.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



At July 31, 2009, the Company did not have any assets or liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3).

Fair Value of Financial Instruments

The carrying amount of the Companys financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their respective fair values because of the relatively short period of time between origination of the instruments and their expected realization. The fair value of the Companys senior secured term loan and revolving
term credit facility approximate their respective carrying amounts.

The estimated fair values of certain of the Companys long-term
debt obligations, based on quoted market prices, as of July 31, 2009 and January 31, 2009 are as follows:



|                                           |  |                |         |            |   |        
|------------------------------------------ |  | -------------- | ------- | ---------- | - | -------
|                                           |  | CarryingAmount |         | Fair Value
|                                           |  | (In thousands)
|As of July 31, 2009:                       |  |                |         |            |   |        
|10.375% Senior Subordinated Notes due 2016 |  | $              | 142,952 |            | $ | 133,303
|As of January 31, 2009:                    |  |                |         |            |   |        
|10.375% Senior Subordinated Notes due 2016 |  | $              | 167,383 |            | $ | 97,082 

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



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

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



|(11) | Subsequent Events
|---- | -----------------

The Company accounts for its
subsequent events in accordance with the provisions of SFAS No. 165 Subsequent Events,(SFAS 165). Under SFAS 165, an entity must disclose the date through which subsequent events have been evaluated, as well as
whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. The Company evaluated subsequent events through September 11, 2009, which was commensurate with the date the
financial statements were issued.

On September 3, 2009, in response to the continuing weakening of the worldwide economy, slowdown in
IT spending and decline in the Companys license revenue, the Company communicated and began to execute a



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SERENA SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



plan to reduce its workforce by approximately 7%, or 49 positions, and implement additional cost saving initiatives. The reduction in its workforce is
expected to affect all organizations within the Company, with a majority of the positions eliminated within the Companys general and administrative and research and development organizations. The Company expects these actions to be
substantially completed by October 31, 2009, resulting in restructuring charges during the quarter ending October 31, 2009 consisting principally of severance, payroll taxes and other employee benefits, facilities closures and legal and
other miscellaneous costs of between $4.0 million and $5.0 million, and a reduction of operating expenses of between $3.0 million and $4.0 million over the remaining course of fiscal year 2010.

On September 4, 2009, Serena announced its intention to launch a tender offer to permit all eligible employees and its independent directors to
exchange, on a one-for-one basis, stock options granted under Serenas 2006 Stock Incentive Plan for new stock options having a lower exercise price and different vesting terms. Eligible optionholders would have the opportunity to exchange part
or all of their time-based options for new time-based options having a vesting period of three years and an exercise price equal to the fair market value of Serenas common stock after the closing of the tender offer. Eligible employees who are
not executive officers or officers of Serena would have the opportunity to exchange part or all of their performance-based options for new time-based options having a vesting period of three years and an exercise price equal to the fair market value
of Serenas common stock after the closing of the tender offer. Executive officers and officers of Serena would have the opportunity to exchange part or all of their performance-based options for new performance-based options having a vesting
period of three years and six months, with vesting based on the achievement of EBITA targets established by Serenas board of directors, and an exercise price equal to the fair market value of Serenas common stock after the closing of the
tender offer. Eligible employees holding stock options to acquire fewer than 25,000 shares of Serena common stock would also have the opportunity to sell their stock options to Serena based on a purchase price of $1.25 per share into which the
options are exercisable. The stock options that potentially could be exchanged through the proposed tender offer represent approximately 9.0 million shares of Serena common stock, and the stock options that potentially could be purchased by
Serena through the proposed tender offer represent approximately 0.6 million shares of Serena common stock. Management is currently assessing the potential financial impact of the proposed option tender offer based on a number of factors,
including the expected level of participation, potential exercise price of the new stock options, achievement of vesting targets under performance-based options and the potential closing date of the tender offer.



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##### Table of Contents

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

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to safe
harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include, but are not limited to, statements about financial projections, operational plans and objectives, future economic performance
and other projections and estimates contained in this report. When used in this report, the words expects, anticipates, intends, plans, believes, seeks, estimates
and similar expressions identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, they are subject to important factors that could cause actual results to differ materially from those expressed or
implied by the forward-looking statements, including those risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 and Part II, Item 1A of our Quarterly Report on Form
10-Q for the fiscal quarter ended July 31, 2009. We assume no obligation to update any forward-looking statements contained in this report. It is important that the discussion below be read together with the attached unaudited condensed
consolidated financial statements and notes thereto and the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 and Part II, Item 1A of our Quarterly Report on
Form 10-Q for the fiscal quarter ended July 31, 2009.

Overview

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

In connection with our merger with Spyglass Merger Corp., an affiliate of Silver Lake Partners, in March 2006, we entered into a senior secured credit
agreement, issued senior subordinated notes, and entered into other related transactions, which we refer to collectively as the acquisition transactions. As a result of the acquisition transactions, we became, and continue to be, highly leveraged.
As of July 31, 2009 we had outstanding $526.0 million in aggregate indebtedness, including $65.0 million of borrowing under our revolving term credit facility. Our liquidity requirements are significant, primarily due to debt service
requirements.

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

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

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



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##### Table of Contents

In the quarter ended July 31, 2009, when compared to the same quarter a year ago, total revenues
decreased 21%, as total revenues were $55.2 million in the current quarter versus $70.1 million in the same quarter a year ago. In the six months ended July 31, 2009, when compared to the same six months a year ago, total revenues decreased
19%, as total revenues were $108.0 million in the current six months versus $133.0 million in the same six months a year ago. For both the current quarter and six months, when compared to the same quarter and six months a year ago, the decrease in
total revenue was primarily due to slower software purchasing activity across all product lines resulting from adverse world-wide general economic conditions, and to a lesser extent, declines in our consulting business.

In the quarter and six months ended July 31, 2009, 73% and 65%, respectively, of our total software license revenue came from our distributed
systems products, as compared to 56% and 64%, respectively, in the same quarter and six months a year ago. In the quarter and six months ended July 31, 2009, 27% and 35%, respectively, of our total software license revenue came from our
mainframe products, as compared to 44% and 36%, respectively, in the same quarter and six months a year ago.

Historically, our revenue has
been generally attributable to sales in North America, Europe and to a lesser extent Asia Pacific. Revenue attributable to sales in North America accounted for approximately 68% of our total revenue in both the quarter and six months ended
July 31, 2009, as compared to 62% in both the same quarter and six months a year ago.

Our international revenue is attributable
principally to our European operations. International revenue accounted for approximately 32% of our total revenue in both the quarter and six months ended July 31, 2009, as compared to 38% in both the same quarter and six months a year ago.

Critical Accounting Policies and Estimates

This discussion is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. In many instances, we could have reasonably used
different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by us. If actual results
differ significantly from these estimates, the resulting changes could have a material adverse effect on our future reported financial results.

On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, trade accounts receivable and allowance for doubtful accounts, impairment or disposal of long-lived assets, accounting
for income taxes, projections used in purchase accounting, impairment of goodwill, valuation of our common stock, and assumptions related to valuation of our options and restricted stock, among other things. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources.

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



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



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



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



| |  |  | Accounting for derivative instruments, and
| | - |  | ------------------------------------------



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



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In the second quarter of fiscal year 2010, there has been no change in the above critical accounting
policies or the underlying assumptions and estimates used in their application. See our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 filed with the SEC on May 1, 2009 for further information regarding our critical
accounting policies and estimates.

