##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(MARK ONE)



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



FOR THE QUARTERLY PERIOD ENDED JULY 31, 2005



OR



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



FOR THE TRANSITION PERIOD FROM
 TO



COMMISSION FILE NO. 000-25285



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SERENA SOFTWARE, INC.

(Exact name of registrant as specified in its charter)



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



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

(Address of principal executive offices, including zip code)



650-522-6600

(Registrants
telephone number, including area code)



---



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



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



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



The number of shares of the registrants Common Stock, par value $0.001, outstanding as of August 31, 2005 was 41,136,561.



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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, 2005 and January 31, 2005                                   |  | 3   
|                             |  |                                                                                                                 
|                             |  | Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended July 31, 2005 and 2004 |  | 4   
|                             |  |                                                                                                                 
|                             |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2005 and 2004                  |  | 5   
|                             |  |                                                                                                                 
|                             |  | Notes to Condensed Consolidated Financial Statements                                                             |  | 6   
|                             |  |                                                                                                                 
|Item 2                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 18  
|                             |  |                                                                                                                 
|Item 3                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 44  
|                             |  |                                                                                                                 
|Item 4                       |  | Controls and Procedures                                                                                          |  | 44  
|                             | 
|PART II OTHER INFORMATION    |  |                                                                                                                 
|                             |  |                                                                                                                 
|Item 1                       |  | Legal Proceedings                                                                                                |  | 47  
|                             |  |                                                                                                                 
|Item 2                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 47  
|                             |  |                                                                                                                 
|Item 3                       |  | Defaults Upon Senior Securities                                                                                  |  | 47  
|                             |  |                                                                                                                 
|Item 4                       |  | Submission of Matters to a Vote of Security Holders                                                              |  | 47  
|                             |  |                                                                                                                 
|Item 5                       |  | Other Information                                                                                                |  | 48  
|                             |  |                                                                                                                 
|Item 6                       |  | Exhibits                                                                                                         |  | 48  
|                             | 
|SIGNATURES                   |  | 49                                                                                                              



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, 2005 |         |   | January 31, 2005 |  
|ASSETS                                                                                                                                                              |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                           |  | $             | 88,330  |   |                  | $ | 133,330 |  
|Restricted cash                                                                                                                                                     |  |               | 3,300   |   |                  |   | 3,300   |  
|Short-term investments                                                                                                                                              |  |               | 43,232  |   |                  |   | 16,778  |  
|Accounts receivable, net of allowance of $325 and $1,700 at July 31 and January 31, 2005, respectively                                                              |  |               | 29,876  |   |                  |   | 40,988  |  
|Deferred taxes                                                                                                                                                      |  |               | 12,267  |   |                  |   | 12,267  |  
|Prepaid expenses and other current assets                                                                                                                           |  |               | 6,130   |   |                  |   | 4,964   |  
|                                                                                                                                                                    |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                                |  |               | 183,135 |   |                  |   | 211,627 |  
|Long-term investments                                                                                                                                               |  |               | 49,228  |   |                  |   | 39,095  |  
|Restricted cash, non-current                                                                                                                                        |  |               | 1,565   |   |                  |   | 3,157   |  
|Property and equipment, net                                                                                                                                         |  |               | 5,765   |   |                  |   | 5,722   |  
|Goodwill                                                                                                                                                            |  |               | 326,350 |   |                  |   | 323,671 |  
|Other intangible assets, net                                                                                                                                        |  |               | 100,855 |   |                  |   | 107,790 |  
|Other assets                                                                                                                                                        |  |               | 3,397   |   |                  |   | 4,057   |  
|                                                                                                                                                                    |  |               |         |   |                  |   |         |  
|TOTAL ASSETS                                                                                                                                                        |  | $             | 670,295 |   |                  | $ | 695,119 |  
|                                                                                                                                                                    |  |               |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                    |  | $             | 1,948   |   |                  | $ | 3,415   |  
|Income taxes payable                                                                                                                                                |  |               | 32,364  |   |                  |   | 27,667  |  
|Accrued expenses                                                                                                                                                    |  |               | 20,417  |   |                  |   | 26,103  |  
|Accrued interest on subordinated notes                                                                                                                              |  |               | 413     |   |                  |   | 413     |  
|Deferred revenue                                                                                                                                                    |  |               | 66,972  |   |                  |   | 63,152  |  
|                                                                                                                                                                    |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                           |  |               | 122,114 |   |                  |   | 120,750 |  
|Deferred revenue, net of current portion                                                                                                                            |  |               | 12,829  |   |                  |   | 13,110  |  
|Long-term liabilities                                                                                                                                               |  |               | 2,321   |   |                  |   | 2,660   |  
|Deferred taxes                                                                                                                                                      |  |               | 38,308  |   |                  |   | 40,983  |  
|Subordinated notes                                                                                                                                                  |  |               | 220,000 |   |                  |   | 220,000 |  
|                                                                                                                                                                    |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                   |  |               | 395,572 |   |                  |   | 397,503 |  
|                                                                                                                                                                    |  |               |         |   |                  |   |         |  
|Commitments and contingencies                                                                                                                                       |  |               |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                                               |  |               |         |   |                  |   |         |  
|Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding                                                                    |  |               |        |   |                  |   |        |  
|Common stock, $0.001 par value; 90,000,000 shares authorized; 41,110,415 and 42,266,206 shares issued and outstanding at July 31 and
January 31, 2005, respectively |  |               | 41      |   |                  |   | 42      |  
|Additional paid-in capital                                                                                                                                          |  |               | 147,158 |   |                  |   | 177,750 |  
|Deferred stock-based compensation                                                                                                                                   |  |               | (9,933  | ) |                  |   | (1,092  | )
|Accumulated other comprehensive loss                                                                                                                                |  |               | (4,727  | ) |                  |   | (4,646  | )
|Retained earnings                                                                                                                                                   |  |               | 142,184 |   |                  |   | 125,562 |  
|                                                                                                                                                                    |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                          |  |               | 274,723 |   |                  |   | 297,616 |  
|                                                                                                                                                                    |  |               |         |   |                  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                          |  | $             | 670,295 |   |                  | $ | 695,119 |  
|                                                                                                                                                                    |  |               |         |   |                  |   |         |  



See accompanying notes
to condensed consolidated financial statements.



3



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##### Table of Contents

SERENA SOFTWARE, INC.



Condensed
Consolidated Statements of Operations



For the Three
Months and Six Months Ended July 31, 2005 and 2004



(In thousands, except per share data)

(Unaudited)

|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |  
|                                                                                                |  | 2005                       |        |   | 2004                     |   |        | 2005 |  |   | 2004    |  
|Revenue:                                                                                        |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Software licenses                                                                               |  | $                          | 18,821 |   |                          | $ | 19,416 |      |  | $ | 40,999  |   |  | $ | 35,256 |  
|Maintenance                                                                                     |  |                            | 34,218 |   |                          |   | 25,732 |      |  |   | 67,214  |   |  |   | 40,497 |  
|Professional services                                                                           |  |                            | 6,366  |   |                          |   | 6,812  |      |  |   | 12,501  |   |  |   | 9,949  |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total revenue                                                                                   |  |                            | 59,405 |   |                          |   | 51,960 |      |  |   | 120,714 |   |  |   | 85,702 |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Cost of revenue:                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Software licenses                                                                               |  |                            | 919    |   |                          |   | 1,025  |      |  |   | 1,522   |   |  |   | 1,351  |  
|Maintenance                                                                                     |  |                            | 3,267  |   |                          |   | 3,151  |      |  |   | 6,687   |   |  |   | 4,714  |  
|Professional services                                                                           |  |                            | 6,113  |   |                          |   | 6,259  |      |  |   | 11,959  |   |  |   | 9,048  |  
|Amortization of acquired technology                                                             |  |                            | 4,379  |   |                          |   | 3,932  |      |  |   | 8,546   |   |  |   | 5,977  |  
|Stock-based compensation (*)                                                                    |  |                            | 7      |   |                          |   | 14     |      |  |   | 21      |   |  |   | 15     |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total cost of revenue                                                                           |  |                            | 14,685 |   |                          |   | 14,381 |      |  |   | 28,735  |   |  |   | 21,105 |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Gross profit                                                                                    |  |                            | 44,720 |   |                          |   | 37,579 |      |  |   | 91,979  |   |  |   | 64,597 |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Operating expenses:                                                                             |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Sales and marketing                                                                             |  |                            | 16,694 |   |                          |   | 18,131 |      |  |   | 34,472  |   |  |   | 27,488 |  
|Research and development                                                                        |  |                            | 8,563  |   |                          |   | 8,875  |      |  |   | 17,419  |   |  |   | 13,824 |  
|General and administrative                                                                      |  |                            | 4,233  |   |                          |   | 4,963  |      |  |   | 8,864   |   |  |   | 7,011  |  
|Stock-based compensation (*)                                                                    |  |                            | 352    |   |                          |   | 223    |      |  |   | 567     |   |  |   | 240    |  
|Amortization of intangible assets                                                               |  |                            | 2,582  |   |                          |   | 2,986  |      |  |   | 5,396   |   |  |   | 3,936  |  
|Acquired in-process research and development                                                    |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   | 10,400 |  
|Restructuring, acquisition and other charges                                                    |  |                            |       |   |                          |   | 1,556  |      |  |   |        |   |  |   | 1,766  |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total operating expenses                                                                        |  |                            | 32,424 |   |                          |   | 36,734 |      |  |   | 66,718  |   |  |   | 64,665 |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Operating income (loss)                                                                         |  |                            | 12,296 |   |                          |   | 845    |      |  |   | 25,261  |   |  |   | (68    | )
|Interest income                                                                                 |  |                            | 1,378  |   |                          |   | 728    |      |  |   | 2,490   |   |  |   | 2,043  |  
|Interest expense                                                                                |  |                            | (825   | ) |                          |   | (825   | )    |  |   | (1,650  | ) |  |   | (1,650 | )
|Amortization of debt issuance costs                                                             |  |                            | (335   | ) |                          |   | (335   | )    |  |   | (670    | ) |  |   | (796   | )
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Income (loss) before income taxes                                                               |  |                            | 12,514 |   |                          |   | 413    |      |  |   | 25,431  |   |  |   | (471   | )
|Income taxes                                                                                    |  |                            | 4,029  |   |                          |   | 157    |      |  |   | 8,809   |   |  |   | 3,547  |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss)                                                                               |  | $                          | 8,485  |   |                          | $ | 256    |      |  | $ | 16,622  |   |  | $ | (4,018 | )
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss) per share:                                                                    |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Basic                                                                                           |  | $                          | 0.21   |   |                          | $ | 0.01   |      |  | $ | 0.40    |   |  | $ | (0.10  | )
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Diluted                                                                                         |  | $                          | 0.18   |   |                          | $ | 0.01   |      |  | $ | 0.34    |   |  | $ | (0.10  | )
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Weighted average shares used in per share calculations:                                         |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Basic                                                                                           |  |                            | 41,165 |   |                          |   | 43,955 |      |  |   | 41,445  |   |  |   | 41,413 |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Diluted                                                                                         |  |                            | 51,758 |   |                          |   | 44,626 |      |  |   | 52,273  |   |  |   | 41,413 |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss)                                                                               |  | $                          | 8,485  |   |                          | $ | 256    |      |  | $ | 16,622  |   |  | $ | (4,018 | )
|Plus: Income impact of assumed conversions:                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Tax effected interest, including amortization of debt issuance costs, on 1.5% convertible notes |  |                            | 697    |   |                          |   |       |      |  |   | 1,396   |   |  |   |       |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Adjusted net income (loss) for diluted net income (loss) per share calculation                  |  | $                          | 9,182  |   |                          | $ | 256    |      |  | $ | 18,018  |   |  | $ | (4,018 | )
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|(*) Stock-based compensation is further classified as follows:                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Cost of maintenance                                                                             |  | $                          | 3      |   |                          | $ | 6      |      |  | $ | 10      |   |  | $ | 7      |  
|Cost of professional services                                                                   |  |                            | 4      |   |                          |   | 8      |      |  |   | 11      |   |  |   | 8      |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Stock-based compensation in cost of revenue                                                     |  |                            | 7      |   |                          |   | 14     |      |  |   | 21      |   |  |   | 15     |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Sales and marketing                                                                             |  |                            | 65     |   |                          |   | 126    |      |  |   | 186     |   |  |   | 136    |  
|Research and development                                                                        |  |                            | 30     |   |                          |   | 57     |      |  |   | 85      |   |  |   | 61     |  
|General and administrative                                                                      |  |                            | 257    |   |                          |   | 40     |      |  |   | 296     |   |  |   | 43     |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Stock-based compensation in operating expenses                                                  |  |                            | 352    |   |                          |   | 223    |      |  |   | 567     |   |  |   | 240    |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total stock-based compensation                                                                  |  | $                          | 359    |   |                          | $ | 237    |      |  | $ | 588     |   |  | $ | 255    |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  

See accompanying notes to condensed consolidated financial statements.



4



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##### Table of Contents

SERENA SOFTWARE, INC.



