This report on Form 10-Q for the quarter ended December 31, 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 nine months 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 third quarter and first nine months 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.

A significant portion of our operating expenses are fixed in the short-term and 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, including the impact of changes in foreign currency exchange rates, 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.

The current highly volatile and uncertain economic conditions globally, forecasts of contracting IT spending and the factors discussed in the preceding paragraph may adversely impact our future revenue, operating results, financial condition and cash flows. While our operating plans include continued discipline in controlling expenses and ongoing efforts to simplify processes and increase efficiencies, there can be no assurance that expense control efforts would offset such adverse conditions.

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.

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 nine months ended December 31, 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 elected to apply the fair value option to a put agreement with a bank as discussed in Note 12 to our condensed consolidated financial statements.

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. The first removes leasing from the scope of SFAS No. 157 and the second delays 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. Refer to Note 12 to our condensed consolidated financial statements for information and related disclosures regarding our fair value measurements.

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        Nine Months Ended
                                                December 31,           December 31,
                                              2008       2007        2008         2007
  Revenue:
  License                                      39.5 %     39.5 %       37.2 %      36.2 %
  Maintenance                                  52.4 %     53.6 %       55.0 %      57.2 %
  Professional services                         8.2 %      6.8 %        7.9 %       6.6 %
  Total revenue                               100.0 %    100.0 %      100.0 %     100.0 %
  Operating expenses:
  Cost of license revenue                       5.9 %      5.5 %        6.2 %       5.8 %
  Cost of maintenance revenue                   7.6 %      9.2 %        8.9 %       9.8 %
  Cost of professional services revenue         7.6 %      7.4 %        7.8 %       7.2 %
  Selling and marketing expenses               26.8 %     29.2 %       29.3 %      30.9 %
  Research and development expenses            10.6 %     11.8 %       12.0 %      11.8 %
  General and administrative expenses          10.1 %     11.2 %       10.8 %      12.1 %
  In-process research and development            -         0.4 %        3.6 %       0.3 %
  Amortization of intangible assets             1.7 %      0.7 %        1.8 %       0.8 %
  Severance, exit costs and related charges     3.3 %      1.3 %        1.7 %       0.8 %
  Total operating expenses                     73.6 %     76.8 %       82.2 %      79.5 %
  Operating income                             26.4 %     23.2 %       17.8 %      20.5 %
  Other income (loss), net                     (1.8 )%     4.0 %        0.2 %       4.6 %
  Earnings before income taxes                 24.5 %     27.2 %       17.9 %      25.1 %
  Provision for income taxes                    7.4 %      8.9 %        6.8 %       8.0 %
  Net earnings                                 17.2 %     18.3 %       11.1 %      17.1 %

Revenue

The following table provides information regarding license and maintenance
revenue for the quarter and nine months ended December 31, 2008 and 2007:



Software License Revenue                     Quarter Ended                     Nine Months Ended
                                             December 31,                        December 31,
                                            2008      2007     % Change         2008        2007     % Change
                                             (In millions)                       (In millions)
Enterprise Service Management              $ 127.0   $ 102.6       23.8 %    $    321.4    $ 254.7       26.2 %
Mainframe Service Management                  65.8      78.9      (16.6 )%        196.3      203.6       (3.6 )%

Total software license revenue             $ 192.8   $ 181.5        6.2 %    $    517.7    $ 458.3       13.0 %


Software Maintenance Revenue                 Quarter Ended                     Nine Months Ended
                                             December 31,                        December 31,
                                            2008      2007     % Change         2008        2007     % Change
                                             (In millions)                       (In millions)
Enterprise Service Management              $ 139.6   $ 130.9        6.6 %    $    414.4    $ 385.5        7.5 %
Mainframe Service Management                 116.1     115.2        0.8 %         351.1      337.3        4.1 %

Total software maintenance revenue         $ 255.7   $ 246.1        3.9 %    $    765.5    $ 722.8        5.9 %