This report on Form 10-Q for the quarter ended September 30, 2008 contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are identified by the use of the words "believe," "expect," "anticipate," "estimate," "will," "contemplate," "would" and similar expressions that contemplate future events. Numerous important factors, risks and uncertainties affect our operating results, and could cause our actual results to differ materially from the results implied by these or any other forward-looking statements made by us or on our behalf. There can be no assurance that future results will meet expectations. It is important that the historical discussion below be read together with the attached condensed consolidated financial statements and notes thereto, with the discussion of such risks and uncertainties included in our Annual Report on Form 10-K for fiscal 2008, with the audited financial statements and notes thereto, and with Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

During the first half of fiscal 2009, we continued to focus on our leadership in Business Service Management (BSM) by responding to IT executive needs, improving IT service quality and supporting business priorities. Our two segments, Enterprise Service Management (ESM) and Mainframe Service Management (MSM), continue to provide the focus to align our resources and product development efforts to meet the demands of the dynamic markets we serve. Our financial performance in terms of revenue, expense management, operating income and operating cash flows for the second quarter and full first half of fiscal 2009 was strong, despite the continuing uncertainty in the global markets. We believe that our performance reflects the tangible value that our solutions offer customers in both good and difficult economic environments, along with our strong ability to control and manage our expenses.

In April 2008, we acquired BladeLogic, Inc. (BladeLogic), a leading provider of data center automation software, for total purchase consideration of $854.0 million. This acquisition expands our service automation offerings for server provisioning, application release management, and configuration automation and compliance.

In June 2008, we completed the issuance of $300.0 million in senior unsecured notes due 2018 (the Notes). Net proceeds from this offering amounted to $295.6 million, which were used for general corporate purposes.

A significant portion of our operating expenses are fixed in the short-term and that we plan a portion of our expense run-rate based on our expectations of future revenue. In addition, a significant amount of our license transactions are completed during the final weeks and days of each quarter and, therefore, we generally do not know whether revenue has met our expectations until after the end of the quarter. If a shortfall in revenue were to occur in any given quarter, there would be an immediate, and possibly significant, impact to our overall earnings and, most likely, our stock price.

Because our software solutions are designed for and marketed to companies to manage their IT infrastructure from a business perspective, demand for our products, and therefore our financial results, are dependent upon corporations continuing to value such solutions and invest in such technology. There are a number of trends that have historically influenced demand for systems management software, including, among others, business demands placed on IT, computing capacity within IT departments, complexity of IT systems, and IT operational costs. Our financial results are also influenced by many economic and industry conditions, including, but not limited to, general economic and market conditions in the United States and other economies in which we market products, corporate spending generally, IT budgets, the competitiveness of the systems management software industry, the adoption rate for BSM and the stability of the mainframe market. As a result of recent changes in global economic conditions, including changes in foreign currency exchange rates and forecasts of contracting IT spending, we have recently reduced our bookings, revenue growth and operating cash flow expectations for the remainder of the fiscal year. In view of this, our operating plans include continued discipline in controlling expenses and ongoing efforts to simplify processes and increase efficiencies.

Critical Accounting Policies

The preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances; the results of which form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. We have discussed the development and selection of the critical accounting policies with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our related disclosures. The critical accounting policies related to the estimates and judgments are discussed in our Annual Report on Form 10-K for fiscal 2008 under Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical accounting policies during the six months ended September 30, 2008.

Recently Adopted Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115" (SFAS No. 159), which permits entities to choose to measure various financial instruments and certain other items at fair value. If an entity chooses to measure various financial instruments and certain other items at fair value, the standard requires that unrealized gains and losses be reported in earnings for those items measured using the fair value option. SFAS No. 159 was effective for us beginning in the first quarter of fiscal 2009. We have not elected to apply the fair value option to any of our assets or liabilities. Therefore, the adoption of SFAS No. 159 has not impacted our consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements, with certain exceptions. In February 2008, the FASB issued two FASB Staff Positions that remove leasing from the scope of SFAS No. 157 and delay the effective date of SFAS No. 157 to April 1, 2009 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is at least annually). In October 2008, the FASB issued an additional FASB Staff Position that clarifies the application of SFAS No. 157 in a market that is not active. We have adopted the required provisions of SFAS No. 157 beginning in the first quarter of fiscal 2009. The adoption of the required provisions of SFAS No. 157 did not have a material impact on our financial position, results of operations or cash flows. We have not determined whether the adoption of the deferred provisions of SFAS No. 157 will have a material effect on our consolidated financial position, results of operations or cash flows.