Condensed
Consolidated Statements of Cash Flows



For the Six
Months Ended July 31, 2005 and 2004



(In thousands)

(Unaudited)



|                                                                                                         |  |                           |         |   |      |   |          |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                                         |  | Six Months Ended July 31, |        
|                                                                                                         |  | 2005                      |         |   | 2004 |  
|Cash flows from operating activities:                                                                    |  |                           |         |   |      |   |          |  
|Net income (loss)                                                                                        |  | $                         | 16,622  |   |      | $ | (4,018   | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:                 |  |                           |         |   |      |   |          |  
|Depreciation                                                                                             |  |                           | 1,414   |   |      |   | 1,201    |  
|Deferred income taxes                                                                                    |  |                           | (5,468  | ) |      |   |         |  
|Tax benefit from employee stock plans                                                                    |  |                           | 220     |   |      |   |         |  
|Provision for doubtful accounts                                                                          |  |                           | 117     |   |      |   | 650      |  
|Accrued interest income, net of cash received                                                            |  |                           | (58     | ) |      |   | 65       |  
|Accrued interest expense on subordinated notes                                                           |  |                           | 1,650   |   |      |   | 1,650    |  
|Amortization of debt issuance costs                                                                      |  |                           | 670     |   |      |   | 796      |  
|Amortization of deferred stock-based compensation                                                        |  |                           | 588     |   |      |   | 255      |  
|Amortization of acquired technology                                                                      |  |                           | 8,546   |   |      |   | 5,977    |  
|Amortization of intangible assets                                                                        |  |                           | 5,396   |   |      |   | 3,936    |  
|Acquired in-process research and development                                                             |  |                           |        |   |      |   | 10,400   |  
|Change in the fair market value of consideration in the acquisition of Merant Plc.                       |  |                           | (4,915  | ) |      |   |         |  
|Changes in operating assets and liabilities:                                                             |  |                           |         |   |      |   |          |  
|Accounts receivable                                                                                      |  |                           | 10,996  |   |      |   | 7,297    |  
|Prepaid expenses and other assets                                                                        |  |                           | (1,177  | ) |      |   | 429      |  
|Accounts payable                                                                                         |  |                           | (1,466  | ) |      |   | (270     | )
|Income taxes payable                                                                                     |  |                           | 4,697   |   |      |   | (4,496   | )
|Accrued expenses                                                                                         |  |                           | (1,756  | ) |      |   | (173     | )
|Deferred revenue                                                                                         |  |                           | 3,540   |   |      |   | (308     | )
|                                                                                                         |  |                           |         |   |      |   |          |  
|Net cash provided by operating activities                                                                |  |                           | 39,616  |   |      |   | 23,391   |  
|                                                                                                         |  |                           |         |   |      |   |          |  
|Cash flows used in investing activities:                                                                 |  |                           |         |   |      |   |          |  
|Purchases of property and equipment                                                                      |  |                           | (1,472  | ) |      |   | (822     | )
|(Purchases) sales of short-term and long-term investments                                                |  |                           | (36,865 | ) |      |   | 58,382   |  
|Cash paid in acquisition of Apptero, Inc., net of cash received and acquisition related costs paid       |  |                           | (3,099  | ) |      |   |         |  
|Cash paid in acquisition of selected net assets of Integrated Chipware, Inc.                             |  |                           |        |   |      |   | (3,780   | )
|Cash paid in acquisition of Merant Plc., net of cash received and acquisition related costs paid         |  |                           | (3,134  | ) |      |   | (193,908 | )
|                                                                                                         |  |                           |         |   |      |   |          |  
|Net cash used in investing activities                                                                    |  |                           | (44,570 | ) |      |   | (140,128 | )
|                                                                                                         |  |                           |         |   |      |   |          |  
|Cash flows (used in) provided by financing activities:                                                   |  |                           |         |   |      |   |          |  
|Exercise of stock options under the employee stock option plan                                           |  |                           | 6,573   |   |      |   | 3,598    |  
|Sale of common stock under the employee stock purchase plan                                              |  |                           | 1,785   |   |      |   | 1,644    |  
|Common stock repurchased under the stock repurchase plan                                                 |  |                           | (48,601 | ) |      |   | (4,231   | )
|                                                                                                         |  |                           |         |   |      |   |          |  
|Net cash (used in) provided by financing activities                                                      |  |                           | (40,243 | ) |      |   | 1,011    |  
|                                                                                                         |  |                           |         |   |      |   |          |  
|Effect of exchange rate changes on cash                                                                  |  |                           | 197     |   |      |   | (1,025   | )
|                                                                                                         |  |                           |         |   |      |   |          |  
|Net decrease in cash and cash equivalents                                                                |  |                           | (45,000 | ) |      |   | (116,751 | )
|Cash and cash equivalents at beginning of period                                                         |  |                           | 133,330 |   |      |   | 257,281  |  
|                                                                                                         |  |                           |         |   |      |   |          |  
|Cash and cash equivalents at end of period                                                               |  | $                         | 88,330  |   |      | $ | 140,530  |  
|                                                                                                         |  |                           |         |   |      |   |          |  
|Supplemental disclosures of cash flow information:                                                       |  |                           |         |   |      |   |          |  
|Income taxes paid                                                                                        |  | $                         | 8,881   |   |      | $ | 6,754    |  
|                                                                                                         |  |                           |         |   |      |   |          |  
|Non-cash investing and financing activity:                                                               |  |                           |         |   |      |   |          |  
|Unrealized loss on marketable securities                                                                 |  | $                         | (279    | ) |      | $ | (385     | )
|                                                                                                         |  |                           |         |   |      |   |          |  
|Common stock issued in the acquisition of Merant Plc., including estimated fair value of options assumed |  | $                         |        |   |      | $ | 127,683  |  
|                                                                                                         |  |                           |         |   |      |   |          |  
|Consideration payable to Apptero Shareholders in the acquisition                                         |  | $                         | 1,060   |   |      | $ |         |  
|                                                                                                         |  |                           |         |   |      |   |          |  
|Change in the fair market value of consideration in the acquisition of Merant Plc.                       |  | $                         | 4,915   |   |      | $ |         |  
|                                                                                                         |  |                           |         |   |      |   |          |  



See accompanying notes
to condensed consolidated financial statements.



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##### Table of Contents

SERENA SOFTWARE, INC.



NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



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



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



Reclassifications and Adjustments



Certain reclassifications have been made to the balances
for the three and six months ended July 31, 2004 in order to conform to the July 31, 2005 presentations.



In the fiscal quarter ended July 31, 2005, $0.6 million in maintenance revenue was recognized that had been fully earned and collected that related to
prior periods. The maintenance revenue recognized totaling $0.6 million represented less than 2% of total maintenance revenue in the quarter and was not material.



Major Customers



No single customer accounted for 10% or more of total revenue in either the fiscal quarter or fiscal six months ended July 31, 2005, or 2004.



(1)    Acquisitions



Merant



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



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



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##### Table of Contents

SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



In connection with the acquisition, the Company recorded $285.9 million in goodwill. The goodwill is
not expected to be fully deductible for tax purposes. The primary reasons for the acquisition and the factors that contributed to a purchase price that resulted in recognition of a significant amount of goodwill included the large installed base
that provided the combined companies with distribution leverage to cross sell products, expand into new geographies, create new opportunities in channel development and generate a profitable and steady maintenance stream.



In the quarter ended July 31, 2005, the Company discovered an error in
the calculation of the total consideration in the Merant acquisition. The fair market value of the consideration was understated by $4.9 million. The correction of the error resulted in an increase in goodwill and involved cash and shares held in
escrow for the consideration with respect to Merant shareholders who have not been identified. The error in the calculation of the total consideration represented 1% of the total consideration and was not material.



The Company acquired 100% of Merants outstanding common stock and
thereby acquired all of its assets and assumed all of its liabilities. The total purchase price was $420.5 million and consisted of a combination of cash and stock as follows (in thousands):



|                                                                                   |  |   |        
|---------------------------------------------------------------------------------- |  | - | -------
|Fair market value of SERENA common stock issued (approximately 5.9 million shares) |  | $ | 123,578
|Cash paid                                                                          |  |   | 268,775
|Estimated fair value of options assumed                                            |  |   | 7,201  
|Estimated employee severance and other costs                                       |  |   | 13,381 
|Estimated acquisition-related costs                                                |  |   | 7,573  
|                                                                                   |  |   |        
|Total estimated purchase price of acquisition                                      |  | $ | 420,508
|                                                                                   |  |   |        



The total purchase
price was allocated as follows (in thousands):



|                                              |  |   |         |  
|--------------------------------------------- |  | - | ------- | -
|Fair value of assets acquired                 |  | $ | 131,071 |  
|Acquired technology                           |  |   | 45,000  |  
|Acquired in-process research and development  |  |   | 10,400  |  
|Trademark / Trade name portfolio              |  |   | 2,400   |  
|Customer contracts                            |  |   | 47,500  |  
|Non-compete agreements                        |  |   | 9,300   |  
|Intrinsic value of options assumed            |  |   | 1,822   |  
|Fair value of liabilities assumed             |  |   | (67,094 | )
|Deferred tax liability                        |  |   | (45,771 | )
|Goodwill                                      |  |   | 285,880 |  
|                                              |  |   |         |  
|Total estimated purchase price of acquisition |  | $ | 420,508 |  
|                                              |  |   |         |  



RTM Acquisition from Integrated
Chipware, Inc.



In June 2004, the Company acquired the
technology, assets, associated expertise and customer base for Integrated Chipwares Requirements and Traceability Management (RTM) product, one of the industrys leading requirements management solutions, for $3.8 million. In
connection with the acquisition, which has been accounted for as an acquisition of a business, the Company has capitalized $4.3 million of acquired technology associated with the RTM product and has recorded an accrual of $0.2 million for
restructuring and acquisition-related charges. There was no goodwill recorded in the business acquisition. The acquired technology will be



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##### Table of Contents

SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



amortized over its economic useful life of three years. Also in connection with the acquisition, the Company acquired certain selected assets and assumed
certain liabilities including selected trade receivables and deferred maintenance contracts; all of which have been recorded at their fair values.



Business Application Planning Technology Acquisition



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



(2)    Acquired In-process Research and Development



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



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



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



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



|                              |  |                    |   |  |              |  
|----------------------------- |  | ------------------ | - |  | ------------ | -
|Application Under Development |  | PercentageComplete |   |  | DiscountRate |  
|Professional version 8.1      |  | 95                 | % |  | 18           | %
|Professional version 8.2      |  | 95                 | % |  | 18           | %
|Dimension version 9.0         |  | 85                 | % |  | 18           | %
|Formula 1                     |  | 0                  | % |  | 23           | %





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##### Table of Contents

SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



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



(3)    Stock-Based Compensation



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



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



|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                            |  | Three Months EndedJuly 31, |        |   | Six Months EndedJuly 31, |  
|                                                                                                                            |  | 2005                       |        |   | 2004                     |   |        | 2005 |  |   | 2004   |  
|Net income (loss), as reported                                                                                              |  | $                          | 8,485  |   |                          | $ | 256    |      |  | $ | 16,622 |   |  | $ | (4,018 | )
|Add: stock-based employee compensation expense included in reported net income, net of tax                                  |  |                            | 226    |   |                          |   | 140    |      |  |   | 370    |   |  |   | 158    |  
|Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of tax |  |                            | (2,927 | ) |                          |   | (3,107 | )    |  |   | (5,872 | ) |  |   | (6,015 | )
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Pro forma net income (loss)                                                                                                 |  | $                          | 5,784  |   |                          | $ | (2,711 | )    |  | $ | 11,120 |   |  | $ | (9,875 | )
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic net income (loss) per share:                                                                                          |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                 |  | $                          | 0.21   |   |                          | $ | 0.01   |      |  | $ | 0.40   |   |  | $ | (0.10  | )
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                   |  | $                          | 0.14   |   |                          | $ | (0.06  | )    |  | $ | 0.27   |   |  | $ | (0.24  | )
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Diluted net income (loss) per share:                                                                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                 |  | $                          | 0.18   |   |                          | $ | 0.01   |      |  | $ | 0.34   |   |  | $ | (0.10  | )
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                   |  | $                          | 0.13   |   |                          | $ | (0.06  | )    |  | $ | 0.24   |   |  | $ | (0.24  | )
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



For the pro forma
amounts determined under SFAS No. 123, as set forth above, the fair value of each stock option grant under the stock option plans and the fair value of the employees purchase rights under the employee



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



stock purchase plan (ESPP) are estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the three months and six months ended July 31, 2005 and 2004.



|                         |  |                             |   |  |                           |   |  |                   |   |  |      |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------ |  | --------------------------- | - |  | ------------------------- | - |  | ----------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                         |  | Stock OptionPlans           |   |  | ESPP                      |   |  | Stock OptionPlans |   |  | ESPP |  
|                         |  | Three Months Ended July 31, |   |  | Six Months Ended July 31, |  
|                         |  | 2005                        |   |  | 2004                      |   |  | 2005              |   |  | 2004 |   |  | 2005 |   |  | 2004 |   |  | 2005 |   |  | 2004 |  
|Expected life (in years) |  | 4.5                         |   |  | 4.5                       |   |  | 0.5               |   |  | 0.5  |   |  | 4.5  |   |  | 4.5  |   |  | 0.5  |   |  | 0.5  |  
|Risk-free interest rate  |  | 4.1                         | % |  | 3.5                       | % |  | 3.8               | % |  | 1.6  | % |  | 4.1  | % |  | 3.5  | % |  | 3.8  | % |  | 1.6  | %
|Volatility               |  | 74                          | % |  | 98                        | % |  | 32                | % |  | 45   | % |  | 74   | % |  | 98   | % |  | 32   | % |  | 45   | %
|Dividend yield           |  | none                        |   |  | none                      |   |  | none              |   |  | none |   |  | none |   |  | none |   |  | none |   |  | none |  



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



In the fiscal quarter ended July 31, 2005, the Company granted restricted stock to certain executive officers. These
restricted common stock awards vest ratably over five years from the date of grant based on continued service. The aggregate market value of the restricted common stock was $9.4 million and was recorded as deferred compensation and is amortized to
operating expenses over the vesting term.