Recent Accounting Pronouncements

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

Historical Results of Operations

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



|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|------------------------------------------------- |  | --------------------------- | -- |  | ------------------------- | -- |  | ---- | -- |  | ---- | --
|                                                  |  | Three Months Ended July 31, |    |  | Six Months Ended July 31, |   
|                                                  |  | 2009                        |    |  | 2008                      |    |  | 2009 |    |  | 2008 |   
|Revenue:                                          |  |                             |    |  |                           |    |  |      |    |  |      |   
|Software licenses                                 |  | 20                          | %  |  | 28                        | %  |  | 19   | %  |  | 26   | % 
|Maintenance                                       |  | 70                          | %  |  | 60                        | %  |  | 70   | %  |  | 61   | % 
|Professional services                             |  | 10                          | %  |  | 12                        | %  |  | 11   | %  |  | 13   | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Total revenue                                     |  | 100                         | %  |  | 100                       | %  |  | 100  | %  |  | 100  | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Cost of revenue:                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Software licenses                                 |  | 1                           | %  |  | 1                         | %  |  | 1    | %  |  | 1    | % 
|Maintenance                                       |  | 6                           | %  |  | 6                         | %  |  | 6    | %  |  | 6    | % 
|Professional services                             |  | 10                          | %  |  | 12                        | %  |  | 11   | %  |  | 12   | % 
|Amortization of acquired technology               |  | 16                          | %  |  | 12                        | %  |  | 16   | %  |  | 13   | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Total cost of revenue                             |  | 33                          | %  |  | 31                        | %  |  | 34   | %  |  | 32   | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Gross profit                                      |  | 67                          | %  |  | 69                        | %  |  | 66   | %  |  | 68   | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Operating expenses:                               |  |                             |    |  |                           |    |  |      |    |  |      |   
|Sales and marketing                               |  | 26                          | %  |  | 31                        | %  |  | 27   | %  |  | 32   | % 
|Research and development                          |  | 14                          | %  |  | 13                        | %  |  | 15   | %  |  | 13   | % 
|General and administrative                        |  | 8                           | %  |  | 8                         | %  |  | 8    | %  |  | 8    | % 
|Amortization of intangible assets                 |  | 17                          | %  |  | 13                        | %  |  | 17   | %  |  | 14   | % 
|Restructuring, acquisition and other charges      |  | 1                           | %  |  |                          |    |  | 2    | %  |  | 2    | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Total operating expenses                          |  | 66                          | %  |  | 65                        | %  |  | 69   | %  |  | 69   | % 
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Operating income (loss)                           |  | 1                           | %  |  | 4                         | %  |  | (3   | )% |  | (1   | )%
|Interest income                                   |  |                            |    |  | 1                         | %  |  |     |    |  | 1    | % 
|Gain on early extinguishment of debt              |  | 2                           | %  |  | 1                         | %  |  | 4    | %  |  |     |   
|Interest expense                                  |  | (16                         | )% |  | (15                       | )% |  | (16  | )% |  | (16  | )%
|Change in the fair value of derivative instrument |  | 2                           | %  |  | 2                         | %  |  | 1    | %  |  | 2    | % 
|Amortization and write-off of debt issuance costs |  | (1                          | )% |  | (1                        | )% |  | (1   | )% |  | (1   | )%
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Loss before income taxes                          |  | (12                         | )% |  | (8                        | )% |  | (15  | )% |  | (15  | )%
|Income tax benefit                                |  | (9                          | )% |  | (4                        | )% |  | (9   | )% |  | (6   | )%
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   
|Net loss                                          |  | (3                          | )% |  | (4                        | )% |  | (6   | )% |  | (9   | )%
|                                                  |  |                             |    |  |                           |    |  |      |    |  |      |   



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##### Table of Contents

Revenue

We derive revenue from software licenses, maintenance and professional services. Our total revenue decreased $14.9 million, or 21%, to $55.2 million in the quarter ended July 31, 2009 from $70.1 million in the same quarter a year
ago. For the six months ended July 31, 2009, total revenue decreased $25.0 million, or 19%, to $108.0 million from $133.0 million in the same six months a year ago.

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



|                      |  |                             |            |      |                           |                    |  |   |         |   |            |     |                    |      |   |         |  |   |         |  |   |         |   |  |     |   
|--------------------- |  | --------------------------- | ---------- | ---- | ------------------------- | ------------------ |  | - | ------- | - | ---------- | --- | ------------------ | ---- | - | ------- |  | - | ------- |  | - | ------- | - |  | --- | --
|                      |  | Three Months Ended July 31, |            |      | Six Months Ended July 31, |                   
|                      |  | 2009                        |            | 2008 |                           | Increase(Decrease) |  |   | 2009    |   | 2008       |     | Increase(Decrease) |     
|                      |  |                             | In Dollars |      |                           | In %               |  |   |         |   | In Dollars |     |                    | In % |  
|Revenue:              |  |                             |            |      |                           |                    |  |   |         |   |            |     |                    |      |   |         |  |   |         |  |   |         |   |  |     |   
|Software licenses     |  | $                           | 11,017     |      | $                         | 19,874             |  | $ | (8,857  | ) |            | (45 | )%                 |      | $ | 20,484  |  | $ | 34,414  |  | $ | (13,930 | ) |  | (40 | )%
|Maintenance           |  |                             | 38,531     |      |                           | 41,820             |  |   | (3,289  | ) |            | (8  | )%                 |      |   | 75,260  |  |   | 81,690  |  |   | (6,430  | ) |  | (8  | )%
|Professional services |  |                             | 5,633      |      |                           | 8,388              |  |   | (2,755  | ) |            | (33 | )%                 |      |   | 12,221  |  |   | 16,941  |  |   | (4,720  | ) |  | (28 | )%
|                      |  |                             |            |      |                           |                    |  |   |         |   |            |     |                    |      |   |         |  |   |         |  |   |         |   |  |     |   
|Total revenue         |  | $                           | 55,181     |      | $                         | 70,082             |  | $ | (14,901 | ) |            | (21 | )%                 |      | $ | 107,965 |  | $ | 133,045 |  | $ | (25,080 | ) |  | (19 | )%
|                      |  |                             |            |      |                           |                    |  |   |         |   |            |     |                    |      |   |         |  |   |         |  |   |         |   |  |     |   

Software Licenses.    Software licenses revenue as a percentage of
total revenue was 20% and 19% in the quarter and six months ended July 31, 2009, respectively, as compared to 28% and 26% in the same quarter and six months, respectively, a year ago. For both the current quarter and six months, when compared
to the same quarter and six months a year ago, the decrease in software licenses revenue, in both absolute dollars and as a percentage of total revenue, is predominantly the result of slower software purchasing activity resulting from world-wide
general economic weakness. Our core software configuration management, or SCM, products continue to make up a significant portion of our total software license revenue. Combined, our core SCM products accounted for $10.5 million, or 96%, and $19.6
million, or 95%, of total software licenses revenue in the quarter and six months ended July 31, 2009, respectively, as compared to $16.2 million, or 82%, and $29.9 million, or 87%, in the same quarter and six months, respectively, a year ago.
Distributed systems products accounted for $8.1 million, or 73%, and $13.3 million, or 65% of total software licenses revenue in the quarter and six months ended July 31, 2009, respectively, as compared to $11.1 million, or 56%, and $22.2
million, or 64%, in the same quarter and six months, respectively, a year ago. We expect that our Dimensions, ZMF and Serena Business Mashups products will continue to account for a substantial portion of software license revenue in
the future. We expect our software license revenue for the quarter ending October 31, 2009 to increase slightly sequentially notwithstanding the anticipated continuation of adverse worldwide economic conditions and reduced IT spending.

