This Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors and elsewhere in this Annual Report.

Overview

During fiscal 2009, the United States and global economies entered into recession. Despite the challenging macroeconomic environment that developed during the fiscal year, we continued to focus on our leadership in BSM by responding to IT executive needs to reduce cost, increase business impact, improve service quality, manage risk and provide greater transparency. Our two business segments, ESM and MSM, continue to provide the focus necessary to align our resources and product development efforts to meet the demands of the dynamic markets we serve.

Our fiscal 2009 financial performance in terms of revenue, expense management, operating income and earnings per share was strong, despite the continuing uncertainty in the global markets. While our operating cash flows for the fiscal year fell short of our expectations, due primarily to elongated contract approval cycles that we started to see in our fourth quarter that caused a higher percentage of our invoicing activity to occur in the latter part of the quarter, we nevertheless recorded strong transactional bookings results for the fourth quarter and fiscal year. Additionally, in the fourth quarter we closed an increased number of large transactions with more complex terms and conditions that resulted in a higher percentage of license transaction bookings being deferred and recognized as revenue ratably over the underlying contractual maintenance terms rather than recorded entirely upfront at the time of the transactions. The primary reasons for license revenue deferral are discussed further under Results of Operations-Software License Revenue, and Critical Accounting Policies-Revenue Recognition, in MD&A herein.

Overall, we believe that our strong fiscal 2009 performance reflects the tangible value that our solutions offer customers in both good and difficult economic environments, along with our ability to control and manage our expenses.

In April 2008, we acquired BladeLogic, a leading provider of data center automation software, for total purchase consideration of $854.0 million. This was a significant acquisition for us as it has expanded our service automation offerings for server provisioning, application release management, and configuration automation and compliance. During the fiscal year, BladeLogic was successfully integrated into our operations.

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.

We continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During fiscal 2009, we repurchased approximately 10.7 million shares for a total value of $330.0 million.

Going into fiscal 2010, we expect that we will continue to see elongated customer contract approval cycles, similar to the fourth quarter, which may have the impact of delaying operating cash flows from quarter to quarter, and that our license revenue recognition ratable rates will be higher due to more complex customer contract terms and conditions and other factors that preclude upfront license revenue recognition.

It is important for our investors to understand that 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 looking to improve the management of their IT infrastructure and processes, 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 IT 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, changes in foreign currency exchange rates, corporate spending generally, IT budgets, the competitiveness of the IT 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.

Acquisitions

We have consummated multiple acquisitions of businesses in recent years. Each of these acquisitions has been accounted for using the purchase accounting method. Accordingly, the financial results for these entities have been included in our consolidated financial results since the applicable acquisition dates.

Fiscal 2009 Acquisition

In April 2008, we acquired BladeLogic, a leading provider of data center automation software, through the successful completion of a tender offer for approximately $830 million in cash, excluding acquisition costs. The BladeLogic acquisition expands our offerings for server provisioning, application release management, as well as configuration automation and compliance.

Fiscal 2008 Acquisitions

In June 2007, we acquired ProactiveNet, a provider of an advanced "early warning system" for the IT market, for approximately $41 million in cash. This acquisition advances the solutions available for our customers looking to align IT services to business priorities. In July 2007, we acquired RealOps, a leading provider of run book automation software, for approximately $54 million in cash. This acquisition enables us to provide a robust

platform for IT process design and execution. In October 2007, we acquired Emprisa, a leading provider of network configuration automation software, for approximately $22 million in cash. This acquisition expands our ability to include the configuration of network devices in our service automation offering.

Fiscal 2007 Acquisition

In May 2006, we acquired Identify Software for approximately $151 million in cash. This acquisition provides solutions that optimize application development organizations through the automation of testing, support and maintenance processes and enables dramatic increases in development outputs.

Historical Information

Historical performance should not be viewed as indicative of future performance, as there can be no assurance that operating income or net earnings will be sustained at these levels. For a discussion of factors affecting operating results, see the Risk Factors section above.

Results of Operations

The following table sets forth, for the fiscal years indicated, the percentages that selected items in the accompanying Consolidated Statements of Operations bear to total revenue.

                                                              Percentage of
                                                          Total Revenue for the
                                                          Year Ended March 31,
                                                       2009       2008       2007
   Revenue:
   License                                              37.9 %     37.4 %     36.1 %
   Maintenance                                          54.4 %     55.9 %     58.1 %
   Professional services                                 7.7 %      6.7 %      5.8 %
   Total revenue                                       100.0 %    100.0 %    100.0 %
   Operating Expenses:
   Cost of license revenue                               6.3 %      5.8 %      6.3 %
   Cost of maintenance revenue                           8.9 %      9.8 %     11.1 %
   Cost of professional services revenue                 7.6 %      7.2 %      6.1 %
   Selling and marketing expenses                       28.9 %     30.5 %     32.8 %
   Research and development expenses                    11.9 %     12.1 %     13.3 %
   General and administrative expenses                  10.6 %     12.1 %     12.8 %
   In-process research and development                   2.7 %      0.2 %       -
   Amortization of intangible assets                     1.8 %      0.9 %      1.7 %
   Severance, exit costs and related charges             1.8 %      0.8 %      2.8 %
   Total operating expenses                             80.4 %     79.4 %     86.9 %
   Operating income                                     19.6 %     20.6 %     13.1 %
   Other income (loss), net:
   Interest and other income, net                        1.4 %      4.3 %      5.5 %
   Interest expense                                     (0.9 )%    (0.1 )%    (0.1 )%
   Gain (loss) on sale and impairment of investments    (0.7 )%     0.2 %      0.5 %
   Total other income (loss), net                       (0.2 )%     4.4 %      5.9 %
   Earnings before income taxes                         19.4 %     25.1 %     19.0 %
   Provision for income taxes                            6.7 %      7.0 %      5.4 %
   Net earnings                                         12.7 %     18.1 %     13.7 %

Revenue

The following table provides information regarding software license and software maintenance revenue for fiscal 2009, 2008 and 2007.