(4)    Net
Income (Loss) Per Share



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



In October 2004, the FASB ratified the consensus reached by the EITF with respect to EITF Issue No. 04-8, The Effect of Contingently
Convertible Instruments on Diluted Earnings Per Share. In accordance with EITF Issue 04-8, potential shares issuable under contingently convertible securities with a market price trigger should be accounted for the same way as other
convertible securities and included in the diluted earnings per share computation, regardless of whether the market price trigger has been met. Upon our adoption of EITF Issue No. 04-8 in the fourth quarter of fiscal 2005, 9,912,694 shares
issuable upon conversion of the Companys Subordinated Convertible Notes due December 15, 2023 (the Notes) have been included in the diluted earnings per share calculation for the current fiscal quarter and six months ended
July 31, 2005, using the if converted method. The 9,912,964 shares issuable from the conversion of the Notes have not been included in the diluted earnings per share calculation for the fiscal quarter and six months ended
July 31, 2004, since their inclusion would have been anti-dilutive. Accordingly, we have not restated our diluted earnings per share calculation for the fiscal quarter and six months ended July 31, 2004. The Notes were issued in the fourth
quarter of fiscal 2004. These common shares will continue to be considered in our diluted earnings per share calculation until the Notes are redeemed, retired or, under certain circumstances, amended. See Note 9 of Notes to Condensed Consolidated
Financial Statements for a further discussion of the Notes.



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



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



|                                                                                                                            |  |                        |        |   |                      |        |                  |   |       |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | -------------------- | ------ | ---------------- | - | ----- | -
|                                                                                                                            |  | Net Income (Numerator) |        |   | Shares (Denominator) |        | Per Share Amount |  
|Three Months Ended July 31, 2005:                                                                                           |  |                        |        |   |                      |        |                  |   |       |  
|Basic net income per share:                                                                                                 |  |                        |        |   |                      |        |                  |   |       |  
|Net income                                                                                                                  |  | $                      | 8,485  |   |                      | 41,165 |                  | $ | 0.21  |  
|Effect of potentially dilutive securities outstandingrestricted stock and options                                          |  |                        |       |   |                      | 680    |                  |   |      |  
|Effect of potentially dilutive securities outstandingshares issuable under contingently convertible securities, net of
tax |  |                        | 697    |   |                      | 9,913  |                  |   |      |  
|                                                                                                                            |  |                        |        |   |                      |        |                  |   |       |  
|Diluted net income per share                                                                                                |  | $                      | 9,182  |   |                      | 51,758 |                  | $ | 0.18  |  
|                                                                                                                            |  |                        |        |   |                      |        |                  |   |       |  
|Three Months Ended July 31, 2004:                                                                                           |  |                        |        |   |                      |        |                  |   |       |  
|Basic net income per share:                                                                                                 |  |                        |        |   |                      |        |                  |   |       |  
|Net income                                                                                                                  |  | $                      | 256    |   |                      | 43,955 |                  | $ | 0.01  |  
|Effect of potentially dilutive securities outstandingrestricted stock and options                                          |  |                        |       |   |                      | 671    |                  |   |      |  
|Effect of potentially dilutive securities outstandingshares issuable under contingently convertible securities, net of
tax |  |                        |       |   |                      |       |                  |   |      |  
|                                                                                                                            |  |                        |        |   |                      |        |                  |   |       |  
|Diluted net income per share                                                                                                |  | $                      | 256    |   |                      | 44,626 |                  | $ | 0.01  |  
|                                                                                                                            |  |                        |        |   |                      |        |                  |   |       |  
|Six Months Ended July 31, 2005:                                                                                             |  |                        |        |   |                      |        |                  |   |       |  
|Basic net income per share:                                                                                                 |  |                        |        |   |                      |        |                  |   |       |  
|Net income                                                                                                                  |  | $                      | 16,622 |   |                      | 41,445 |                  | $ | 0.40  |  
|Effect of potentially dilutive securities outstandingrestricted stock and options                                          |  |                        |       |   |                      | 915    |                  |   |      |  
|Effect of potentially dilutive securities outstandingshares issuable under contingently convertible securities, net of
tax |  |                        | 1,396  |   |                      | 9,913  |                  |   |      |  
|                                                                                                                            |  |                        |        |   |                      |        |                  |   |       |  
|Diluted net income per share                                                                                                |  | $                      | 18,018 |   |                      | 52,273 |                  | $ | 0.34  |  
|                                                                                                                            |  |                        |        |   |                      |        |                  |   |       |  
|Six Months Ended July 31, 2004:                                                                                             |  |                        |        |   |                      |        |                  |   |       |  
|Basic net loss per share:                                                                                                   |  |                        |        |   |                      |        |                  |   |       |  
|Net loss                                                                                                                    |  | $                      | (4,018 | ) |                      | 41,413 |                  | $ | (0.10 | )
|Effect of potentially dilutive securities outstandingrestricted stock and options                                          |  |                        |       |   |                      |       |                  |   |      |  
|Effect of potentially dilutive securities outstandingshares issuable under contingently convertible securities, net of
tax |  |                        |       |   |                      |       |                  |   |      |  
|                                                                                                                            |  |                        |        |   |                      |        |                  |   |       |  
|Diluted net loss per share                                                                                                  |  | $                      | (4,018 | ) |                      | 41,413 |                  | $ | (0.10 | )
|                                                                                                                            |  |                        |        |   |                      |        |                  |   |       |  



Options to purchase
shares of common stock with an exercise price which is greater than the average fair market value of SERENAs common stock for the period are not included in the computation of diluted earnings per share, or EPS, because the effect of their
inclusion would have been anti-dilutive. For both the three and six month periods ended July 31, 2005, 2,650,953 of options to purchase shares of common stock at an average share price of $23.70 were excluded from the computation of diluted
EPS. For the three month period ended July 31, 2004, 2,364,202 of options to purchase shares of common stock at an average share price of $23.68 were



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



excluded from the computation of diluted EPS. For the six month period ended July 31, 2004, all options to purchase shares of common stock were excluded
from the computation of diluted earnings per share because the effect of their inclusion would be anti-dilutive. Accordingly, 5,966,708 options to purchase shares of common stock at an average share price of $18.30 were excluded from the computation
of diluted EPS.



(5)    Acquisition-Related and
Restructuring Charges and Accruals



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



With respect to the Companys acquisition of Merant in April 2004, the Company recorded acquisition-related costs totaling $10.7 million, and employee severance and other restructuring costs totaling $13.4 million, accrued through
purchase accounting. With the Merant acquisition, the major actions that comprised the employee severance plan included a company-wide review of the combined organization to identify redundancies, and a notification to affected employees of the
acquired entity. Affected employees from the sales organization were notified in early May 2004, the remaining affected North America employees were notified in late May 2004, and all affected international employees were notified by the end of our
second quarter of fiscal 2005 on July 31, 2004. The employee severance plan was essentially completed upon notification and employees from all employee groups across the organization were terminated.



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



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



In aggregate, the Company accrued $0.1 million and paid $3.2 million in acquisition-related and
restructuring charges in the current fiscal six months ended July 31, 2005. Purchase accounting adjustments recorded in the first fiscal quarter ended April 30, 2005 totaled $2.2 million and were the result of finalizing certain
acquisition-related estimates associated with the Merant acquisition at the one year anniversary of the acquisition. There were no purchase accounting adjustments associated with acquisition-related and restructuring charges recorded in the second
fiscal quarter ended July 31, 2005. The nature of the acquisition-related and restructuring charges and the amounts paid and accrued as of July 31, 2005 and 2004 are summarized as follows (in thousands):



|                                                    |  |                                                      |        |   |                     |   |        |                                           |  |   |                                                                   |   |  |   |         |  
|--------------------------------------------------- |  | ---------------------------------------------------- | ------ | - | ------------------- | - | ------ | ----------------------------------------- |  | - | ----------------------------------------------------------------- | - |  | - | ------- | -
|                                                    |  | Severance, payroll taxes and other employee benefits |        |   | Facilities closures |   |        | Legal and other acquisition-related costs |  |   | Total acquisition- related and restructuring charges and accruals |  
|Balances as of January 31, 2005                     |  | $                                                    | 5,066  |   |                     | $ | 637    |                                           |  | $ | 940                                                               |   |  | $ | 6,643   |  
|Activity during the six months ended July 31, 2005: |  |                                                      |        |   |                     |   |        |                                           |  |   |                                                                   |   |  |   |         |  
|Accrued                                             |  |                                                      |       |   |                     |   |       |                                           |  |   | 100                                                               |   |  |   | 100     |  
|Paid                                                |  |                                                      | (2,137 | ) |                     |   | (337   | )                                         |  |   | (727                                                              | ) |  |   | (3,201  | )
|Adjustments                                         |  |                                                      | (1,428 | ) |                     |   | (143   | )                                         |  |   | (665                                                              | ) |  |   | (2,236  | )
|                                                    |  |                                                      |        |   |                     |   |        |                                           |  |   |                                                                   |   |  |   |         |  
|Balances as of July 31, 2005                        |  | $                                                    | 1,501  |   |                     | $ | 157    |                                           |  | $ | (352                                                              | ) |  | $ | 1,306   |  
|                                                    |  |                                                      |        |   |                     |   |        |                                           |  |   |                                                                   |   |  |   |         |  
|Balances as of January 31, 2004                     |  | $                                                    | 115    |   |                     | $ | 47     |                                           |  | $ | 5                                                                 |   |  | $ | 167     |  
|Activity during the six months ended July 31, 2004: |  |                                                      |        |   |                     |   |        |                                           |  |   |                                                                   |   |  |   |         |  
|Accrued                                             |  |                                                      | 10,934 |   |                     |   | 2,503  |                                           |  |   | 13,008                                                            |   |  |   | 26,445  |  
|Paid                                                |  |                                                      | (3,234 | ) |                     |   | (1,154 | )                                         |  |   | (8,665                                                            | ) |  |   | (13,053 | )
|Adjustments                                         |  |                                                      | 195    |   |                     |   | (195   | )                                         |  |   |                                                                  |   |  |   |        |  
|                                                    |  |                                                      |        |   |                     |   |        |                                           |  |   |                                                                   |   |  |   |         |  
|Balances as of July 31, 2004                        |  | $                                                    | 8,010  |   |                     | $ | 1,201  |                                           |  | $ | 4,348                                                             |   |  | $ | 13,559  |  
|                                                    |  |                                                      |        |   |                     |   |        |                                           |  |   |                                                                   |   |  |   |         |  



(6)    Goodwill
and Other Intangible Assets



The Company accounts for
goodwill and certain intangible assets after an acquisition is completed in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. As such, goodwill and other indefinite life intangible assets are not amortized
but instead are periodically tested for impairment. The annual impairment test required by SFAS No. 142 will be performed in the fourth fiscal quarter each year and has been performed in each of the fourth quarters of fiscal 2005, 2004 and
2003. The Company has concluded that there were no indicators of impairment of goodwill as of July 31, 2005.