Maintenance.    Maintenance revenue as a percentage of total revenue was 70% in both the quarter and six months
ended July 31, 2009, as compared to 60% and 61% in the same quarter and six months, respectively, a year ago. For both the current quarter and six months, when compared to the same quarter and six months a year ago, the increase in maintenance
revenue as a percentage of total revenue is primarily due to the impact from lower software license revenue and professional services revenue resulting from the general weakening of the worldwide economy and continued slowdown in IT spending. For
both the current quarter and six months, when compared to the same quarter and six months a year ago, the decrease in maintenance revenue in absolute dollars is primarily due to the strengthening of the United States dollar against foreign
currencies, predominantly the British pound sterling and euro, all partially offset by growth in the installed software license base, as new licenses generally include one year of maintenance, and maintenance price increases. We expect maintenance
revenue for the quarter ending October 31, 2009 to increase slightly sequentially and remain relatively flat or decline slightly year over year as a result of the recent decline in our software license revenue and pricing pressure caused by the
expected continuation of adverse worldwide economic conditions and reduced IT spending.



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Professional Services.    Professional services revenue as a percentage of
total revenue was 10% and 11% in the quarter and six months ended July 31, 2009, respectively, as compared to 12% and 13% in the same quarter and six months, respectively, a year ago. For both the current quarter and six months, when compared
to the same quarter and six months a year ago, the decrease in both absolute dollars and as a percentage of total revenue is predominantly due to a decline in the number of smaller consulting engagements primarily as a result of lower software
license revenue and the general weakening of the worldwide economy. In general, professional services revenue is attributable to consulting opportunities in our installed customer base and expanding our consulting service capabilities. We expect
professional services revenue for the quarter ending October 31, 2009 to increase slightly sequentially as a result of the expected continuation of adverse worldwide economic conditions and reduced IT spending.

Cost of Revenue

Cost of revenue, consisting of cost
of software licenses, cost of maintenance, cost of professional services and amortization of acquired technology, was 33% and 34% of total revenue in the quarter and six months ended July 31, 2009, respectively, as compared to 31% and 32% in
the same quarter and six months, respectively, a year ago.

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



|                                    |  |                             |            |   |                           |      |        |                    |  |   |            |   |  |      |    |  |                    |        |   |  |   |        |   |  |   |        |   |  |     |   
|----------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | ---- | ------ | ------------------ |  | - | ---------- | - |  | ---- | -- |  | ------------------ | ------ | - |  | - | ------ | - |  | - | ------ | - |  | --- | --
|                                    |  | Three Months Ended July 31, |            |   | Six Months Ended July 31, |     
|                                    |  | 2009                        |            |   | 2008                      |      |        | Increase(Decrease) |  |   | 2009       |   |  | 2008 |    |  | Increase(Decrease) |       
|                                    |  |                             | In Dollars |   |                           | In % |        |                    |  |   | In Dollars |   |  | In % |   
|Cost of revenue:                    |  |                             |            |   |                           |      |        |                    |  |   |            |   |  |      |    |  |                    |        |   |  |   |        |   |  |   |        |   |  |     |   
|Software licenses                   |  | $                           | 808        |   |                           | $    | 516    |                    |  | $ | 292        |   |  | 57   | %  |  | $                  | 1,438  |   |  | $ | 956    |   |  | $ | 482    |   |  | 50  | % 
|Maintenance                         |  |                             | 3,220      |   |                           |      | 4,259  |                    |  |   | (1,039     | ) |  | (24  | )% |  |                    | 6,436  |   |  |   | 8,270  |   |  |   | (1,834 | ) |  | (22 | )%
|Professional services               |  |                             | 5,441      |   |                           |      | 8,145  |                    |  |   | (2,704     | ) |  | (33  | )% |  |                    | 11,583 |   |  |   | 16,420 |   |  |   | (4,837 | ) |  | (29 | )%
|Amortization of acquired technology |  |                             | 8,747      |   |                           |      | 8,704  |                    |  |   | 43         |   |  |     |    |  |                    | 17,093 |   |  |   | 17,496 |   |  |   | (403   | ) |  | (2  | )%
|                                    |  |                             |            |   |                           |      |        |                    |  |   |            |   |  |      |    |  |                    |        |   |  |   |        |   |  |   |        |   |  |     |   
|Total cost of revenue               |  | $                           | 18,216     |   |                           | $    | 21,624 |                    |  | $ | (3,408     | ) |  | (16  | )% |  | $                  | 36,550 |   |  | $ | 43,142 |   |  | $ | (6,592 | ) |  | (15 | )%
|                                    |  |                             |            |   |                           |      |        |                    |  |   |            |   |  |      |    |  |                    |        |   |  |   |        |   |  |   |        |   |  |     |   
|Percentage of total revenue         |  |                             | 33         | % |                           |      | 31     | %                  |  |   |            |   |  |      |    |  |                    | 34     | % |  |   | 32     | % |  |   |        |   |  |     |   

Software Licenses.    Cost of software licenses consists principally of
fees associated with integrating third party technology into our PVCS and Dimensions distributed systems products, amortization of certain capitalized software costs and, to a lesser extent, salaries, bonuses and other costs associated
with our product release organization. Cost of software licenses as a percentage of total software licenses revenue was 7% in both the quarter and six months ended July 31, 2009, respectively, as compared to 3% in both the same quarter and six
months a year ago. The increase in both absolute dollars and as a percentage of total software licenses revenue in both the quarter and six months ended July 31, 2009, when compared to the same quarter and six months a year ago, was primarily
due to increased amortization of certain capitalized software costs and decreased sales of our distributed systems licenses.

Maintenance.    Cost of maintenance consists primarily of salaries, bonuses and other costs associated with our customer support organization. Cost of maintenance as a percentage of total maintenance revenue was
8% and 9% in the quarter and six months ended July 31, 2009, respectively, as compared to 10% in both the same quarter and six months a year ago. For both the current quarter and six months, when compared to the same quarter and six months a
year ago, in both absolute dollars and as a percentage of total maintenance revenue, the decrease in cost of maintenance was primarily attributable to decreases in expenses associated with our customer support organization resulting from
restructuring and other cost cutting initiatives.



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Professional Services.    Cost of professional services consists of salaries,
bonuses and other costs associated with supporting and growing our professional services organization. Cost of professional services as a percentage of total professional services revenue was 97% and 95% in the quarter and six months ended
July 31, 2009, respectively, as compared to 97% in both the same quarter and six months a year ago. For both the current quarter and six months, when compared to the same quarter and six months a year ago, the decrease in the cost of
professional services in absolute dollars was predominantly due to decreases in expenses to support lower professional services revenue and, to a lesser extent, restructuring and other cost cutting initiatives.

Amortization of Acquired Technology.    In connection with our merger in March 2006, and to a lesser extent small technology
acquisitions in March 2006, October 2006 and September 2008, we have recorded $178.7 million in acquired technology, reduced by amortization totaling $123.8 million as of July 31, 2009. For both the quarter and six months ended
July 31, 2009, when compared to the same quarter and six months a year ago, amortization expense was predominantly due to the acquired technology recorded in connection with the merger. Assuming there are no impairments and no acquisitions, we
expect to record $8.7 million in amortization expense in each of the next three fiscal quarters, $8.3 million in amortization expense in each of the three fiscal quarters following thereafter and finally, $3.6 million in amortization expense in the
first quarter of fiscal 2012.