Results of Operations and Financial Condition

The following table sets forth, for the periods indicated, the percentages that
selected items in the Condensed Consolidated Statements of Operations and
Comprehensive Income represent of total revenue. These financial results are not
necessarily indicative of future results.



                                                     Percentage of Total Revenue
                                                Quarter Ended        Six Months Ended
                                                September 30,          September 30,
                                                2008      2007       2008         2007
   Revenue:
   License                                       37.6 %    35.9 %      35.9 %      34.4 %
   Maintenance                                   54.7 %    57.3 %      56.4 %      59.2 %
   Professional services                          7.6 %     6.8 %       7.7 %       6.5 %
   Total revenue                                100.0 %   100.0 %     100.0 %     100.0 %
   Operating expenses:
   Cost of license revenue                        6.3 %     5.9 %       6.3 %       5.9 %
   Cost of maintenance revenue                   10.0 %     9.4 %       9.6 %      10.1 %
   Cost of professional services revenue          7.8 %     7.2 %       7.9 %       7.1 %
   Selling and marketing expenses                29.3 %    30.7 %      30.6 %      31.9 %
   Research and development expenses             11.5 %    11.8 %      12.8 %      11.8 %
   General and administrative expenses           10.3 %    12.1 %      11.2 %      12.6 %
   In-process research and development              -         -         5.6 %       0.3 %
   Amortization of intangible assets              1.9 %     0.8 %       1.9 %       0.8 %
   Severance, exit costs and related charges      0.3 %     0.5 %       0.9 %       0.5 %
   Total operating expenses                      77.4 %    78.3 %      86.9 %      81.1 %
   Operating income                              22.6 %    21.7 %      13.1 %      18.9 %
   Other income, net                              0.7 %     4.7 %       1.2 %       5.0 %
   Earnings before income taxes                  23.3 %    26.4 %      14.4 %      23.9 %
   Provision for income taxes                     8.3 %     8.0 %       6.5 %       7.5 %
   Net earnings                                  15.0 %    18.4 %       7.9 %      16.5 %

Revenue

The following table provides information regarding license and maintenance
revenue for the quarter and six months ended September 30, 2008 and 2007:



Software License Revenue                     Quarter Ended                    Six Months Ended
                                             September 30,                     September 30,
                                            2008      2007     % Change        2008       2007     % Change
                                             (In millions)                     (In millions)
Enterprise Service Management              $ 104.8   $  85.5       22.6 %   $    194.4   $ 152.1       27.8 %
Mainframe Service Management                  70.7      65.4        8.1 %        130.5     124.7        4.7 %

Total software license revenue             $ 175.5   $ 150.9       16.3 %   $    324.9   $ 276.8       17.4 %


Software Maintenance Revenue                 Quarter Ended                    Six Months Ended
                                             September 30,                     September 30,
                                            2008      2007     % Change        2008       2007     % Change
                                             (In millions)                     (In millions)
Enterprise Service Management              $ 138.1   $ 129.2        6.9 %   $    274.8   $ 254.6        7.9 %
Mainframe Service Management                 117.4     112.0        4.8 %        235.0     222.1        5.8 %

Total software maintenance revenue         $ 255.5   $ 241.2        5.9 %   $    509.8   $ 476.7        6.9 %