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



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



|                                 |  |               |         |                  |   |        
|-------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                                 |  | July 31, 2005 |         | January 31, 2005
|Goodwill                         |  | $             | 326,350 |                  | $ | 323,671
|                                 |  |               |         |                  |   |        
|Non-compete agreement            |  | $             | 10,933  |                  | $ | 10,933 
|Acquired technology              |  |               | 93,755  |                  |   | 86,741 
|Customer contracts               |  |               | 49,300  |                  |   | 49,300 
|Trademark / Trade name portfolio |  |               | 2,600   |                  |   | 2,600  
|Customer relationships           |  |               | 2,510   |                  |   | 2,510  
|                                 |  |               |         |                  |   |        
|                                 |  |               | 159,098 |                  |   | 152,084
|Less: accumulated amortization   |  |               | 58,243  |                  |   | 44,294 
|                                 |  |               |         |                  |   |        
|                                 |  | $             | 100,855 |                  | $ | 107,790
|                                 |  |               |         |                  |   |        



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



|                                                             |  |                        |         |                          |   |         |                     |  |   |        
|------------------------------------------------------------ |  | ---------------------- | ------- | ------------------------ | - | ------- | ------------------- |  | - | -------
|                                                             |  | As of July 31, 2005   
|                                                             |  | Gross Carrying Amount  |         | Accumulated Amortization |   |         | Net Carrying Amount
|Amortizing intangible assets:                                |  |                        |         |                          |   |         |                     |  |   |        
|Non-compete agreements                                       |  | $                      | 10,933  |                          | $ | (3,995  | )                   |  | $ | 6,938  
|Acquired technology                                          |  |                        | 93,755  |                          |   | (40,260 | )                   |  |   | 53,495 
|Maintenance service contracts                                |  |                        | 49,300  |                          |   | (10,412 | )                   |  |   | 38,888 
|Trademark / Trade name portfolio                             |  |                        | 2,600   |                          |   | (1,763  | )                   |  |   | 837    
|Customer relationships                                       |  |                        | 2,510   |                          |   | (1,813  | )                   |  |   | 697    
|                                                             |  |                        |         |                          |   |         |                     |  |   |        
|Total                                                        |  | $                      | 159,098 |                          | $ | (58,243 | )                   |  | $ | 100,855
|                                                             |  |                        |         |                          |   |         |                     |  |   |        
|                                                             | 
|                                                             |  | As of January 31, 2005
|                                                             |  | Gross Carrying Amount  |         | Accumulated Amortization |   |         | Net Carrying Amount
|Amortizing intangible assets:                                |  |                        |         |                          |   |         |                     |  |   |        
|Non-compete agreements                                       |  | $                      | 10,933  |                          | $ | (2,950  | )                   |  | $ | 7,983  
|Acquired technology                                          |  |                        | 86,741  |                          |   | (31,708 | )                   |  |   | 55,033 
|Customer contracts                                           |  |                        | 49,300  |                          |   | (7,030  | )                   |  |   | 42,270 
|Trademark / Trade name portfolio                             |  |                        | 2,600   |                          |   | (1,212  | )                   |  |   | 1,388  
|Customer relationships                                       |  |                        | 2,510   |                          |   | (1,394  | )                   |  |   | 1,116  
|                                                             |  |                        |         |                          |   |         |                     |  |   |        
|Total                                                        |  | $                      | 152,084 |                          | $ | (44,294 | )                   |  | $ | 107,790
|                                                             |  |                        |         |                          |   |         |                     |  |   |        
|Aggregate amortization expense:                              |  |                        |         |                          |   |         |                     |  |   |        
|For the remaining six months of year ending January 31, 2006 |  |                        |         |                          |   |         |                     |  | $ | 13,496 
|Estimated amortization expense:                              |  |                        |         |                          |   |         |                     |  |   |        
|For year ended January 31, 2007                              |  |                        |         |                          |   |         |                     |  |   | 23,741 
|For year ended January 31, 2008                              |  |                        |         |                          |   |         |                     |  |   | 19,745 
|For year ended January 31, 2009                              |  |                        |         |                          |   |         |                     |  |   | 17,547 
|For year ended January 31, 2010                              |  |                        |         |                          |   |         |                     |  |   | 16,116 
|For year ended January 31, 2011                              |  |                        |         |                          |   |         |                     |  |   | 8,597  
|Thereafter                                                   |  |                        |         |                          |   |         |                     |  |   | 1,613  
|                                                             |  |                        |         |                          |   |         |                     |  |   |        
|Total                                                        |  |                        |         |                          |   |         |                     |  | $ | 100,855
|                                                             |  |                        |         |                          |   |         |                     |  |   |        



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



As of July 31, 2005, the weighted average remaining amortization period for acquired technology
is 39 months; trademark/trade name portfolio and customer relationships is 10 months; non-compete agreements is 8 months; and customer contracts is 66 months. The total weighted average remaining amortization period for all identifiable intangible
assets is 45 months. The aggregate amortization expense of acquired technology and other intangible assets was $7.0 million and $6.9 million in the three months ended July 31, 2005 and 2004, respectively. For the six month periods ended
July 31, 2005 and 2004, the aggregate amortization expense of acquired technology and other intangible assets was $13.9 million and $9.9 million, respectively. There were no impairment charges in the three or six month periods ended
July 31, 2005 and 2004.



In the quarter ended
July 31, 2005, the Company discovered an error in the calculation of the total consideration in the Merant acquisition. The fair market value of the consideration was understated by $4.9 million. The correction of the error resulted in an
increase in goodwill and involved cash and shares held in escrow for the consideration with respect to Merant shareholders who have not been identified. The error in the calculation of the total consideration represented 1% of the total
consideration and was not material.



The change in the carrying
amount of goodwill for the six months ended July 31, 2005 is as follows (in thousands):



|                                                         |  |   |         |  
|-------------------------------------------------------- |  | - | ------- | -
|Balance as of January 31, 2005                           |  | $ | 323,671 |  
|Activity during the six months ended July 31, 2005:      |  |   |         |  
|Purchase accounting adjustments to the Merant goodwill   |  |   | (2,236  | )
|Correction of an error in the Merant purchase accounting |  |   | 4,915   |  
|                                                         |  |   |         |  
|Balance as of July 31, 2005                              |  | $ | 326,350 |  
|                                                         |  |   |         |  



(7)    Comprehensive Income (Loss)



We report components of comprehensive income (loss) in our annual consolidated statements of shareholders equity. Comprehensive income (loss) consists of net income, foreign currency translation adjustments, and unrealized losses on
marketable equity securities. Total comprehensive income (loss) for the three and six month periods ended July 31, 2005 and 2004 is as follows (in thousands):



|                                         |  |                             |       |   |                           |   |      |      |  |   |        |   |  |   |        |  
|---------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ---- | ---- |  | - | ------ | - |  | - | ------ | -
|                                         |  | Three Months Ended July 31, |       |   | Six Months Ended July 31, |  
|                                         |  | 2005                        |       |   | 2004                      |   |      | 2005 |  |   | 2004   |  
|Comprehensive income (loss):             |  |                             |       |   |                           |   |      |      |  |   |        |   |  |   |        |  
|Net income (loss)                        |  | $                           | 8,485 |   |                           | $ | 256  |      |  | $ | 16,622 |   |  | $ | (4,018 | )
|Other comprehensive income (loss):       |  |                             |       |   |                           |   |      |      |  |   |        |   |  |   |        |  
|Foreign currency translation adjustment  |  |                             | 378   |   |                           |   | 97   |      |  |   | 197    |   |  |   | (157   | )
|Unrealized loss on marketable securities |  |                             | (193  | ) |                           |   | (161 | )    |  |   | (279   | ) |  |   | (385   | )
|                                         |  |                             |       |   |                           |   |      |      |  |   |        |   |  |   |        |  
|Other comprehensive income (loss)        |  |                             | 185   |   |                           |   | (64  | )    |  |   | (82    | ) |  |   | (542   | )
|                                         |  |                             |       |   |                           |   |      |      |  |   |        |   |  |   |        |  
|Total comprehensive income (loss)        |  | $                           | 8,670 |   |                           | $ | 192  |      |  | $ | 16,540 |   |  | $ | (4,560 | )
|                                         |  |                             |       |   |                           |   |      |      |  |   |        |   |  |   |        |  



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



(8)    Recent Accounting Pronouncements



In June 2005, the Financial Accounting Standards Board (FASB)
issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements
(SFAS 154). SFAS 154 will require companies to account for and apply changes in accounting principles retrospectively to prior periods financial statements, instead of recording a cumulative effect adjustment within the period of
the change, unless it is impracticable to determine the effects of the change to each period being presented. SFAS 154 is effective for accounting changes made in annual periods beginning after December 15, 2005 and, accordingly, the Company
must adopt the new accounting provisions effective February 1, 2006.



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



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



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



(9)    Subordinated Notes



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



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SERENA SOFTWARE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Unaudited)



Accrued and unpaid interest on the Notes totaled $0.4 million as of July 31, 2005. The holders
of the Companys Notes may require the Company to repurchase for cash all or a portion of their Notes on December 15, 2008, December 15, 2013 or December 15, 2018 at a purchase price equal to 100% of the principal amount of
the Notes being purchased, plus accrued and unpaid interest to, but excluding the purchase date.



The Company pledged to the trustee under the indenture for the exclusive benefit of the holders of the Notes, $9.6 million of U.S. government securities,
which was sufficient, upon receipt of scheduled principal and interest payments thereon, to provide for the payment in full of the first six scheduled semi-annual interest payments on the Notes when due. Accordingly, at July 31, 2005, the
Company had restricted cash balances on hand totaling $4.9 million to cover the remaining three of the first six semi-annual interest payments.



In connection with the Notes, the Company recorded in the fourth quarter of fiscal 2004 $6.7 million in debt issuance costs, which is being amortized over
5 years, the term of the initial put option by the Note holders. Under the put option, the Note holders may require the Company to purchase for cash all or a portion of the option holders Notes on December 15, 2008, December 15,
2013 or December 15, 2018 at a purchase price equal to 100% of the principal amount of the Notes being purchased, plus accrued and unpaid interest to, but excluding, the purchase date. As of July 31, 2005, the Company had approximately
$4.5 million in debt issuance costs remaining and had amortized approximately $0.3 million in each of the quarters ended July 31, 2005 and 2004, and had amortized approximately $0.7 million and $0.8 million in the six month periods ended
July 31, 2005 and 2004, respectively. Amortization of debt issuance costs will be $1.34 million annually going forward through December 15, 2008, when the initial put option expires, or earlier, upon conversion of the notes.



(10)    Stock Repurchase Programs and Repurchase of Common Stock



In February 2005, the Board of Directors authorized the
repurchase of up to 1.5 million shares of the Companys Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in
connection with employee stock programs and general corporate purposes. Under this program, the Company repurchased in aggregate a total of 1,465,000 shares of its common stock for cash at an average price of $23.50 per share.



In May 2005, the Board of Directors authorized the repurchase of up to
1.5 million shares of the Companys Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with
employee stock programs and general corporate purposes. Under this program, the Company repurchased in aggregate a total of 722,500 shares of its common stock for cash at an average price of $19.61 per share.



A summary of the Companys repurchases in the fiscal six months ended
July 31, 2005 is as follows:



|           |  |                   |  |                        |      
|---------- |  | ----------------- |  | ---------------------- | -----
|Month      |  | RepurchasedShares |  | Average PricePer Share
|March 2005 |  | 1,415,000         |  | $                      | 23.50
|April 2005 |  | 50,000            |  | $                      | 23.56
|June 2005  |  | 697,500           |  | $                      | 19.62
|July 2005  |  | 25,000            |  | $                      | 19.26



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



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



Overview



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



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



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



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



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



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



In January 2002, we entered into an OEM Agreement with IBM Corporation (IBM) whereby IBM acquired the rights to resell our StarTool APM
technology. We recognized our first revenue from this arrangement in the second quarter of fiscal 2003 and such revenue has been subject to material fluctuations from quarter to quarter. Total revenue from our IBM OEM relationship was 5% of total
revenue in fiscal 2004 and accounted for less than 2% of total revenue in fiscal 2005 and less than 2% of total revenue in both the quarter and six months ended July 31, 2005. In April 2005, the Company received from IBM the notice of
termination of the OEM Agreement. Under the terms of the Agreement, the Company will continue to support IBMs customers for approximately the next four calendar quarters through June 30, 2006.



In the current fiscal quarter and six month periods ended July 31, 2005,
when compared to the same quarter and six months a year ago, SERENA experienced increases in total revenues of 14% and 41%, respectively, as total revenues for the current quarter and six months ended July 31, 2005 were $59.4 million and $120.7
million, respectively, versus $52.0 million and $85.7 million in the same quarter and six months from a year ago. These increases were primarily the result of the Companys acquisition of Merant in April 2004, and to a lesser extent, its
acquisition of TeamShare in June 2003.



For the current fiscal
quarter and fiscal six months ended July 31, 2005, 64% and 66%, respectively, of our software license revenue came from our distributed systems products and 36% and 34%, respectively, came from our mainframe products. Our distributed systems
products are licensed on a per user seat basis. Customers



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typically purchase mainframe products under Million Instructions Per Second, or MIPS-based, perpetual licenses. Mainframe software products and applications
are usually priced based on hardware computing capacity. The higher a hardwares MIPS capacity, the more expensive a software license will be.



Historically, SERENAs revenue has been generally attributable to sales in North America, Europe and to a lesser extent Asia Pacific. Revenue
attributable to sales in North America accounted for approximately 71% and 66% of SERENAs total revenue in the current fiscal quarter and fiscal six months ended July 31, 2005, respectively, versus 68% and 69% in the same quarter and six
months, respectively, a year ago.



Our international revenue is
attributable principally to our European operations. International revenue accounted for approximately 29% and 34% of SERENAs total revenue in the current fiscal quarter and fiscal six months ended July 31, 2005, respectively, versus 32%
and 31% in the same quarter and six months, respectively, a year ago.



Critical Accounting Policies and Estimates



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



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



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



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



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



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



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



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



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



Valuation of Long-Lived Intangible Assets, Including Goodwill.    In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets assets such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Such events or changes in circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or asset, a significant decrease in the benefits
realized from the acquired business or asset, difficulties or delays in integrating the business, or a significant change in the operations of the acquired business or use of an asset. Recoverability of long-lived assets other than goodwill is
measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Significant management judgment is required in identifying a triggering event that arises from a change in circumstances; forecasting future
operating results; and estimating the proceeds from the disposition of long-lived or intangible assets. Material impairment charges could be necessary should different conditions prevail or different judgments be made. Assets to be disposed of would
be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would be no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the balance sheet.



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



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



The Company completed this test during the fourth quarters of fiscal 2003,
fiscal 2004 and fiscal 2005, and the Company has not recorded an impairment loss on goodwill. The Company has concluded that there were no indicators of impairment of goodwill as of July 31, 2005.