Operating Expenses

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



|                                           |      |                             |            |      |                           |      |                    |   |  |      |            |   |      |      |    |                    |   |        |   |  |   |        |   |  |   |         |   |  |     |   
|------------------------------------------ | ---- | --------------------------- | ---------- | ---- | ------------------------- | ---- | ------------------ | - |  | ---- | ---------- | - | ---- | ---- | -- | ------------------ | - | ------ | - |  | - | ------ | - |  | - | ------- | - |  | --- | --
|                                           |      | Three Months Ended July 31, |            |      | Six Months Ended July 31, |     
|                                           | 2009 |                             |            | 2008 |                           |      | Increase(Decrease) |   |  | 2009 |            |   | 2008 |      |    | Increase(Decrease) |  
|                                           |      |                             | In Dollars |      |                           | In % |                    |   |  |      | In Dollars |   |      | In % |   
|Operating expenses:                        |      |                             |            |      |                           |      |                    |   |  |      |            |   |      |      |    |                    |   |        |   |  |   |        |   |  |   |         |   |  |     |   
|Sales and marketing                        |      | $                           | 14,367     |      |                           | $    | 22,000             |   |  | $    | (7,633     | ) |      | (35  | )% |                    | $ | 29,343 |   |  | $ | 42,582 |   |  | $ | (13,239 | ) |  | (31 | )%
|Research and development                   |      |                             | 7,961      |      |                           |      | 9,009              |   |  |      | (1,048     | ) |      | (12  | )% |                    |   | 16,321 |   |  |   | 17,779 |   |  |   | (1,458  | ) |  | (8  | )%
|General and administrative                 |      |                             | 4,586      |      |                           |      | 5,359              |   |  |      | (773       | ) |      | (14  | )% |                    |   | 8,671  |   |  |   | 10,805 |   |  |   | (2,134  | ) |  | (20 | )%
|Amortization of intangible assets          |      |                             | 9,203      |      |                           |      | 9,203              |   |  |      |           |   |      |     |    |                    |   | 18,406 |   |  |   | 18,406 |   |  |   |        |   |  |    |   
|Restructuring, acquisition & other charges |      |                             | 364        |      |                           |      | 329                |   |  |      | 35         |   |      | 11   | %  |                    |   | 2,215  |   |  |   | 2,268  |   |  |   | (53     | ) |  | (2  | )%
|                                           |      |                             |            |      |                           |      |                    |   |  |      |            |   |      |      |    |                    |   |        |   |  |   |        |   |  |   |         |   |  |     |   
|Total operating expenses                   |      | $                           | 36,481     |      |                           | $    | 45,900             |   |  | $    | (9,419     | ) |      | (21  | )% |                    | $ | 74,956 |   |  | $ | 91,840 |   |  | $ | (16,884 | ) |  | (18 | )%
|                                           |      |                             |            |      |                           |      |                    |   |  |      |            |   |      |      |    |                    |   |        |   |  |   |        |   |  |   |         |   |  |     |   
|Percentage of total revenue                |      |                             | 66         | %    |                           |      | 65                 | % |  |      |            |   |      |      |    |                    |   | 69     | % |  |   | 69     | % |  |   |         |   |  |     |   

Sales and Marketing.    Sales and marketing expenses consist primarily
of salaries, commissions and bonuses, payroll taxes and employee benefits as well as travel, entertainment and marketing expenses. Sales and marketing expenses as a percentage of total revenue were 26% and 27% in the quarter and six months ended
July 31, 2009, respectively, as compared to 31% and 32% in the same quarter and six months, respectively, a year ago. For both the quarter and six months ended July 31, 2009, when compared to the same quarter and six months a year ago, in
both absolute dollars and as a percentage of total revenue, the decrease was the result of lower direct costs, such as travel and sales commissions, associated with lower software licenses revenue, decreases in stock-based compensation expenses and
restructuring and other cost cutting initiatives put in place in the first quarter of fiscal 2010. In absolute dollar terms, we expect sales and marketing expenses to decrease slightly over the near term.

Research and Development.    Research and development expenses consist primarily of salaries, bonuses, payroll taxes, employee
benefits and costs attributable to research and development activities. Research and development expenses as a percentage of total revenue were 14% and 15% in the quarter and six months ended July 31, 2009, respectively, as compared to 13% in
both the same quarter and six months a year ago. For both the



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quarter and six months ended July 31, 2009, when compared to the same quarter and six months a year ago, the decrease in research and development
expenses in absolute dollars is primarily attributable to decreases in stock-based compensation expenses and restructuring and other cost cutting initiatives. In absolute dollar terms, we expect research and development expenses to decrease slightly
in the near term.

General and Administrative.    General and administrative expenses consist primarily of
salaries, bonuses, payroll taxes, benefits and certain non-allocable administrative costs, including legal and accounting fees and bad debt. General and administrative expenses as a percentage of total revenue were 8% in both the quarter and six
months ended July 31, 2009 as well as the same quarter and six months a year ago. For both the quarter and six months ended July 31, 2009, when compared to the same quarter and six months a year ago, the decrease in general and
administrative expenses in absolute dollars is primarily attributable to decreases in stock-based compensation expenses and restructuring and other cost cutting initiatives. In absolute dollar terms, we expect general and administrative expenses to
decrease slightly in the near term.

Amortization of Intangible Assets.    In connection with our merger in
March 2006, and to a lesser extent a small technology acquisitions in October 2006, and in connection with our capitalizing certain software costs including more recently software development costs related to our on-demand applications beginning in
the first quarter of fiscal year 2009, we have recorded $308.4 million in identifiable intangible assets, reduced by amortization totaling $130.9 million as of July 31, 2009. For the quarter and six months ended July 31, 2009 and
the same quarter and six months a year ago, amortization expense was predominantly due to the identifiable intangible assets recorded in connection with the merger. Assuming there are no impairments and no acquisitions, we expect to record $9.2
million in amortization expense in each of the next eleven fiscal quarters, $9.1 million in amortization expense in each of the seven fiscal quarters following thereafter and finally, $3.9 million in amortization expense in the first quarter of
fiscal 2015.

Restructuring, Acquisition and Other Charges.    In connection with our restructuring put in place
on April 30, 2009, and to a lesser extent, sponsor fees and other charges which are not part of ongoing operations, we recorded $0.4 and $2.2 million in restructuring, acquisition and other charges in the quarter and six months ended
July 31, 2009, respectively. See Note 3 of notes to our unaudited condensed consolidated financial statements included elsewhere in this report for additional information related to the restructuring plan. In the same quarter and six months a
year ago, we recorded $0.3 million and $2.3 million in restructuring, acquisition and other charges, respectively, predominantly related to severance and other employee related costs, and to a lesser extent, sponsor fees and other charges which are
not part of ongoing operations.



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##### Table of Contents

Other Income (Expense)