Total Software Revenue                       Quarter Ended                    Six Months Ended
                                             September 30,                     September 30,
                                            2008      2007     % Change        2008       2007     % Change
                                             (In millions)                     (In millions)
Enterprise Service Management              $ 242.9   $ 214.7       13.1 %   $    469.2   $ 406.7       15.4 %
Mainframe Service Management                 188.1     177.4        6.0 %        365.5     346.8        5.4 %

Total software revenue                     $ 431.0   $ 392.1        9.9 %   $    834.7   $ 753.5       10.8 %

Software License Revenue

Total software license revenue was $175.5 million for the quarter ended September 30, 2008, an increase of 16.3%, or $24.6 million, from the prior year period. This increase was attributable to license revenue increases in both the ESM and MSM segments, as further discussed below. Recognition of license revenue that was deferred in prior periods increased $5.5 million for the quarter ended September 30, 2008, as compared to the prior year period. Of the license transactions recorded, the percentage of license revenue recognized upfront decreased from 55% during the quarter ended September 30, 2007 to 51% during the quarter ended September 30, 2008. During the quarter ended September 30, 2008, we recorded 35 transactions with license values over $1 million, with a total license value of $104.6 million, compared with 19 transactions with license values over $1 million, with a total license value of $52.5 million, in the prior year quarter.

Total software license revenue was $324.9 million for the six months ended September 30, 2008, an increase of 17.4%, or $48.1 million, from the prior year period. This increase was attributable to license revenue increases in both the ESM and MSM segments, as further discussed below. Recognition of license revenue that was deferred in prior periods increased $13.2 million for the six months ended September 30, 2008, as compared to the prior year period. Of the license transactions recorded, the percentage of license revenue recognized upfront increased from 48% during the six months ended September 30, 2007 to 51% during the six months ended September 30, 2008. During the six months ended September 30, 2008, we recorded 50 transactions with license values over $1 million, with a total license value of $155.4 million, compared with 36 transactions with license values over $1 million, with a total license value of $128.1 million, in the prior year period.

ESM license revenue represented 59.7%, or $104.8 million, and 59.8%, or $194.4 million, of our total license revenue for the quarter and six months ended September 30, 2008, respectively, and 56.7%, or $85.5 million, and 54.9%, or $152.1 million, of our total license revenue for the quarter and six months ended September 30, 2007, respectively. ESM license revenue for the quarter ended September 30, 2008 increased 22.6%, or $19.3 million, from the prior year period. ESM license revenue for the six months ended September 30, 2008 increased 27.8%, or $42.3 million, from the prior year period. These period over period increases were attributable primarily to increased demand for our BSM solutions, inclusive of incremental service automation revenues resulting from our acquisition of BladeLogic in April 2008 and our fiscal 2008 acquisitions, as well as an increase in the recognition of previously deferred license revenue quarter over quarter, partially offset by an increase in the level of new license transactions with revenue being deferred into future periods. Service Automation license revenue contributed by BladeLogic amounted to $16.8 million and $32.1 million during the quarter and six months ended September 30, 2008, respectively.

MSM license revenue represented 40.3%, or $70.7 million, and 40.2%, or $130.5 million, of our total license revenue for the quarter and six months ended September 30, 2008, respectively, and 43.3%, or $65.4 million, and 45.1%, or $124.7 million, of our total license revenue for the quarter and six months ended September 30, 2007, respectively. MSM license revenue for the quarter ended September 30, 2008 increased 8.1%, or $5.3 million, from the prior year period. MSM license revenue for the six months ended September 30, 2008 increased 4.7%, or $5.8 million, from the prior year period. These period over period increases were attributable primarily to an increase in the recognition of previously deferred license revenue period over period, partially offset by a decrease in the volume of license transactions recorded.