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



Recent Accounting Pronouncements



In June 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (SFAS 154). SFAS 154 will require companies to account for and apply changes in
accounting principles retrospectively to prior periods financial statements, instead of recording a cumulative effect adjustment within the period of the change, unless it is impracticable to determine the effects of the change to each period
being presented. SFAS 154 is effective for accounting changes made in annual periods beginning after December 15, 2005 and, accordingly, the Company must adopt the new accounting provisions effective February 1, 2006.



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



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



FSP No. 109-2 Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (FSP 109-2) allows companies additional time to evaluate whether foreign earnings will be repatriated under the repatriation provisions of the AJCA and requires specified



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disclosures for companies needing the additional time to complete the evaluation. Once a decision is made to repatriate the foreign earnings, companies must
reflect the deferred tax liabilities attributable to foreign earnings in the period that the decision is made to remit those earnings.



Results of Operations



References to the dollar and percentage increases or decreases set forth below in this discussion and analysis of SERENAs results of operations are
derived from comparisons between SERENAs condensed consolidated statements of operations for the three and six month periods ended July 31, 2005 to the condensed consolidated statements of operations for the three and six month periods
ended July 31, 2004. Historical results include the post-acquisition results of TeamShare from June 5, 2003, Merant from April 23, 2004, the RTM product from June 21, 2004, and the business application planning technology product
from March 7, 2005.



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



|                                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|-------------------------------------------- |  | ----------------------------------------------- | -- |  | ----------------------------------------------- | -- |  | ---- | -- |  | ---- | --
|                                             |  | Percentage of RevenueThree Months EndedJuly 31, |    |  | Percentage of Revenue Six Months Ended July 31, |   
|                                             |  | 2005                                            |    |  | 2004                                            |    |  | 2005 |    |  | 2004 |   
|Revenue:                                     |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Software licenses                            |  | 32                                              | %  |  | 37                                              | %  |  | 34   | %  |  | 41   | % 
|Maintenance                                  |  | 57                                              | %  |  | 50                                              | %  |  | 56   | %  |  | 47   | % 
|Professional services                        |  | 11                                              | %  |  | 13                                              | %  |  | 10   | %  |  | 12   | % 
|                                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Total revenue                                |  | 100                                             | %  |  | 100                                             | %  |  | 100  | %  |  | 100  | % 
|                                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Cost of revenue:                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Software licenses                            |  | 2                                               | %  |  | 2                                               | %  |  | 1    | %  |  | 2    | % 
|Maintenance                                  |  | 5                                               | %  |  | 6                                               | %  |  | 6    | %  |  | 5    | % 
|Professional services                        |  | 10                                              | %  |  | 12                                              | %  |  | 10   | %  |  | 11   | % 
|Amortization of acquired technology          |  | 8                                               | %  |  | 8                                               | %  |  | 7    | %  |  | 7    | % 
|Stock-based compensation                     |  |                                                |    |  |                                                |    |  |     |    |  |     |   
|                                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Total cost of revenue                        |  | 25                                              | %  |  | 28                                              | %  |  | 24   | %  |  | 25   | % 
|                                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Gross profit                                 |  | 75                                              | %  |  | 72                                              | %  |  | 76   | %  |  | 75   | % 
|                                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Operating expenses:                          |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Sales and marketing                          |  | 28                                              | %  |  | 35                                              | %  |  | 29   | %  |  | 32   | % 
|Research and development                     |  | 14                                              | %  |  | 17                                              | %  |  | 14   | %  |  | 16   | % 
|General and administrative                   |  | 7                                               | %  |  | 9                                               | %  |  | 7    | %  |  | 8    | % 
|Stock-based compensation                     |  | 1                                               | %  |  |                                                |    |  |     |    |  |     |   
|Amortization of intangible assets            |  | 4                                               | %  |  | 6                                               | %  |  | 5    | %  |  | 5    | % 
|Acquired in-process research and development |  |                                                |    |  |                                                |    |  |     |    |  | 12   | % 
|Restructuring, acquisition and other charges |  |                                                |    |  | 3                                               | %  |  |     |    |  | 2    | % 
|                                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Total operating expenses                     |  | 54                                              | %  |  | 70                                              | %  |  | 55   | %  |  | 75   | % 
|                                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Operating income (loss)                      |  | 21                                              | %  |  | 2                                               | %  |  | 21   | %  |  | 0    | % 
|Interest income                              |  | 2                                               | %  |  | 1                                               | %  |  | 2    | %  |  | 2    | % 
|Interest expense                             |  | (1                                              | )% |  | (2                                              | )% |  | (1   | )% |  | (2   | )%
|Amortization of debt issuance costs          |  | (1                                              | )% |  | (1                                              | )% |  | (1   | )% |  | (1   | )%
|                                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Income (loss) before income taxes            |  | 21                                              | %  |  |                                                |    |  | 21   | %  |  | (1   | )%
|Income taxes                                 |  | 7                                               | %  |  |                                                |    |  | 7    | %  |  | 4    | % 
|                                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   
|Net income (loss)                            |  | 14                                              | %  |  | 0                                               | %  |  | 14   | %  |  | (5   | )%
|                                             |  |                                                 |    |  |                                                 |    |  |      |    |  |      |   



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Revenue



We derive revenue from software licenses, maintenance and professional services. Our total revenue increased $7.4 million, or 14%, to $59.4 million in the
fiscal quarter ended July 31, 2005 from $52.0 million in the same quarter a year ago. For the six months ended July 31, 2005, total revenue increased $35.0 million, or 41%, to $120.7 million from $85.7 million in the same six month period
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, |                    
|                      |  | 2005                        |        | 2004      |                           | Increase (Decrease) |      |   | 2005  |   | 2004 |           | Increase (Decrease) |     
|                      |  |                             |        | InDollars |                           |                     | In % |   |       |   |      | InDollars |                     | In % |  
|Revenue:              |  |                             |        |           |                           |                     |      |   |       |   |      |           |                     |      |   |         |  |   |        |  |   |        |  |    |  
|Software licenses     |  | $                           | 18,821 |           | $                         | 19,416              |      | $ | (595  | ) |      | (3        | )%                  |      | $ | 40,999  |  | $ | 35,256 |  | $ | 5,743  |  | 16 | %
|Maintenance           |  |                             | 34,218 |           |                           | 25,732              |      |   | 8,486 |   |      | 33        | %                   |      |   | 67,214  |  |   | 40,497 |  |   | 26,717 |  | 66 | %
|Professional services |  |                             | 6,366  |           |                           | 6,812               |      |   | (446  | ) |      | (7        | )%                  |      |   | 12,501  |  |   | 9,949  |  |   | 2,552  |  | 26 | %
|                      |  |                             |        |           |                           |                     |      |   |       |   |      |           |                     |      |   |         |  |   |        |  |   |        |  |    |  
|Total revenue         |  | $                           | 59,405 |           | $                         | 51,960              |      | $ | 7,445 |   |      | 14        | %                   |      | $ | 120,714 |  | $ | 85,702 |  | $ | 35,012 |  | 41 | %
|                      |  |                             |        |           |                           |                     |      |   |       |   |      |           |                     |      |   |         |  |   |        |  |   |        |  |    |  



Software
Licenses.    Software licenses revenue as a percentage of total revenue was 32% and 34% in the current fiscal quarter and fiscal six months ended July 31, 2005, respectively, as compared to 37% and 41% in the same
quarter and six months, respectively, a year ago. For the current fiscal quarter, when compared to the same quarter a year ago, the decrease in total software licenses revenue is predominantly due to extended sales cycles and the inability to close
several large transactions due to a challenging spending environment and rigorous customer purchasing processes. For the current fiscal six months, when compared to the same six months a year ago, the increase in total software licenses revenue is
predominantly due to increases in our distributed systems license revenue, for the most part coming from sales of Merant products after the Merant acquisition late in the first fiscal quarter ended April 30, 2004 and, to a lesser extent, sales
of RTM andTeamTrack coming from our Integrated Chipware acquisition in second quarter of fiscal 2005 and our TeamShare acquisition in the second quarter of fiscal 2004. Sales of our distributed systems products, predominantly
ChangeMan DSand TeamTrackbeginning in fiscal 2004 and ChangeMan DS, TeamTrackand our newly acquired product line from Merant beginning in the first quarter of fiscal 2005, make up an increasing proportion of total software
licenses revenue. Distributed systems products accounted for $12.0 million or 64% and $27.0 million or 66% of total software licenses revenue in the current fiscal quarter and fiscal six months ended July 31, 2005, respectively, as compared to
$13.6 million or 70% and $22.1 million or 63% in the same quarter and six months, respectively, a year ago. The Company expects that its distributed systems revenues in total and as a percentage of software licenses revenue will increase over time,
and that core software change management will continue to account for a substantial portion of software licenses revenue in the future.



Maintenance.    Maintenance revenue as a percentage of total revenue was 57% and 56% in the current fiscal quarter and fiscal
six months ended July 31, 2005, respectively, as compared to 50% and 47% in the same quarter and six months, respectively, a year ago. For the fiscal quarter and fiscal six months ended July 31, 2005, when compared to the same periods a
year ago, the increase in maintenance revenue is predominantly due to the Companys acquisition of Merant late in the first fiscal quarter ended April 30, 2004, and to a lesser extent, growth in installed software licenses base, as new
licenses generally include one year of maintenance, renewals of maintenance agreements by existing customers, and maintenance price increases; all partially offset by some cancellations in maintenance contracts. In the fiscal quarter ended
July 31, 2005, $0.6 million in maintenance revenue was recognized that had been fully earned and collected that related to prior periods. The maintenance revenue recognized totaling $0.6 million represented less than 2% of total maintenance
revenue in the quarter and was not material. We expect maintenance revenue to grow in absolute dollars in the near term as maintenance contracts renew.



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Professional Services.    Professional services revenue as a percentage of
total revenue was 11% and 10% in the current fiscal quarter and fiscal six months ended July 31, 2005, respectively, as compared to 13% and 12% in the same quarter and six months, respectively, a year ago. For the current fiscal quarter ended
July 31, 2005, when compared to the same quarter a year ago, the dollar decrease is predominantly due to a few large engagements which fueled the year ago quarters consulting business. For the current fiscal six months, when compared to
the same six months a year ago, the increase is predominantly due to the acquisition of Merant. In general, professional services revenue is attributable to consulting opportunities resulting from our installed customer base and our expanded
consulting service capabilities, all partially offset by the continued weak U.S. economy, price pressures on consulting rates, and the deferral of existing consulting projects.



Cost of Revenue



Cost of revenue, which consists of cost of software licenses, cost of maintenance, cost of professional services, amortization of acquired technology and
stock-based compensation, was 25% and 24% of total revenue in the current fiscal quarter and fiscal six months ended July 31, 2005, respectively, as compared to 28% and 25% 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, |  
|                                    |  |                             |        |   |                           |   |        | Increase (Decrease) |  |   |      |   |  |      |    |  | Increase (Decrease) |       
|                                    |  | 2005                        |        |   | 2004                      |   |        | In Dollars          |  |   | In % |   |  | 2005 |    |  | 2004                |        |   | In Dollars |   | In %   |  
|Cost of revenue:                    |  |                             |        |   |                           |   |        |                     |  |   |      |   |  |      |    |  |                     |        |   |            |   |        |   |  |   |       |  |    |  
|Software licenses                   |  | $                           | 919    |   |                           | $ | 1,025  |                     |  | $ | (106 | ) |  | (10  | )% |  | $                   | 1,522  |   |            | $ | 1,351  |   |  | $ | 171   |  | 13 | %
|Maintenance                         |  |                             | 3,267  |   |                           |   | 3,151  |                     |  |   | 116  |   |  | 4    | %  |  |                     | 6,687  |   |            |   | 4,714  |   |  |   | 1,973 |  | 42 | %
|Professional services               |  |                             | 6,113  |   |                           |   | 6,259  |                     |  |   | (146 | ) |  | (2   | )% |  |                     | 11,959 |   |            |   | 9,048  |   |  |   | 2,911 |  | 32 | %
|Amortization of acquired technology |  |                             | 4,379  |   |                           |   | 3,932  |                     |  |   | 447  |   |  | 11   | %  |  |                     | 8,546  |   |            |   | 5,977  |   |  |   | 2,569 |  | 43 | %
|Stock-based compensation            |  |                             | 7      |   |                           |   | 14     |                     |  |   | (7   | ) |  | (50  | )% |  |                     | 21     |   |            |   | 15     |   |  |   | 6     |  | 40 | %
|                                    |  |                             |        |   |                           |   |        |                     |  |   |      |   |  |      |    |  |                     |        |   |            |   |        |   |  |   |       |  |    |  
|Total cost of revenue               |  | $                           | 14,685 |   |                           | $ | 14,381 |                     |  | $ | 304  |   |  | 2    | %  |  | $                   | 28,735 |   |            | $ | 21,105 |   |  | $ | 7,630 |  | 36 | %
|                                    |  |                             |        |   |                           |   |        |                     |  |   |      |   |  |      |    |  |                     |        |   |            |   |        |   |  |   |       |  |    |  
|Percentage of total revenue         |  |                             | 25     | % |                           |   | 28     | %                   |  |   |      |   |  |      |    |  |                     | 24     | % |            |   | 25     | % |  |   |       |  |    |  
|                                    |  |                             |        |   |                           |   |        |                     |  |   |      |   |  |      |    |  |                     |        |   |            |   |        |   |  |   |       |  |    |  



Software
Licenses.    Cost of software licenses consists principally of fees associated with sales of certain distributed systems products, in particular, products from our acquisition of Merant; and to a lesser extent, salaries,
bonuses and other costs associated with our product release organization, certain referral fees and fees associated with integrating third party technology into our distributed systems products. Cost of software licenses as a percentage of total
software licenses revenue was 5% in both the current fiscal quarter ended July 31, 2005 and the same quarter a year ago, and 4% in both the current fiscal six months and the same six months a year ago. For the current fiscal quarter ended
July 31, 2005, when compared to the same quarter a year ago, the decrease in absolute dollars is predominantly due to decreases in fees as a result of lower revenues. For the current fiscal six months, when compared to the same six months a
year ago, the increase in absolute dollars is primarily due to increases in fees associated with sales of Merant products beginning with the acquisition of Merant late in the first fiscal quarter ended April 30, 2004.