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



|                                                  |      |                             |            |      |                           |      |                    |    |  |      |            |   |      |      |    |                    |   |         |    |  |   |         |    |  |   |        |   |  |     |   
|------------------------------------------------- | ---- | --------------------------- | ---------- | ---- | ------------------------- | ---- | ------------------ | -- |  | ---- | ---------- | - | ---- | ---- | -- | ------------------ | - | ------- | -- |  | - | ------- | -- |  | - | ------ | - |  | --- | --
|                                                  |      | Three Months Ended July 31, |            |      | Six Months Ended July 31, |     
|                                                  | 2009 |                             |            | 2008 |                           |      | Increase(Decrease) |    |  | 2009 |            |   | 2008 |      |    | Increase(Decrease) |  
|                                                  |      |                             | In Dollars |      |                           | In % |                    |    |  |      | In Dollars |   |      | In % |   
|Other income (expense):                           |      |                             |            |      |                           |      |                    |    |  |      |            |   |      |      |    |                    |   |         |    |  |   |         |    |  |   |        |   |  |     |   
|Interest income                                   |      | $                           | 134        |      |                           | $    | 342                |    |  | $    | (208       | ) |      | (61  | )% |                    | $ | 347     |    |  | $ | 774     |    |  | $ | (427   | ) |  | (55 | )%
|Gain on early extinguishment of debt              |      |                             | 1,038      |      |                           |      | 628                |    |  |      | 410        |   |      | 65   | %  |                    |   | 4,602   |    |  |   | 628     |    |  |   | 3,974  |   |  | 633 | % 
|Interest expense                                  |      |                             | (8,591     | )    |                           |      | (10,240            | )  |  |      | 1,649      |   |      | (16  | )% |                    |   | (17,257 | )  |  |   | (21,495 | )  |  |   | 4,238  |   |  | (20 | )%
|Change in the fair value of derivative instrument |      |                             | 1,033      |      |                           |      | 1,627              |    |  |      | (594       | ) |      | (37  | )% |                    |   | 1,447   |    |  |   | 2,866   |    |  |   | (1,419 | ) |  | (50 | )%
|Amortization and write-off of debt issuance costs |      |                             | (674       | )    |                           |      | (655               | )  |  |      | (19        | ) |      | 3    | %  |                    |   | (1,306  | )  |  |   | (840    | )  |  |   | (466   | ) |  | 55  | % 
|                                                  |      |                             |            |      |                           |      |                    |    |  |      |            |   |      |      |    |                    |   |         |    |  |   |         |    |  |   |        |   |  |     |   
|Total other income (expense)                      |      | $                           | (7,060     | )    |                           | $    | (8,298             | )  |  | $    | 1,238      |   |      | (15  | )% |                    | $ | (12,167 | )  |  | $ | (18,067 | )  |  | $ | 5,900  |   |  | (33 | )%
|                                                  |      |                             |            |      |                           |      |                    |    |  |      |            |   |      |      |    |                    |   |         |    |  |   |         |    |  |   |        |   |  |     |   
|Percentage of total revenue                       |      |                             | (13        | )%   |                           |      | (12                | )% |  |      |            |   |      |      |    |                    |   | (11     | )% |  |   | (14     | )% |  |   |        |   |  |     |   

Interest Income.    For both the quarter and six months ended
July 31, 2009, when compared to the same quarter and six months a year ago, the dollar decrease in interest income is predominantly due to decreases in balances in interest bearing accounts, such as cash and cash equivalents, resulting from
servicing and paying down principal on our debt and, to a lesser extent, lower yields, all partially offset by increases in cash balances from our borrowing $65.0 million under the revolving credit facility in the quarter ended October 31, 2008
and cash from operating cash flows.

Gain on Early Extinguishment of Debt.In the six months ended
July 31, 2009 and the same six months a year ago, we recorded gains on the early extinguishment of debt totaling $4.6 million and $0.6 million, respectively, following authorization of our Board of Directors to repurchase our senior
subordinated notes. See Note 7 of notes to our unaudited condensed consolidated financial statements included elsewhere in this report for additional information related to our debt.

Interest Expense.    For both the quarter and six months ended July 31, 2009, when compared to the same quarter and six
months a year ago, the dollar decrease in interest expense is predominantly due to our paying down principal on our senior subordinated notes totaling $11.4 million, $21.2 million, $8.9 million and $15.6 million in the quarters ended July 31,
2008, January 31, 2009, April 30, 2009 and July 31, 2009, respectively, and to a lesser extent, paying down principal on our senior secured term loan totaling $2.0 million in the quarter ended April 30, 2009 and lower
variable rates on the senior secured term loan. See Note 7 of notes to our unaudited condensed consolidated financial statements included elsewhere in this report for additional information related to our debt.

Change in the Fair Value of Derivative Instrument.    We use an interest rate swap as part of our interest rate risk
management strategy. In the second fiscal quarter ended July 31, 2006, we entered into an interest rate swap transaction to effectively convert the variable interest rate on a portion of the $400.0 million senior secured term loan to a
fixed rate. The swap, which expires on April 10, 2010, is recorded on the consolidated balance sheet at fair value in accordance with SFAS 133. The swap has not been designated as a hedge, and accordingly, changes in the fair value of the
derivative are recognized in the consolidated statement of operations. The notional amount of the swap was $250.0 million initially declining over time to $126.0 million at the time the swap transaction



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expires on April 10, 2010. Under the terms of the swap, we will make interest payments based on a fixed rate equal to 5.38% and will receive interest
payments based on the LIBOR setting rate, set in arrears. In the quarter and six months ended July 31, 2009 we recorded income of $1.0 million and $1.4 million, respectively, related to the changes in the fair value of the derivative as
compared to income of $1.6 million and $2.9 million in the same quarter and six months, respectively, a year ago.

Amortization and
Write-Off of Debt Issuance Costs.    In connection with the merger, we recorded $16.1 million in debt issuance costs, reduced by accumulated amortization totaling $7.9 million as of July 31, 2009. In the quarter and six
months ended July 31, 2009, we recorded $0.7 million and $1.3 million in amortization of debt issuance costs, respectively, as compared to $0.7 million and $0.8 million in the same quarter and six months, respectively, a year ago. The increase
in amortization expense in the six months ended July 31, 2009, when compared to the same six months a year ago, is predominantly due to the write-off of unamortized debt issuance costs of approximately $0.4 million recorded in the fiscal six
months ended July 31, 2009 associated with the early extinguishment of the senior subordinated notes as compared to a $0.2 million write-off in the same six months a year ago. Assuming we do not incur additional debt or extinguish senior
subordinated notes before maturity, we expect to record $0.4 million to $0.5 million per quarter in amortization expense over the next fifteen fiscal quarters through the end of fiscal 2013 and $0.1 million to $0.2 million per quarter in
amortization expense over the twelve fiscal quarters following thereafter through the end of fiscal 2016.

Capitalized Software Costs
and Impairment.The carrying amount of our capitalized software costs related to our on-demand application services as of July 31, 2009 was $6.7 million. In accordance with SFAS No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets (as amended),we test our long-lived assets for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. A long-lived asset is
not recoverable, and therefore subject to an impairment charge, if its carrying amount exceeds the undiscounted cash flows associated with it. As a result of the general weakening of the worldwide economy, a continued slowdown in IT spending and a
decline in our license revenue, we tested our capitalized software costs related to our on-demand application services for impairment and concluded that no impairment existed as of July 31, 2009 since the estimated undiscounted cash flows
expected to result from the capitalized software related to our on-demand application services exceeded its carrying amount. Factors that could lead to a subsequent recognition of impairment of capitalized software costs include a continued
weakening of the worldwide economy, deterioration in sales forecasts from our on-demand application services, reductions in IT spending by our customers and future declines in our license revenue. It is reasonably possible in the near-term that such
factors could arise and the resulting impairment charge could materially adversely affect our results of operations in the quarter where such determination is reached.