Deferred License Revenue

Changes to deferred license revenue for the quarter and six months ended
September 30, 2008 and 2007 are summarized as follows:



                                                             Quarter Ended          Six Months Ended
                                                             September 30,            September 30,
                                                           2008        2007         2008         2007
                                                                          (In millions)
Deferred license revenue balance at beginning of period   $ 554.0     $ 520.2     $  555.4     $  504.4
Deferrals of license revenue                                 92.3        63.9        165.1        146.7
Recognition from deferred license revenue                   (78.6 )     (73.1 )     (153.4 )     (140.2 )
Impact of foreign currency exchange rate changes             (2.0 )       0.8         (1.4 )        0.9

Deferred license revenue balance at end of period         $ 565.7     $ 511.8     $  565.7     $  511.8

The primary reasons for license revenue deferrals include, but are not limited to, customer transactions that include products for which the maintenance pricing is based on both discounted and undiscounted license list prices, certain arrangements that include unlimited licensing rights, time-based licenses that are recognized over the term of the arrangement, customer transactions that include products with differing maintenance periods and other transactions for which we do not have or are not able to determine vendor-specific objective evidence of the fair value of the maintenance and/or professional services. The contract terms and conditions that result in deferral of revenue recognition for a given transaction result from arm's length negotiations between us and our customers. We anticipate our transactions will continue to include such contract terms that result in deferral of the related license revenue as we expand our offerings to meet customers' product, pricing and licensing needs.

Once it is determined that license revenue for a particular contract must be deferred, based on the contractual terms and application of revenue recognition policies to those terms, we recognize such license revenue either ratably over the term of the contract or when the revenue recognition criteria are met. Because of this, we generally know the timing of the subsequent recognition of license revenue at the time of deferral. Therefore, the amount of license revenue to be recognized out of the deferred revenue balance in each future quarter is generally predictable, and our total license revenue to be recognized each quarter becomes more predictable as a larger percentage of that revenue comes from the deferred license revenue balance. As of September 30, 2008, the deferred license revenue balance was $565.7 million. As additional license revenue is deferred in future periods, the amounts to be recognized in future periods will increase. A summary of the estimated deferred license revenue we expect to recognize in future periods as of September 30, 2008 follows (in millions):

                       Remainder fiscal 2009        $ 159.3
                       Fiscal 2010                  $ 207.9
                       Fiscal 2011 and thereafter   $ 198.5

Software Maintenance Revenue

Total software maintenance revenue was $255.5 million for the quarter ended September 30, 2008, an increase of 5.9%, or $14.3 million, from the prior year period. Total software maintenance revenue was $509.8 million for the six months ended September 30, 2008, an increase of 6.9%, or $33.1 million, from the prior year period. These period over period increases were attributable to increases in both ESM and MSM maintenance revenue as discussed below.

ESM maintenance revenue represented 54.1%, or $138.1 million, and 53.9%, or $274.8 million, of our total maintenance revenue for the quarter and six months ended September 30, 2008, respectively, and 53.6%, or $129.2 million, and 53.4%, or $254.6 million, of our total maintenance revenue for the quarter and six months ended September 30, 2007, respectively. ESM maintenance revenue for the quarter ended September 30, 2008 increased 6.9%, or $8.9 million, over the prior year period. ESM maintenance revenue for the six months ended September 30, 2008 increased 7.9%, or $20.2 million, over the prior year period. These period over period increases were attributable primarily to the expansion of our installed ESM customer license base, including incremental maintenance revenue resulting from of our acquisition of BladeLogic in April 2008 and our fiscal 2008 acquisitions. Maintenance revenue contributed by BladeLogic amounted to $3.7 million and $5.6 million during the quarter and six months ended September 30, 2008, respectively.

MSM maintenance revenue represented 45.9%, or $117.4 million, and 46.1%, or $235.0 million, of our total maintenance revenue for the quarter and six months ended September 30, 2008, respectively, and 46.4%, or $112.0 million, and 46.6%, or $222.1 million,

of our total maintenance revenue for the quarter and six months ended September 30, 2007, respectively. MSM maintenance revenue for the quarter ended September 30, 2008 increased 4.8%, or $5.4 million, over the prior year period. MSM maintenance revenue for the six months ended September 30, 2008 increased 5.8%, or $12.9 million, over the prior year period. These period over period increases were attributable primarily to the expansion of our installed MSM customer license base and increasing capacities of the current installed base.