Maintenance.    Cost of maintenance consists
primarily of salaries, bonuses and other costs associated with our customer support organizations. Cost of maintenance as a percentage of total maintenance revenue was 10% in both the current fiscal quarter and fiscal six months ended July 31,
2005, as compared to 12% in both the same quarter and six months a year ago. In absolute dollar terms, the increase in cost of maintenance is primarily attributable to increases in expenses associated with our customer support organizations as a
result of the growth in both maintenance revenue and our installed customer base with our acquisition of Merant late in the first quarter of fiscal 2005, and to a lesser extent, the increase in our installed customer base resulting from the
RTM



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technology acquisition in the second quarter of fiscal 2005. As a percentage of total maintenance revenue, the margin improvement in the current fiscal
quarter and fiscal six months, when compared to the same periods a year ago, reflects economies of scale achieved as the rate of growth in maintenance revenue was greater than the rate of growth in costs associated with our customer support
organizations.



Professional
Services.    Cost of professional services consists of salaries, bonuses and other costs associated with supporting our professional services organization. Cost of professional services as a percentage of total professional
services revenue was 96% in both the current fiscal quarter and fiscal six months ended July 31, 2005, as compared to 92% and 91% in the same quarter and six months, respectively, a year ago. For the current fiscal quarter ended July 31,
2005, when compared to the same quarter a year ago, the decrease in cost of professional services in absolute dollars is predominantly due decreases in expenses associated with our professional services organization to support lower professional
services revenues. For the current fiscal six months, when compared to the same six months a year ago, the increase in cost of professional services in absolute dollars is predominantly due to increases in expenses associated with our professional
services organization to support higher professional services revenue, for the most part fueled by increases in fees associated with Merant services beginning with the acquisition of Merant late in the first fiscal quarter ended April 30, 2004.
As a percentage of total professional services revenue, the margin decline in the current fiscal quarter and fiscal six months, when compared to the same quarter and six months a year ago, is the result of the rate of growth in costs associated with
our professional services organizations being greater than the rate of growth in professional services revenue.



Amortization of Acquired Technology.    In connection with various prior acquisitions and most recently TeamShare, Merant, the
RTM technology, and the business application planning technology, the Company has recorded $93.8 million in acquired technologies, offset by amortization totaling $40.3 million as of July 31, 2005. For both the current fiscal quarter and
fiscal six months ended July 31, 2005, when compared to the same periods a year ago, the increase in amortization expense was predominantly due to the acquired technology recorded in connection with the Companys acquisition of Merant, and
to a lesser extent, the acquired technology recorded in connection with the Companys acquisitions of TeamShare, the RTM product and the business application planning product. The Company expects to record $4.2 million per quarter in
amortization expense over the remaining two quarters of fiscal 2006, then between $4.2 million and $3.3 million per quarter over the next four quarters following thereon through the end of fiscal 2007. See Notes 1 and 6 of Notes to Condensed
Consolidated Financial Statements for additional information related to amortization of acquired technology and the acquisitions of Merant and the RTM technology from Integrated Chipware.



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, |  
|                                           |  |                             |        |   |                           |   |        | Increase (Decrease) |  |   |        |   |  |      |    |  | Increase (Decrease) |       
|                                           |  | 2005                        |        |   | 2004                      |   |        | In Dollars          |  |   | In %   |   |  | 2005 |    |  | 2004                |        |   | In Dollars |   |        | In % | 
|Operating expenses:                        |  |                             |        |   |                           |   |        |                     |  |   |        |   |  |      |    |  |                     |        |   |            |   |        |      |  |   |         |   |  |      |   
|Sales and marketing                        |  | $                           | 16,694 |   |                           | $ | 18,131 |                     |  | $ | (1,437 | ) |  | (8   | )% |  | $                   | 34,472 |   |            | $ | 27,488 |      |  | $ | 6,984   |   |  | 25   | % 
|Research and development                   |  |                             | 8,563  |   |                           |   | 8,875  |                     |  |   | (312   | ) |  | (4   | )% |  |                     | 17,419 |   |            |   | 13,824 |      |  |   | 3,595   |   |  | 26   | % 
|General and administrative                 |  |                             | 4,233  |   |                           |   | 4,963  |                     |  |   | (730   | ) |  | (15  | )% |  |                     | 8,864  |   |            |   | 7,011  |      |  |   | 1,853   |   |  | 26   | % 
|Stock-based compensation                   |  |                             | 352    |   |                           |   | 223    |                     |  |   | 129    |   |  | 58   | %  |  |                     | 567    |   |            |   | 240    |      |  |   | 327     |   |  | 136  | % 
|Amortization of intangible assets          |  |                             | 2,582  |   |                           |   | 2,986  |                     |  |   | (404   | ) |  | (14  | )% |  |                     | 5,396  |   |            |   | 3,936  |      |  |   | 1,460   |   |  | 37   | % 
|Acquired in-process R&D                    |  |                             |       |   |                           |   |       |                     |  |   |       |   |  |     |    |  |                     |       |   |            |   | 10,400 |      |  |   | (10,400 | ) |  | (100 | )%
|Restructuring, acquisition & other charges |  |                             |       |   |                           |   | 1,556  |                     |  |   | (1,556 | ) |  | (100 | )% |  |                     |       |   |            |   | 1,766  |      |  |   | (1,766  | ) |  | (100 | )%
|                                           |  |                             |        |   |                           |   |        |                     |  |   |        |   |  |      |    |  |                     |        |   |            |   |        |      |  |   |         |   |  |      |   
|Total operating expenses                   |  | $                           | 32,424 |   |                           | $ | 36,734 |                     |  | $ | (4,310 | ) |  | (12  | )% |  | $                   | 66,718 |   |            | $ | 64,665 |      |  | $ | 2,053   |   |  | 3    | % 
|                                           |  |                             |        |   |                           |   |        |                     |  |   |        |   |  |      |    |  |                     |        |   |            |   |        |      |  |   |         |   |  |      |   
|Percentage of total revenue                |  |                             | 54     | % |                           |   | 70     | %                   |  |   |        |   |  |      |    |  |                     | 55     | % |            |   | 75     | %    |  |   |         |   |  |      |   
|                                           |  |                             |        |   |                           |   |        |                     |  |   |        |   |  |      |    |  |                     |        |   |            |   |        |      |  |   |         |   |  |      |   



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Sales and Marketing.    Sales and marketing expenses consist primarily of
salaries, commissions and bonuses, payroll taxes, and employee benefits as well as travel, entertainment and marketing expenses. Sales and marketing expenses as a percentage of total revenue were 28% and 29% in the current fiscal quarter and fiscal
six months ended July 31, 2005, respectively, as compared to 35% and 32% in the same quarter and six months, respectively, a year ago. For the current fiscal quarter ended July 31, 2005, when compared to the same quarter a year ago, the
absolute dollar decrease in sales and marketing expenses is predominantly due to decreases in commissions and other incentive accruals as a result of lower revenues and the realization of cost synergies associated with the Merant acquisition. For
the current fiscal six months, when compared to the same six months a year ago, the absolute dollar increase is due primarily to the expansion of our direct sales and marketing organizations to support license revenue growth, salary, benefits and
other employee related cost increases associated with our Merant acquisition, and to a lesser extent, our TeamShare acquisition. The decrease in sales and marketing expenses as a percentage of total revenue in the current fiscal quarter and fiscal
six months, when compared to the same quarter and six months a year ago, is predominantly due to lower commissions and the realization of cost synergies associated with the Merant acquisition. In absolute dollar terms, we expect sales and marketing
expenses to increase as we continue to hire additional sales and marketing personnel, market our distributed systems products and undertake additional marketing programs.



Research and Development.    Research and development expenses consist primarily of salaries,
bonuses, payroll taxes, employee benefits and costs attributable to research and development activities. Research and development expenses as a percentage of total revenue were 14% in both the current fiscal quarter and fiscal six months ended
July 31, 2005, as compared to 17% and 16% in the same quarter and six months, respectively, a year ago. For the current fiscal quarter ended July 31, 2005, when compared to the same quarter a year ago, the decrease in research and
development expenses in absolute dollars is primarily attributable to cost cutting initiatives and the realization of cost synergies associated with the Merant acquisition, and to a lesser extent, a decline in payroll and payroll related costs
associated with a slight decline in headcount. For the current fiscal six months, when compared to the same six months a year ago, the increase in research and development expenses in absolute dollars is primarily attributable to salary, benefits
and other employee related cost increases as a result of our acquisition of Merant, and to a lesser extent, our acquisitions of TeamShare and the Process View Composertechnology, and continued expansion of our research and development
efforts to enhance existing products and develop our distributed systems products. As a percentage of total revenue, research and development expenses decreased in both the current fiscal quarter and fiscal six months, when compared to the same
quarter and six months a year ago, as a result of the rate of growth in revenue being greater than the rate of growth in costs associated with our research and development activities. We expect research and development expenses to increase, both in
absolute dollar terms and as a percentage of total revenue, as we localize our products and hire additional research and development personnel primarily to develop our distributed systems product suite.



General and Administrative.    General and
administrative expenses consist primarily of salaries, bonuses, payroll taxes, and benefits and certain non-allocable administrative costs, including legal and accounting fees and bad debts. General and administrative expenses as a percentage of
total revenue were 7% in both the current fiscal quarter and fiscal six months ended July 31, 2005, as compared to 9% and 8% in the same quarter and six months, respectively, a year ago. For the current fiscal quarter ended July 31, 2005,
when compared to the same quarter a year ago, the decrease in general and administrative expenses in absolute dollars is primarily due to the realization of cost synergies associated with the Merant acquisition, a reduction in Sarbanes-Oxley and
audit related costs, and to a lesser extent, a decline in payroll and payroll related costs associated with headcount changes. For the current fiscal six months, when compared to the same six months a year ago, the increase in general and
administrative expenses in absolute dollars is primarily due to our Merant acquisition. For both the current fiscal quarter and fiscal six months, when compared to the same periods a year ago, the decrease in general and administrative expenses as a
percentage of total revenue is primarily due to the realization of cost synergies associated with the Merant acquisition, a reduction in Sarbanes-Oxley and audit related costs, and to a lesser extent, a decline in payroll and payroll related costs
associated with headcount changes. We expect general and administrative expenses to increase in absolute dollar terms as we expand our infrastructure and our operations in the future.



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Stock-Based Compensation.    In connection with the Companys acquisition
of Merant, the Company recorded $1.8 million in deferred stock-based compensation reflecting the intrinsic value of the stock options assumed in the acquisition. The deferred stock-based compensation is being amortized over four years under an
accelerated method whereby approximately $0.9 million, $0.5 million, $0.3 million and $0.1 million will be amortized to expense in the first, second, third and fourth years, respectively. In connection with the Companys issuance of restricted
stock in the current fiscal quarter ended July 31, 2005, the Company recorded an additional $9.4 million in deferred stock-based compensation reflecting the fair market value of the stock on the date of grant. Deferred stock-based compensation
associated with the restricted stock is being amortized over five years under the straight-line method. As of July 31, 2005, the Company has amortized $1.3 million in deferred stock- based compensation and has $9.9 million remaining to be
amortized. Stock-based compensation expense will be approximately $0.6 million per quarter over the next three quarters through the end of the first quarter of fiscal 2007, and then $0.5 million per quarter thereafter through the end of the first
quarter of fiscal 2011.



Amortization of Intangible
Assets.    In connection with various prior acquisitions, most recently TeamShare and Merant, the Company has recorded $65.3 million in identifiable intangible assets, offset by amortization totaling $18.0 million as of
July 31, 2005. Amortization expense in the current fiscal quarter and fiscal six months ended July 31, 2005 is predominantly due to the Merant acquisition, which added $59.2 million in amortizable intangible assets and, to a lesser extent,
due to the TeamShare acquisition, which added $5.2 million in amortizable intangible assets. Amortization of intangible assets will be approximately $2.6 million per quarter over the next three quarters through the first quarter of fiscal 2007, and
$2.2 million per quarter thereafter through the end of fiscal 2009.



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



Restructuring, acquisition and other
charges.    In connection with the Companys acquisition of Merant, the Company incurred restructuring, acquisition and other charges in the first and second quarters of fiscal 2005 related to the acquisition that are
not part of the Companys ongoing operations. Such charges included certain employee payroll, severance and other employee related costs associated with transitional activities that are not part of ongoing operations, and travel and other
direct costs associated with integrating the two companies.