Income Tax Benefit

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



|                            |      |                             |            |      |                           |      |                    |    |  |      |            |   |      |      |   |                    |   |        |    |  |   |        |    |  |   |      |   |  |    |  
|--------------------------- | ---- | --------------------------- | ---------- | ---- | ------------------------- | ---- | ------------------ | -- |  | ---- | ---------- | - | ---- | ---- | - | ------------------ | - | ------ | -- |  | - | ------ | -- |  | - | ---- | - |  | -- | -
|                            |      | Three Months Ended July 31, |            |      | Six Months Ended July 31, |     
|                            | 2009 |                             |            | 2008 |                           |      | Increase(Decrease) |    |  | 2009 |            |   | 2008 |      |   | Increase(Decrease) |  
|                            |      |                             | In Dollars |      |                           | In % |                    |    |  |      | In Dollars |   |      | In % |  
|Income tax benefit          |      | $                           | (5,081     | )    |                           | $    | (2,719             | )  |  | $    | (2,362     | ) |      | 87   | % |                    | $ | (9,398 | )  |  | $ | (8,479 | )  |  | $ | (919 | ) |  | 11 | %
|                            |      |                             |            |      |                           |      |                    |    |  |      |            |   |      |      |   |                    |   |        |    |  |   |        |    |  |   |      |   |  |    |  
|Percentage of total revenue |      |                             | (9         | )%   |                           |      | (4                 | )% |  |      |            |   |      |      |   |                    |   | (9     | )% |  |   | (6     | )% |  |   |      |   |  |    |  

Income Tax Benefit.    Income tax benefit was $5.1 million and
$9.4 million in the quarter and six months ended July 31, 2009, respectively, as compared to $2.7 million and $8.5 million in the same quarter and six months, respectively, a year ago. Our projected effective income tax benefit rate
for the twelve months of fiscal year 2010 is 55%, excluding $0.7 million of discrete items recorded as a tax benefit in the six months ended July 31, 2009. Our effective income tax benefit rate for the twelve months of fiscal year 2009 was 3%.
The



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effective income tax benefit rate projected for fiscal 2010 is significantly greater than the effective income tax benefit rate for fiscal 2009 predominantly
due to the goodwill impairment charge in the fourth quarter of fiscal 2009 totaling $326.7 million. Our effective income tax benefit rate is greater than the statutory rate due to the impacts of permanently reinvested foreign earnings, the domestic
production deduction, and the United States research and experimentation tax credit. See Note 8 of notes to our unaudited condensed consolidated financial statements included elsewhere in this report for further information regarding income
taxes and the impact of FIN 48 on our results of operations and financial position.

Liquidity and Capital Resources

Cash and Cash Equivalents.    Since our inception, we have financed our operations and met our capital expenditure requirements
through cash flows from operations. As of July 31, 2009, we had $98.0 million in cash and cash equivalents.

Net Cash Provided
by Operating Activities.    Cash flows provided by operating activities were $9.6 million and $17.1 million in the six months ended July 31, 2009 and the same six months a year ago, respectively. In the six months
ended July 31, 2009, our cash flows provided by operating activities exceeded net loss principally due to the inclusion of non-cash expenses in net loss and a decrease in accounts receivable, all partially offset by interest payments made on
the term credit facility and subordinated notes totaling $17.6 million, income tax payments net of refunds totaling $8.9 million, cash collections in advance of revenue recognition for maintenance contracts and a decrease in accrued expenses.
In the six months ended July 31, 2008, our cash flows provided by operating activities exceeded net loss principally due to the inclusion of non-cash expenses in net loss and a decrease in accounts receivable, all partially offset by interest
payments made on the term credit facility and subordinated notes totaling $22.2 million, cash collections in advance of revenue recognition for maintenance contracts and an increase in prepaid expenses and other assets.

Net Cash Used in Investing Activities.    Net cash used in investing activities was $3.1 million and $7.1 million in the
six months ended July 31, 2009 and the same six months a year ago, respectively. In the six months ended July 31, 2009 and the same six months a year ago, net cash used in investing activities related to capitalized software totaling $2.4
million and $3.2 million, respectively, the purchase of computer equipment and office furniture and equipment totaling $0.5 million and $3.7 million, respectively, and acquisition related costs paid in connection with acquisitions totaling $0.2
million and $0.1 million, respectively.

Net Cash Used in Financing Activities.    Net cash used in
financing activities was $22.1 million and $11.2 million in the six months ended July 31, 2009 and the same six months a year ago, respectively. In the six months ended July 31, 2009, net cash used in financing activities principally
related to principal payments made on the senior subordinated notes and the term credit facility totaling $19.8 million and $2.0 million, respectively, the repurchases of common stock totaling $0.2 million and the repurchase of option rights under
our employee stock option plan totaling $0.1 million. In the six months ended July 31, 2008, net cash used in financing activities related to principal payments made on the senior subordinated notes totaling $10.8 million and the repurchase of
option rights under our employee stock option plan totaling $0.4 million.

Contractual Obligations and Commitments

As a result of the acquisition transactions related to our merger in March 2006, we became highly leveraged. As of July 31, 2009, we had outstanding
$526.0 million in aggregate indebtedness. Our liquidity obligations are significant, primarily due to debt service obligations. Our interest expense for the quarter and six months ended July 31, 2009 was $8.6 million and $17.3 million,
respectively, as compared to $10.2 million and $21.5 million in the same quarter and six months, respectively, a year ago.

We believe that
current cash and cash equivalents, and cash flows from operations will satisfy our working capital and capital expenditure requirements through the fiscal year ending January 31, 2010. As discussed under



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the section entitled Senior Secured Credit Agreementbelow, we have fully drawn down all of the available commitments under our Senior Secured Credit
Agreement and currently have no other committed source of credit available to us. At some point in the future, we may require additional funds for either operating or strategic purposes and may seek to raise additional funds through public or
private debt or equity financing. If we are required to seek additional financing in the future through public or private debt or equity financing, there is no assurance that this additional financing will be available or, if available, will be upon
reasonable terms and not legally or structurally senior to or on parity with our existing debt obligations.

The following is a summary of
our various contractual commitments, including non-cancelable operating lease agreements for office space that expire between calendar years 2009 and 2012. All periods start from August 1, 2009.



|                                                  |  |                           |         |                 |   |           |  |           |         |            |   |         |  |   |        
|------------------------------------------------- |  | ------------------------- | ------- | --------------- | - | --------- |  | --------- | ------- | ---------- | - | ------- |  | - | -------
|                                                  |  | Payments Due by Period(2)
|                                                  |  | Total                     |         | Less than1 year |   | 1-3 years |  | 3-5 years |         | Thereafter
|                                                  |  | (in thousands)           
|Operating lease obligations                       |  | $                         | 8,542   |                 | $ | 4,333     |  | $         | 4,186   |            | $ | 23      |  | $ |       
|Credit Facility:                                  |  |                           |         |                 |   |           |  |           |         |            |   |         |  |   |        
|Senior secured term loan due March 10, 2013       |  |                           | 318,000 |                 |   |          |  |           |        |            |   | 318,000 |  |   |       
|Revolving term credit facility due March 10, 2012 |  |                           | 65,000  |                 |   |          |  |           | 65,000  |            |   |        |  |   |       
|Senior subordinated notes due March 15, 2016      |  |                           | 142,952 |                 |   |          |  |           |        |            |   |        |  |   | 142,952
|Scheduled interest on debt(1)                     |  |                           | 137,926 |                 |   | 29,510    |  |           | 49,427  |            |   | 34,888  |  |   | 24,101 
|                                                  |  |                           |         |                 |   |           |  |           |         |            |   |         |  |   |        
|                                                  |  | $                         | 672,420 |                 | $ | 33,843    |  | $         | 118,613 |            | $ | 352,911 |  | $ | 167,053
|                                                  |  |                           |         |                 |   |           |  |           |         |            |   |         |  |   |        



|(1) | Scheduled interest on debt is calculated through the instruments due date and assumes no principal paydowns or borrowings. Scheduled interest on debt includes the seven year
senior secured term loan due March 10, 2013 at an annual rate of 2.62938%, which is the rate in effect as of July 31, 2009, the fully drawn six year term credit facility due March 10, 2012 at an annual rate of 2.87938%, which is the
rate in effect as of July 31, 2009, the ten year senior subordinated notes due March 15, 2016 at the stated annual rate of 10.375%, and the fair value of the derivative instrument as of July 31, 2009 totaling $4.4 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This table excludes our unrecognized tax benefits totaling $8.3 million as of July 31, 2009 since we have determined that the timing of payments with respect to these
liabilities cannot be reasonably estimated.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accounts Receivable and Deferred Revenue. At July 31, 2009, we
had accounts receivable, net of allowances, of $19.3 million and total deferred revenue of $75.5 million.