As of September 30, 2008, the deferred maintenance revenue balance was $1,175.9 million. A summary of the estimated deferred maintenance revenue we expect to recognize in future periods as of September 30, 2008, follows (in millions):

                       Remainder of fiscal 2009     $ 385.6
                       Fiscal 2010                  $ 435.3
                       Fiscal 2011 and thereafter   $ 355.0

Domestic vs. International Revenue



                                             Quarter Ended                    Six Months Ended
                                             September 30,                     September 30,
                                            2008      2007     % Change        2008       2007     % Change
                                             (In millions)                     (In millions)
License:
Domestic                                   $  98.5   $  76.3       29.1 %   $    171.0   $ 142.4       20.1 %
International                                 77.0      74.6        3.2 %        153.9     134.4       14.5 %

Total license revenue                        175.5     150.9       16.3 %        324.9     276.8       17.4 %

Maintenance:
Domestic                                     138.0     131.3        5.1 %        275.9     260.7        5.8 %
International                                117.5     109.9        6.9 %        233.9     216.0        8.3 %

Total maintenance revenue                    255.5     241.2        5.9 %        509.8     476.7        6.9 %

Professional services:
Domestic                                      15.9      11.9       33.6 %         29.8      22.0       35.5 %
International                                 19.8      16.7       18.6 %         39.7      30.2       31.5 %

Total professional services revenue           35.7      28.6       24.8 %         69.5      52.2       33.1 %


Total domestic revenue                       252.4     219.5       15.0 %        476.7     425.1       12.1 %
Total international revenue                  214.3     201.2        6.5 %        427.5     380.6       12.3 %

Total revenue                              $ 466.7   $ 420.7       10.9 %   $    904.2   $ 805.7       12.2 %

License Revenue

Our domestic license revenue represented 56.1%, or $98.5 million, and 50.6%, or $76.3 million, of our total license revenue for the quarter ended September 30, 2008 and 2007, respectively. Our domestic license revenue for the quarter ended September 30, 2008 increased 29.1%, or $22.2 million, over the prior year period. This period over period increase was attributable primarily to an increase in ESM license revenue, including incremental revenue resulting from our acquisition of BladeLogic in April 2008 and our fiscal 2008 acquisitions, and an increase in MSM license revenue. Our domestic license revenue represented 52.6%, or $171.0 million, and 51.4%, or $142.4 million, of our total license revenue for the six months ended September 30, 2008 and 2007, respectively. Our domestic license revenue for the six months ended September 30, 2008 increased 20.1%, or $28.6 million, compared to the same period in the prior year. This period over period increase was attributable primarily to an increase in ESM license revenue, including incremental revenue resulting from our acquisition of BladeLogic in April 2008 and our fiscal 2008 acquisitions, as MSM domestic license revenue was relatively flat period over period.

Our international license revenue represented 43.9%, or $77.0 million, and 49.4%, or $74.6 million, of our total license revenue for the quarter ended September 30, 2008 and 2007, respectively. Our international license revenue for the quarter ended September 30, 2008 increased 3.2%, or $2.4 million, over the prior year period. This period over period increase was attributable to an increase in MSM license revenue in our European market, partially offset by a decrease in MSM license revenue in our Latin American markets. Our international license revenue represented 47.4%, or $153.9 million, and 48.6%, or $134.4 million, of our total license revenue for the six months ended September 30, 2008 and 2007, respectively. Our international license revenue for the six months ended September 30, 2008 increased 14.5%, or $19.5 million, over the prior year period. This period over period increase was attributable to ESM and MSM license revenue increases in most of our international regions. The ESM license revenue increase was attributable primarily to increases in our European market, principally due to incremental revenue resulting from our acquisition of BladeLogic in

April 2008, and to a lesser degree increases in our Latin America and Asia Pacific markets. The MSM license revenue increase was attributable primarily to increases in our European and Asia Pacific markets. Both the quarter and . . .