Interest
Income, Interest Expense and Amortization of Debt Issuance Costs



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, |  
|                                    |  |                             |       |   |                           |   |      | Increase(Decrease) |  |      |     |  |      |    |  |      | Increase(Decrease) |  
|                                    |  | 2005                        |       |   | 2004                      |   |      | In Dollars         |  | In % |     |  | 2005 |    |  | 2004 |                    |   | In Dollars |   | In %   |  
|Other income (expense)              |  |                             |       |   |                           |   |      |                    |  |      |     |  |      |    |  |      |                    |   |            |   |        |   |  |   |     |  |     |   
|Interest income                     |  | $                           | 1,378 |   |                           | $ | 728  |                    |  | $    | 650 |  | 89   | %  |  | $    | 2,490              |   |            | $ | 2,043  |   |  | $ | 447 |  | 21  | % 
|Interest expense                    |  |                             | (825  | ) |                           |   | (825 | )                  |  |      |    |  |     |    |  |      | (1,650             | ) |            |   | (1,650 | ) |  |   |    |  |    |   
|Amortization of debt issuance costs |  |                             | (335  | ) |                           |   | (335 | )                  |  |      |    |  |     |    |  |      | (670               | ) |            |   | (796   | ) |  |   | 126 |  | (16 | )%
|                                    |  |                             |       |   |                           |   |      |                    |  |      |     |  |      |    |  |      |                    |   |            |   |        |   |  |   |     |  |     |   
|Total other income (expense)        |  | $                           | 218   |   |                           | $ | (432 | )                  |  | $    | 650 |  | (    | *) |  | $    | 170                |   |            | $ | (403   | ) |  | $ | 573 |  | (   | *)
|                                    |  |                             |       |   |                           |   |      |                    |  |      |     |  |      |    |  |      |                    |   |            |   |        |   |  |   |     |  |     |   
|Percentage of total revenue         |  |                             | 0     | % |                           |   | (1   | )%                 |  |      |     |  |      |    |  |      | 0                  | % |            |   | 0      | % |  |   |     |  |     |   
|                                    |  |                             |       |   |                           |   |      |                    |  |      |     |  |      |    |  |      |                    |   |            |   |        |   |  |   |     |  |     |   

---

|(*) |  | Percentage is not meaningful.
|--- |  | -----------------------------



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Interest Income.    For the current fiscal quarter and fiscal six months ended
July 31, 2005, when compared to the same quarter and six months a year ago, the dollar increase in interest income is predominantly due to increases in balances on interest-bearing accounts, such as cash and cash equivalents, and both short and
long-term investments, resulting from the accumulation of earnings and higher yields; all partially offset by (i) decreases in balances on interest-bearing accounts, such as cash and cash equivalents, and both short and long- term investments,
resulting from our acquisition of Merant in which the Company paid approximately $267 million in cash in the second fiscal quarter ended July 31, 2004 for the acquisition itself and an additional $18.4 million in acquisition related costs, and
(ii) to a lesser extent, decreases in cash balances of $94.1 million due to the Companys stock repurchase programs implemented after the fiscal quarter ended April 30, 2004, and $4.5 million, including acquisition related-costs, paid
for the acquisition of certain assets of Integrated Chipware in the second quarter of fiscal 2005.



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



The Company records interest expense in connection with the Notes at a rate of 1.5% per annum on a principal balance of $220 million, or $825,000 per quarter. Accordingly, interest expense for the current fiscal
quarter ended July 31, 2005 and the same quarter a year ago was $825,000, and for the current fiscal six months and the same six months a year ago was $1.65 million.



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



Income Taxes



Income
Taxes.    Income taxes were $4.0 million and $8.8 million in the current fiscal quarter and fiscal six months ended July 31, 2005, respectively, as compared to $0.2 million and $3.5 million in the same quarter and six
months, respectively, a year ago. The Companys projected effective income tax rate for fiscal 2006 is 37%. In the current fiscal quarter ended July 31, 2005, the Company benefited from the release of certain research credit tax reserves
totaling approximately $0.6 million in connection with a franchise tax audit settlement. This non-recurring benefit reduced the effective tax rate in the current fiscal quarter to 32% from 37%. The Companys effective income tax rate for fiscal
2005 was 53%, and excluding the impact of the one-time in-process research and development charge of $10.4 million taken in the first quarter of fiscal 2005 ended April 30, 2004, would have been 35%. SERENAs effective income tax rate has
historically benefited from the United States research and experimentation tax credit and tax benefits generated from export sales made from the United States.



Liquidity and Capital Resources



Cash, cash equivalents and investments.    Since SERENAs inception, we have financed our operations and met our capital
expenditure requirements through cash flows from operations. As of July 31, 2005 and excluding $4.9 million in restricted cash, SERENA had $88.3 million in cash and cash equivalents, and an additional $43.2 million and $49.2 million in short
and long-term investments, respectively, consisting principally of high grade commercial paper, certificates of deposit and short and long-term corporate notes and bonds.



Net cash provided by operating activities.    Cash flows provided by operating activities were
$39.6 million and $23.4 million in the current fiscal six months ended July 31, 2005 and the same six months a year ago, respectively. In the current fiscal six months ended July 31, 2005, the Companys cash flows provided by



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operating activities exceeded net income principally due to the inclusion of non-cash expenses in net income, a decrease in trade accounts receivable, an
increase in corporate income taxes payable, and cash collections in advance of revenue recognition on maintenance contracts; all partially offset by a change in the fair market value of consideration in the acquisition of Merant Plc., and increases
in deferred income taxes, accrued expenses and trade accounts payable, and a decrease in prepaid expenses. In the same six months a year ago, the Companys cash flows provided by operating activities exceeded net loss principally due to the
inclusion of non-cash expenses in net income and a decrease in trade accounts receivable; all partially offset by a decrease in corporate income taxes payable.



Net cash used in or provided by investing activities.    Net cash used in investing activities was $44.6 million and $140.1
million in the current fiscal six months ended July 31, 2005 and the same six months a year ago, respectively. In the current fiscal six months ended July 31, 2005, net cash used in investing activities related to net purchases of short
and long-term investments totaling $36.9 million, acquisition related costs paid in connection with the Merant acquisition totaling $3.1 million, acquisition related costs paid in connection with the acquisition of business application planning
technology totaling $3.1 million, and the purchase of computer equipment and office furniture and equipment totaling $1.5 million. In the same six months a year ago, net cash used in investing activities related to acquisition related costs paid in
connection with the Merant acquisition totaling $193.9 million, acquisition related costs paid in connection with the acquisition of selected net assets of Integrated Chipware, Inc. totaling $3.8 million and purchase of computer equipment and office
furniture and equipment totaling $0.8 million; all partially offset by net sales of short and long-term investments totaling $58.4 million.



Net cash used in or provided by financing activities.    Net cash used in financing activities was $40.2 million in the current
fiscal six months ended July 31, 2005 and net cash provided by financing activities was $1.0 million in the same six months a year ago. In the current fiscal six months ended July 31, 2005, net cash used in financing activities related to
common stock repurchased under the stock repurchase plan totaling $48.6 million; partially offset by the exercise of stock options under the Companys employee stock option plan totaling $6.6 million, and the sale of common stock under the
Companys employee stock purchase plan totaling $1.8 million. In the same six months a year ago, net cash provided by financing activities was related to the exercise of stock options under the Companys employee stock option plan totaling
$3.6 million and the sale of common stock under the Companys employee stock purchase plan totaling $1.6 million; all partially offset by common stock repurchased under the stock repurchase plan totaling $4.2 million.



Contractual obligations and commitments.    At
July 31, 2005, the Company did not have any material commitments for capital expenditures and has no revolving credit agreement or other term loan agreements with any bank or other financial institution.



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



The Company has pledged a portfolio of U.S. government securities to secure the first six scheduled interest payments on the Notes. Accordingly, as of
July 31, 2005, the Company has approximately $4.9 million in restricted cash against this pledge to cover the remaining three of the first six scheduled interest payments. Other than this pledge of U.S. government securities, the Notes are
subordinated unsecured obligations and rank junior in right of payment to the Companys existing and future senior indebtedness and structurally subordinated to all indebtedness and other liabilities of the Companys subsidiaries. The
Notes are not listed on any securities exchange.



The Company
may redeem the Notes, in whole or in part, under certain circumstances and at certain times. Accrued interest to the redemption date will be paid by the Company in any such redemption. The holders of the



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Notes may require the Company to repurchase for cash all or a portion of their Notes on December 15, 2008, December 15, 2013, or
December 15, 2018 at a purchase price equal to 100% of the principal amount of the Notes being purchased, plus accrued and unpaid interest to, but excluding the purchase date.



At July 31, 2005, the Company had Notes outstanding totaling $220 million. The Notes bear interest at 1.5% per
annum and are due in 2023. Accrued and unpaid interest on the notes totaled $0.4 million as of July 31, 2005 with restricted cash balances on hand totaling $4.9 million to cover the next three semi-annual interest payments.



The Company has noncancelable operating lease agreements for office space
that expire between calendar 2005 and 2013. Future payments due under operating leases and debt as of July 31, 2005 are as follows (in thousands):



|                                                  |  |                        |         |                 |   |           |  |           |       |            |   |       |  |   |        
|------------------------------------------------- |  | ---------------------- | ------- | --------------- | - | --------- |  | --------- | ----- | ---------- | - | ----- |  | - | -------
|                                                  |  | Payments Due by Period
|                                                  |  | Total                  |         | Less than1 year |   | 1-3 years |  | 3-5 years |       | Thereafter
|Operating lease obligations                       |  | $                      | 15,119  |                 | $ | 3,800     |  | $         | 6,081 |            | $ | 3,999 |  | $ | 1,239  
|Restructuring-related operating lease obligations |  |                        | 4,182   |                 |   | 1,565     |  |           | 2,008 |            |   | 296   |  |   | 313    
|11/2%
Convertible Subordinated Notes due 2023     |  |                        | 220,000 |                 |   |           |  |           |       |            |   |       |  |   | 220,000
|                                                  |  |                        |         |                 |   |           |  |           |       |            |   |       |  |   |        
|                                                  |  | $                      | 239,301 |                 | $ | 5,365     |  | $         | 8,089 |            | $ | 4,295 |  | $ | 221,552
|                                                  |  |                        |         |                 |   |           |  |           |       |            |   |       |  |   |        



Working capital,
accounts receivable and deferred revenue.    At July 31, 2005, the Company had working capital of $61.0 million and accounts receivable, net of allowances, of $29.9 million. Total deferred revenue increased to $79.8
million at July 31, 2005 from $76.3 million at January 31, 2005 primarily as a result of the Merant acquisition in April 2004, and to a lesser extent, increased billings of maintenance fees and the RTM technology asset purchase from
Integrated Chipware in June 2004.



Off-balance sheet
arrangements.    As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, or SPEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of July 31, 2005, we are not involved in any
unconsolidated SPE transactions.



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



Factors
That May Affect Future Results



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



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



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



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



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



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



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



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



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



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



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



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



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



| |  |  | Possible inconsistencies in standards, controls, procedures and policies, business cultures and compensation structures between SERENA and Merant;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Coordinating and consolidating ongoing and future research and development efforts;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Consolidating corporate and administrative infrastructure, particularly in light of Merants complex corporate structure;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Integrating and managing the technologies and products of the two companies, including consolidating and integrating computer information systems;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consolidating sales and marketing operations;
| | - |  | ---------------------------------------------



| |  |  | Retaining existing customers and attracting new customers;
| | - |  | ----------------------------------------------------------



| |  |  | Retaining strategic partners and attracting new strategic partners;
| | - |  | -------------------------------------------------------------------



| |  |  | Retaining key employees;
| | - |  | ------------------------



| |  |  | Retaining and integrating distributors and key sales representatives;
| | - |  | ---------------------------------------------------------------------



| |  |  | Identifying and eliminating redundant and underperforming operations and assets;
| | - |  | --------------------------------------------------------------------------------



| |  |  | Using capital assets efficiently to develop the business of the combined company;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Minimizing the diversion of managements attention from ongoing business concerns;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Coordinating geographically separate organizations;
| | - |  | ---------------------------------------------------



| |  |  | Possible tax or other costs or inefficiencies associated with integrating the operations of the combined company;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | International rules and regulations that may limit or complicate restructuring plans;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Possible modification of operating control standards in order to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Retaining and attracting new employees to support existing and new products and new technology development.
| | - |  | -----------------------------------------------------------------------------------------------------------



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



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



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



| |  |  | The combined company will incur additional amortization expense over the estimated useful lives of certain of the intangible assets acquired in connection with the acquisition
during such estimated useful lives; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | To the extent the value of goodwill or intangible assets with indefinite lives becomes impaired, the combined company may be required to incur material charges relating to the
impairment of those assets.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



We depend on our installed customer base for future revenues from
maintenance renewal fees and licenses or upgrades of additional products. If our customers do not purchase additional products, upgrade existing



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



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



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



| |  |  | Incur additional restructuring and acquisition charges relative to the integration of Merant;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Include the expenses associated with our TeamShare and Merant acquisitions, and any other acquisitions we may complete;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



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



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



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



| |  |  | Expand our distribution channels; and
| | - |  | -------------------------------------