Off-Balance Sheet
Arrangements.    As part of our ongoing operations, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, or SPEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of July 31, 2009, we were not involved in any
unconsolidated SPE transactions.

Senior Secured Credit Agreement

In connection with the consummation of the merger in March 2006, we entered into a senior secured credit agreement pursuant to a debt commitment we
obtained from affiliates of the initial purchasers of our senior subordinated notes.

General.    The borrower
under the senior secured credit agreement initially was Spyglass Merger Corp. and immediately following completion of the merger became Serena. The senior secured credit agreement provides for (1) a seven-year term loan in the amount of $400.0
million, amortizing at a rate of 1.00% per year on a quarterly basis for the first six and three-quarter years after the closing date of the acquisition transactions, with



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the balance paid at maturity, and (2) a six-year revolving credit facility that permits loans in an aggregate amount of up to $75.0 million (see
discussion below regarding default by a participating lender), which includes a letter of credit facility and a swing line facility. In addition, subject to certain terms and conditions, the senior secured credit agreement provides for one or more
uncommitted incremental term loan or revolving credit facilities in an aggregate amount not to exceed $150.0 million. Proceeds of the term loan on the initial borrowing date were used to partially finance the merger, to refinance certain
indebtedness of Serena and to pay fees and expenses incurred in connection with the merger. Proceeds of the revolving credit facility have been and any incremental facilities will be used for working capital and general corporate purposes of the
borrower and its restricted subsidiaries.

Interest Rates and Fees.    The $400.0 million term loan, of which
$318.0 million is currently outstanding as of July 31, 2009, bears interest at a rate equal to three-month LIBOR plus 2.00%. That rate was 2.62938% as of July 31, 2009. The fully drawn revolving term credit facility, of which $65.0 million
is currently outstanding as of July 31, 2009, bears interest at a rate equal to three-month LIBOR plus 2.25%. That rate was 2.87938% as of July 31, 2009. More generally, the loans under the senior secured credit agreement bear interest, at
the option of the borrower, at the following:



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



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

The revolving credit facility bears an annual commitment fee of 0.50% on the undrawn portion of that facility commencing on the date of execution and
delivery of the senior secured credit agreement. As a result of our borrowing $65.0 million under the revolving credit facility in the fiscal quarter ended October 31, 2008 and LCPI becoming a defaulting lender due to its failure to fund its
portion of the loan commitment, the annual commitment fee of 0.50% will not be payable pursuant to the terms of the senior secured credit agreement until all or a portion of the loans under the revolving credit facility are repaid.

We use an interest rate swap as part of our interest rate risk management strategy. In the second fiscal quarter ended July 31, 2006, we entered
into an interest rate swap transaction to effectively convert the variable interest rate on a portion of the $400.0 million senior secured term loan to a fixed rate. The swap, which expires on April 10, 2010, is recorded on the
consolidated balance sheet at fair value in accordance with SFAS 133, as amended by SFAS 138, SFAS 149 and SFAS 157. The swap has not been designated as an accounting hedge and accordingly, changes in the fair value of the derivative are recognized
in the consolidated statement of operations. The notional amount of the swap was $250.0 million initially and amortizes down over time to $126.0 million at the time the swap transaction expires on April 10, 2010. Under the terms of
the swap, we will make interest payments based on a fixed rate equal to 5.38% and will receive interest payments based on the LIBOR setting rate, set in arrears.

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

Prepayments.    At our option, (1) amounts outstanding under the term loan may be voluntarily prepaid and
(2) the unutilized portion of the commitments under the revolving credit facility may be permanently reduced and the loans under such facility may be voluntarily repaid, in each case subject to requirements as to minimum amounts and multiples,
at any time in whole or in part without premium or penalty, except that any prepayment of LIBOR rate advances other than at the end of the applicable interest periods will be made with reimbursement



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for any funding losses or redeployment costs of the lenders resulting from the prepayment. Loans under the term loan and under any incremental term loan
facility are subject to mandatory prepayment with (a) 50% of annual excess cash flow with certain step downs to be based on the most recent total leverage ratio and agreed upon by the issuer and the lenders, (b) 100% of net cash proceeds
of asset sales and other asset dispositions by the borrower or any of its restricted subsidiaries, subject to various reinvestment rights of the company and other exceptions, and (c) 100% of the net cash proceeds of the issuance or incurrence
of debt by the company or any of its restricted subsidiaries, subject to various baskets and exceptions.

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

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

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



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



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

Covenants, Representations and Warranties.    The
senior secured credit agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, investments, capital expenditures, sales of assets,
mergers and acquisitions, liens and dividends and other distributions. There are no financial covenants included in the senior secured credit agreement, other than a minimum interest coverage ratio and a maximum total leverage ratio as discussed
below under Covenant Compliance.

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

Senior Subordinated Notes

As of
July 31, 2009, we have outstanding $143.0 million principal amount of senior subordinated notes, which bear interest at a rate of 10.375%, payable semi-annually on March 15 and September 15, and which mature on March 15, 2016.
Each of our domestic subsidiaries that guarantees the obligations under our senior secured credit agreement will jointly, severally and unconditionally guarantee the notes on an unsecured senior subordinated basis. As of the date of this report, we
do not have any domestic subsidiaries and, accordingly, there are no guarantors on such date. The notes are our unsecured, senior subordinated obligations, and the guarantees, if any, will be unsecured, senior subordinated obligations of the
guarantors. The notes are subject to redemption at our option under terms and conditions specified in the indenture related to the notes, and may be redeemed at the option of the holders at 101% of their face amount, plus accrued and unpaid
interest, upon certain change of control events.

In the fiscal year ended January 31, 2009, we repurchased, in eight separate
privately negotiated transactions, an aggregate of $32.6 million of principal amount of our original outstanding $200.0 million senior subordinated notes. The repurchases resulted in a gain of $8.7 million from the extinguishment of debt in the
fiscal year ended January 31, 2009.



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

Covenant Compliance

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



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



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



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



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



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



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



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



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



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



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



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



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

In addition, under our senior secured credit agreement, we are required to satisfy and maintain specified financial ratios and other financial condition
tests, including minimum interest coverage ratio and a maximum total leverage ratio. We were in compliance with all of the covenants under the secured credit agreement and indenture as of July 31, 2009 and expect to be in compliance at our
fiscal 2010 year end. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests in the future. A breach of any of these covenants would result
in a default (which, if not cured, could mature into an event of default) and in certain cases an immediate event of default under our senior secured credit agreement. Upon the occurrence of an event of default under our senior secured credit
agreement, all amounts outstanding under our senior secured credit agreement could be declared to be (or could automatically become) immediately due and payable and all commitments to extend further credit could be terminated.

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

The breach of financial covenants in our senior secured credit agreement (i.e., those that require the maintenance of ratios based on Adjusted EBITDA)
would force us to seek a waiver or amendment with the lenders under our senior secured credit agreement, and no assurance can be given that in those circumstances we would be able to obtain any necessary waivers or amendments on satisfactory terms,
if at all. The lenders would



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likely condition any waiver or amendment, if given, on additional consideration from us, such as a consent fee, a higher interest rate, principal repayment
or more restrictive covenants and limitations on our business. Any such breach, if not waived by the lenders, would result in an event of default under that agreement, in which case the lenders could elect to declare all amounts borrowed due and
payable. Any such acceleration would also result in a default under the indenture governing the senior subordinated notes. Additionally, under our debt agreements, our ability to engage in activities such as incurring additional indebtedness, making
investments and paying dividends is also tied to ratios based on Adjusted EBITDA.