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



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



Our License Revenues from Products for Distributed Systems May Fluctuate



We introduced our ChangeMan DS product in fiscal
2000 and our ChangeMan ZDD product in the first quarter of fiscal 2003. In the second quarter of fiscal 2004, we acquired the TeamTrack product with our acquisition of TeamShare effective June 5, 2003. In the first quarter of
fiscal 2005, we acquired the Merant product line with our acquisition of Merant effective April 23, 2004. In the second quarter of fiscal 2005, we acquired the RTM product with our asset purchase from Integrated Chipware, Inc. In the
first quarter of fiscal 2006, we acquired business application planning technology in an asset purchase. While license revenues from our distributed systems products was 64% and 66% of total license revenue in the current fiscal quarter and fiscal
six months ended July 31, 2005, respectively, they may fluctuate materially from quarter to quarter and could in fact decline. We are currently developing new products and enhancing our product suite to support additional distributed systems
products. If we do not successfully develop, market, sell and support our distributed systems products, this would materially adversely affect our business and our future quarterly and annual operating



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results. Prior to our acquisition of Merant in the first quarter of fiscal 2005, the majority of our products had been designed for the mainframe platform,
and the majority of our software license revenue, maintenance revenue and professional services revenue had been attributable to licenses for these mainframe products. Our competitors may have substantially greater experience providing distributed
systems compatible software products than we do, and many also may have significantly greater financial and organizational resources.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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Risks of International Operations.    International sales increased to 34% of
our total revenue in the current fiscal six months ended July 31, 2005, as compared to 31% in the same six months a year ago primarily as a result of the Merant acquisition late in the first quarter of fiscal 2005 and a single large transaction
with an international customer in the first quarter of fiscal 2006. Our international revenue is attributable principally to our European operations, however we currently have increased and plan to continue to increase our investment in sales and
marketing in the Asia Pacific region going forward. Our international operations are, and any expanded international operations will be, subject to a variety of risks associated with conducting business internationally that could materially
adversely affect our business and future quarterly and annual operating results, including the following:



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



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



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



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



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



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



| |  |  | Limitations on repatriation of earnings;
| | - |  | ----------------------------------------



| |  |  | Reduced protection of intellectual property rights and less favorable contract interpretation rules in some countries;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Political and economic instability;
| | - |  | -----------------------------------



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



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



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



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



Our substantial leverage could have significant negative consequences, including:



| |  |  | Increasing our vulnerability to general adverse economic and industry conditions;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Limiting our ability to obtain additional financing;
| | - |  | ----------------------------------------------------



| |  |  | Requiring the dedication of a portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for
other purposes, including capital expenditures;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Placing us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



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We May Not Have the Ability to Purchase the Notes



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



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



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



In October 2004, the FASB
ratified the consensus reached by the EITF with respect to EITF Issue No. 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share. In accordance with EITF Issue 04-8, potential shares issuable
under contingently convertible securities with a market price trigger should be accounted for the same way as other convertible securities and included in the diluted earnings per share computation, regardless of whether the market price trigger has
been met. Upon our adoption of EITF Issue No. 04-8 in the fourth quarter of fiscal 2005, 9,912,694 shares issuable from the conversion of the Notes have been included in the diluted earnings per share calculation for the current fiscal quarter
and fiscal six months ended July 31, 2005, using the if converted method. The 9,912,964 shares issuable from the conversion of the Notes have not been included in the diluted earnings per share calculation for the fiscal quarter and
fiscal six months ended July 31, 2004, since their inclusion would have been anti-dilutive. Accordingly, we have not restated our diluted earnings per share calculation for the fiscal quarter and fiscal six months ended July 31, 2004. The
original instrument was issued in the fourth quarter of fiscal 2004. These common shares will continue to be considered in our diluted earnings per share calculation until the Notes are redeemed, retired or, under certain circumstances, amended.



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



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



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



Under the SOX Act, or the Act, we are required to assess the effectiveness
of our internal controls over financial reporting and assert that such internal controls are effective. Our independent auditors must evaluate managements assessment concerning the effectiveness of our internal controls over financial
reporting and



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render an opinion on our assessment and the effectiveness of our internal controls over financial reporting. The SOX Act has resulted in and is likely to
continue to result in increased expenses, and has required and is likely to continue to require significant efforts by management and other employees. Although we believe that our efforts will enable us to remain compliant under the Act, we can give
no assurance that in the future such efforts will be successful. Our business is complex and involves significant judgments and estimates as described in our Critical Accounting Estimates. If certain judgments and estimates are
determined incorrectly, we may be unable to assert that our internal controls over financial reporting are effective, or our independent auditors may not be able to render the required attestation concerning our assessment and the effectiveness of
our internal controls over financial reporting, which could adversely effect investor confidence in us and the market price of our common stock.



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



Statement of Financial
Accounting Standards No.123 (revised 2004) (SFAS No. 123R), Shared-Based Payment, will require us to account for equity under our stock plans using fair value based model on the option grant date and record it as a stock-based compensation
expense. Our net income and our earnings per share will be significantly reduced or may reflect a loss. We currently calculate stock-based compensation expense using the Black-Scholes option-pricing model and disclose the pro forma impact on net
income (loss) and net income (loss) per share in Note 3 to our condensed consolidated financial statements for the three and six month periods ended July 31, 2005 and 2004. A fair value based model such as the Black-Scholes option-pricing model
requires the input of highly subjective assumptions and does not necessarily provide a reliable single measure of the fair value of our stock options. Assumptions used under the Black-Scholes option-pricing model that are highly subjective include
the expected stock price volatility and expected life of an option. SFAS No. 123R requires us to adopt the new accounting provisions beginning in our first quarter of fiscal 2007, and will require us to expense shares issued under employee
stock purchase plans and stock options as a stock-based compensation expense using a fair value based model.



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



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



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



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



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



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



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



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



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



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



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



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



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



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





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



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



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



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



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



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



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



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



| |  |  | Our ability to integrate the acquisition of Merant;
| | - |  | ---------------------------------------------------



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Because our software products are complex, they often contain errors or bugs that can be detected at any point in a products life cycle.
While we continually test our products for errors and work with customers through our customer support services to identify and correct bugs in our software, we expect that errors in our products will continue to be found in the future. Although
many of these errors may prove to be immaterial, certain of these errors could be significant. Detection of any significant errors may result in, among other things, loss of, or



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delay in, market acceptance and sales of our products, diversion of development resources, injury to our reputation, or increased service and warranty costs.
These problems could materially adversely affect our business and future quarterly and annual operating results. In the past we have discovered errors in certain of our products and have experienced delays in the shipment of our products during the
period required to correct these errors. These delays have principally related to new version and product update releases. To date, none of these delays have materially affected our business. However, product errors or delays in the future,
including any product errors or delays associated with the introduction of our distributed systems products, could be material. In addition, in certain cases we have warranted that our products will operate in accordance with specified customer
requirements. If our products fail to conform to such specifications, customers could demand a refund for the software license fee paid to us or assert claims for damages.



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



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



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



The Company does not use derivative financial instruments in its investment portfolio and has no foreign exchange contracts. Its financial instruments
consist of cash and cash equivalents, short and long-term investments, trade accounts receivable and accounts payable. The Company considers investments in highly liquid instruments purchased with a remaining maturity of 90 days or less to be cash
equivalents. All of the Companys cash equivalents and short and long-term investments principally consist of commercial paper and debt securities, and are classified as available-for-sale as of July 31, 2005. The Companys exposure
to market risk for changes in interest rates relates primarily to its short and long-term investments and short-term obligations, thus, a hypothetical 10% fluctuation in interest rates would not have a material impact on the fair value of these
securities.



Sales to foreign countries accounted for
approximately 29% and 34% of the total sales during the current fiscal quarter and fiscal six months ended July 31, 2005, respectively. Because the Company invoices certain of its foreign sales in currencies other than the United States dollar,
predominantly the British pound sterling and euro, and does not hedge these transactions, fluctuations in exchange rates could adversely affect the translated results of operations of the Companys foreign subsidiaries. Therefore, foreign
exchange fluctuations could create a risk of significant balance sheet gains or losses on the Companys consolidated financial statements. However, given the Companys foreign subsidiaries net book values as of July 31, 2005 and
net cash flows for the most recent fiscal six months then ended, the Company does not believe that a hypothetical 10% fluctuation in foreign currency exchange rates would have a material impact on our financial position or results of operations.



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



Attached as exhibits to this Form 10-Q are certifications of SERENAs Chief Executive Officer and Chief Financial Officer, which are required in
accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as



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amended (the Exchange Act). This Controls and Procedures section includes information concerning the controls and controls evaluation
referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.



Evaluation of disclosure controls and procedures.    Disclosure controls and procedures are designed to ensure that the
information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls
and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Our disclosure controls and procedures include components of our internal control over our financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of financial
reporting and permitting the preparation of our financial statements in conformity with generally accepted accounting principles. To the extent that components of our internal control over our financial reporting are included within our disclosure
controls and procedures, they are included in the scope of our quarterly controls evaluation. Internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set
forth in our Form 10-K.



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



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



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



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



We intend to review and evaluate the design and effectiveness
of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we



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may discover in the future. Our senior management has timely access to all material financial and non-financial information concerning our business. While we
believe the present design of our disclosure controls and procedures is effective, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.



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



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PART IIOTHER INFORMATION



ITEM 1.    Legal Proceedings



Not applicable.



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



In February 2005, the Board of Directors authorized the repurchase of up to 1.5 million shares of the Companys Common Stock from time to time
in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes. Under this program, the
Company repurchased in aggregate a total of 1,465,000 shares of its common stock for cash at an average price of $23.50 per share.



In May 2005, the Board of Directors authorized the repurchase of up to 1.5 million shares of the Companys Common Stock from time to time in the
open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes. Under this program, the Company
repurchased in aggregate a total of 722,500 shares of its common stock for cash at an average price of $19.61 per share.



A summary of the Companys repurchases for the fiscal six months ended July 31, 2005 is as follows:



|                               |  |                   |  |                        |       |                                                                              |           |                                                                                                                     |  
|------------------------------ |  | ----------------- |  | ---------------------- | ----- | ---------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------------------------------------- | -
|Month                          |  | RepurchasedShares |  | Average PricePer Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs |           | Maximum Number(or ApproximateDollar Value) ofShares (or Units)that May Yet BePurchased Underthe Plans
orPrograms(1)
|March 1, 2005  March 31, 2005 |  | 1,415,000         |  | $                      | 23.50 |                                                                              | 1,415,000 |                                                                                                                     | 0
|April 1, 2005  April 30, 2005 |  | 50,000            |  | $                      | 23.56 |                                                                              | 50,000    |                                                                                                                     | 0
|June 1, 2005  June 30, 2005   |  | 697,500           |  | $                      | 19.62 |                                                                              | 697,500   |                                                                                                                     | 0
|July 1, 2005  July 31, 2005   |  | 25,000            |  | $                      | 19.26 |                                                                              | 25,000    |                                                                                                                     | 0

---

|(1) |  | Stock Purchase Programs authorized by the Companys Board of Directors expire at the end of the fiscal quarter in which they are approved. As a result, no shares will be
repurchased under the programs authorized prior to July 31, 2005.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 3.    Defaults Upon Senior Securities



Not Applicable



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



(a) The fiscal 2005 Annual Meeting of the Stockholders of SERENA Software, Inc. was held at the Companys offices 2755 Campus Drive, 3rdFloor, San Mateo, California 94403 on June 24, 2005 at 2:00 p.m.



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(b) PROPOSAL 1At the Annual Meeting, the following seven persons were elected to the Companys
Board of Directors, constituting all members of the Board of Directors.



|                      |  |            |  |               
|--------------------- |  | ---------- |  | --------------
|Board Nominees        |  | CommonFor  |  | CommonWithheld
|Douglas D. Troxel     |  | 36,799,663 |  | 1,755,364     
|Mark E. Woodward      |  | 37,256,207 |  | 1,298,820     
|Robert I. Pender, Jr. |  | 36,506,132 |  | 2,048,895     
|Carl Bass             |  | 28,996,617 |  | 9,558,410     
|J. Hallam Dawson      |  | 28,996,719 |  | 9,558,308     
|Gregory J. Owens      |  | 28,995,993 |  | 9,559,034     
|David G. DeWalt       |  | 37,882,142 |  | 672,885       



(c) The following
additional proposal was considered at the Annual Meeting with its results according to the respective votes of the stockholders:



PROPOSAL 2Ratification and approval of the appointment of KPMG LLP as independent auditors of the Company for the fiscal year ending
January 31, 2006.



|           |  |               |  |          
|---------- |  | ------------- |  | ---------
|Common For |  | CommonAgainst |  | Abstained
|37,984,543 |  | 362,121       |  | 208,363  



ITEM 5.    Other Information



Not Applicable



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



(a) Exhibits



|               |     |  |                                                                                                                                                                          
|-------------- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |     |  | Exhibit Title                                                                                                                                                            
|               |    
|31.1           | (a) |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|               |    
|31.2           | (a) |  | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|               |    
|32.1           | (a) |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                        
|               |    
|32.2           | (a) |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                        

---

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



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SIGNATURES



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



SERENA SOFTWARE, INC. (Registrant)By:

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




Date: September 9, 2005



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EXHIBIT INDEX



|            |  |                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                              
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|32.1        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                        
|            | 
|32.2        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                        



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