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

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



|                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|-------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                             |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |  
|                                             |  | 2009                       |        |   | 2008                     |   |        | 2009 |  |   | 2008   |  
|Net loss(1)                                  |  | $                          | (1,495 | ) |                          | $ | (3,021 | )    |  | $ | (6,310 | ) |  | $ | (11,525 | )
|Interest expense (income), net(2)            |  |                            | 7,060  |   |                          |   | 8,298  |      |  |   | 12,167 |   |  |   | 18,067  |  
|Income tax benefit                           |  |                            | (5,081 | ) |                          |   | (2,719 | )    |  |   | (9,398 | ) |  |   | (8,479  | )
|Depreciation and amortization expense(3)     |  |                            | 19,667 |   |                          |   | 19,979 |      |  |   | 38,450 |   |  |   | 41,359  |  
|                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|EBITDA                                       |  |                            | 20,151 |   |                          |   | 22,537 |      |  |   | 34,909 |   |  |   | 39,422  |  
|Deferred maintenance writedown(1)            |  |                            | 32     |   |                          |   | 271    |      |  |   | 67     |   |  |   | 577     |  
|Restructuring, acquisition and other charges |  |                            | 364    |   |                          |   | 329    |      |  |   | 2,215  |   |  |   | 2,268   |  
|                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Adjusted EBITDA(1)                           |  | $                          | 20,547 |   |                          | $ | 23,137 |      |  | $ | 37,191 |   |  | $ | 42,267  |  
|                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  



|(1) | Net loss for the periods presented includes the periodic effect of the deferred maintenance step-down associated with both the merger in the first quarter of fiscal year 2007 and
the Pacific Edge acquisition in the third quarter of fiscal year 2007. This maintenance revenue is added back in calculating Adjusted EBITDA for purposes of the indenture governing the senior subordinated notes and the senior secured credit
agreement.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(3) | Depreciation and amortization expense includes depreciation of fixed assets, amortization of leasehold improvements, amortization of acquired technologies and other intangible
assets, and amortization of stock-based compensation.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable, term loan,
secured indebtedness and our interest rate swap contract. We consider investments in highly liquid instruments purchased with an original maturity of 90 days or less to be cash equivalents. All of our cash equivalents principally consist of money
market funds, and are classified as available-for-sale as of July 31, 2009. We are subject to interest rate risk on the variable interest rate of the unhedged portion of the secured term loan. We do not believe that a hypothetical 25%
fluctuation in the variable interest rate would have a material impact on our consolidated financial position or results of operations. In addition, we are subject to the risk of default by the originator of the interest rate swap.

We account for derivative instruments in accordance with the provisions of SFAS 133, as amended by SFAS 138, SFAS 149 and SFAS 157. We utilize a
derivative instrument to enhance our ability to manage risk relating to interest rate exposure. Derivative instruments are entered into for periods consistent with the related underlying exposures and are not entered into for speculative purposes.
We document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategies for undertaking various hedge transactions.

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

As of July 31, 2009, we had $318.0 million of debt under our
senior secured credit agreement. A 1% increase in these floating rates would increase annual interest expense by $3.2 million. We have had limited exposure to interest rate fluctuations historically. As a result we have not used interest rate
hedging strategies in the past. However, given our increased exposure to volatility in floating rates after the acquisition transactions, we continue to evaluate hedging opportunities and may enter into hedging transactions in the future.

Under our senior secured credit agreement, we were required, within 90 days after the closing date, to fix the interest rate of at least
50% of the aggregate principal amount of indebtedness under our term loan through swaps, caps, collars, future or option contracts or similar agreements. We were also required to maintain this interest rate protection for a minimum of two years.

Consequently, in the second fiscal quarter ended July 31, 2006, we entered into an interest rate swap transaction to effectively
convert the variable interest rate on a portion of the $400.0 million senior secured term loan to a fixed rate. The swap, which expires on April 10, 2010, is recorded on our consolidated balance sheet at fair value in accordance with SFAS
133, as amended by SFAS 138, SFAS 149 and SFAS 157. The swap has not been designated as an accounting hedge and, accordingly, changes in the fair value of the derivative are recognized in the consolidated statement of operations. The notional amount
of the swap was $250.0 million initially and amortizes down over time to $126.0 million at the time the swap transaction expires on April 10, 2010. Under the terms of the swap, we will make interest payments based on a fixed rate
equal to 5.38% and will receive interest payments based on the LIBOR setting rate, set in arrears. In the quarter and six months ended July 31, 2009 we recorded income totaling $1.0 million and $1.4 million, respectively, related to the changes
in the fair value of the derivative, as compared to income totaling $1.6 million and $2.9 million in the same quarter and six months, respectively, a year ago.

Foreign Exchange Risk.    Sales to foreign countries accounted for approximately 32% of the total sales in both the quarter and six months ended July 31, 2009, as compared to 38% in
both the same quarter and six months a year ago. Because we invoice certain foreign sales in currencies other than the United States dollar, predominantly the British pound sterling and euro, and do not hedge these transactions, fluctuations in
exchange rates could adversely affect the translated results of operations of our foreign subsidiaries. Therefore, foreign exchange fluctuations could create a risk of significant balance sheet gains or losses in our consolidated financial



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statements. In addition, in the past several years we have benefited from the weakness of the U.S. dollar against other currencies, which increased our net
revenues derived from international operations. In more recent quarters, the United States dollar appreciated against these foreign currencies, which negatively affected our net revenues. If the U.S. dollar continues to strengthen against foreign
currencies, our future net revenues could be adversely affected. However, given our foreign subsidiaries net book values as of July 31, 2009 and net cash flows for the most recent fiscal six months ended July 31, 2009, we do not
believe that a hypothetical 25% fluctuation in foreign currency exchange rates would have a material impact on our consolidated financial position or results of operations.



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

Evaluation of
Disclosure Controls and Procedures.    Our Chief Executive Officer and Chief Financial Officer, with the assistance of senior management personnel, have conducted an evaluation of the effectiveness of our disclosure controls
and procedures (as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act)) as of July 31, 2009. We perform this evaluation on a quarterly basis so that the conclusions concerning the
effectiveness of our disclosure controls and procedures can be reported in our annual and quarterly reports filed under the Exchange Act. Based on this evaluation, and subject to the limitations described below, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of July 31, 2009.

Changes in
Internal Control over Financial Reporting.    There were no changes in our internal control over financial reporting during the quarter ended July 31, 2009 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls.    Our
management, including our Chief Executive Officer and the Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can only provide reasonable, not absolute, assurances that the objectives of the control system are met. The design of a control system reflects resource constraints, and the benefits of controls must be
considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, have been or will be
detected.



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##### Table of Contents

PART IIOTHER INFORMATION



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

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



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

There have been no material
changes from the risk factors associated with our business, financial condition and results of operations as set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.



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

On June 15, 2009, one of our employees exercised a stock option to acquire 15,583 shares of our common stock for an aggregate exercise price of $19,479. The exercise of the stock option was effected through the net exercise of the
stock option, with 5,646 shares applied to the payment of the aggregate exercise price, 3,909 shares applied to the payment of applicable taxes and withholdings and 6,028 shares issued to the employee. The shares were issued under an exemption from
registration requirements pursuant to Rule 701 of the Securities Act of 1933, which provides an exemption for offers and sales of securities pursuant to certain compensatory benefit plans.



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

Not Applicable



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

Not Applicable



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

Not Applicable



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

(a) Exhibits



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



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

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



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SIGNATURES

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



SERENA SOFTWARE, INC.By:

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


Date: September 11, 2009



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EXHIBIT INDEX



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



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

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



40