Software License Revenue



                                                                                   Percentage Change

                                           Year Ended March 31,                 2009               2008
                                                                             Compared to        Compared to
                                     2009          2008          2007           2008               2007
                                               (In millions)
Enterprise Service Management      $   436.1     $   350.5     $   330.1            24.4 %              6.2 %
Mainframe Service Management           273.6         297.1         239.7            (7.9 )%            23.9 %

Total software license revenue     $   709.7     $   647.6     $   569.8             9.6 %             13.7 %

Software Maintenance Revenue



                                                                                         Percentage Change

                                                Year Ended March 31,                  2009              2008
                                                                                   Compared to       Compared to
                                          2009           2008          2007           2008              2007
                                                    (In millions)
Enterprise Service Management          $     550.1     $   517.4     $   478.1             6.3 %             8.2 %
Mainframe Service Management                 467.7         450.3         440.7             3.9 %             2.2 %

Total software maintenance revenue     $   1,017.8     $   967.7     $   918.8             5.2 %             5.3 %

Total Software Revenue



                                                                                        Percentage Change

                                             Year Ended March 31,                    2009               2008
                                                                                  Compared to        Compared to
                                     2009            2008            2007            2008               2007
                                                 (In millions)
Enterprise Service Management     $     986.2     $     867.9     $     808.2            13.6 %              7.4 %
Mainframe Service Management            741.3           747.4           680.4            (0.8 )%             9.8 %

Total software revenue            $   1,727.5     $   1,615.3     $   1,488.6             6.9 %              8.5 %

Software License Revenue

License revenue was $709.7 million, $647.6 million and $569.8 million for fiscal 2009, 2008 and 2007, respectively.

License revenue in fiscal 2009 increased by 9.6%, or $62.1 million, over fiscal 2008. This increase was attributable to license revenue increases in the ESM segment, partially offset by a license revenue decrease in the MSM segment, as further discussed below. Recognition of license revenue that was deferred in prior periods increased $25.7 million in fiscal 2009 as compared to fiscal 2008. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront remained constant at 50% during fiscal 2009 and 2008. During fiscal 2009, we closed 135 transactions with license values over $1 million, with a total license value of $364.3 million, compared with 94 transactions with license values over $1 million, with a total license value of $278.1 million, in fiscal 2008.

License revenue in fiscal 2008 increased by 13.7%, or $77.8 million, over fiscal 2007. This increase was attributable to license revenue increases in both the MSM and ESM segments, as further discussed below. Recognition of license revenue that was deferred in prior periods increased $55.7 million in fiscal 2008 as compared to fiscal 2007. Of the license transactions recorded, the percentage of license revenue recognized upfront decreased from 51% during fiscal 2007 to 50% during fiscal 2008. During fiscal 2008, we closed 94 transactions with license values over $1 million, with a total license value of $278.1 million, compared with 89 transactions with license values over $1 million, with a total license value of $243.1 million, in fiscal 2007.

ESM license revenue represented 61.4%, or $436.1 million, 54.1%, or $350.5 million, and 57.9%, or $330.1 million, of our total license revenue for fiscal 2009, 2008 and 2007, respectively. ESM license revenue for fiscal 2009 increased 24.4%, or $85.6 million, from fiscal 2008, and for fiscal 2008 increased 6.2%, or $20.4 million, from fiscal 2007. These increases were attributable primarily to increased demand for our BSM solutions, inclusive of incremental revenue 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 year over year, partially offset by an increase in the level of new license transactions with revenue being deferred into future periods. ESM license revenue contributed by BladeLogic products amounted to $57.5 million in fiscal 2009.

MSM license revenue represented 38.6%, or $273.6 million, 45.9%, or $297.1 million, and 42.1%, or $239.7 million, of our total license revenue for fiscal 2009, 2008 and 2007, respectively. MSM license revenue for fiscal 2009 decreased 7.9%, or $23.5 million, from fiscal 2008, primarily due to a decrease in the volume of new license transactions executed, partially offset by an increase in the recognition of previously deferred license revenue year over year. MSM license revenue for fiscal 2008 increased 23.9%, or $57.4 million, from fiscal 2007, primarily due to an increase in the recognition of previously deferred license revenue year over year and an increase in the volume of new license transactions executed, combined with a decline in the level of new transactions whose revenue was deferred into future periods.

For fiscal 2009, 2008 and 2007, our recognized license revenue was impacted by the changes in our deferred license revenue balance as follows:

                                                                Year Ended March 31,
                                                       2009             2008             2007
                                                                    (In millions)
Deferrals of license revenue                        $    (383.2 )    $    (347.2 )    $    (314.8 )
Recognition from deferred license revenue                 324.2            298.5      $     242.8
Impact of foreign currency exchange rate changes            3.5             (2.3 )           (0.1 )

Net impact to deferred license revenue              $     (55.5 )    $     (51.0 )    $     (72.1 )

Deferred license revenue balance at end of year     $     610.9      $     555.4      $     504.4

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 a combination of undiscounted license list prices, net license fees or discounted 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 March 31, 2009, the deferred license revenue balance was $610.9 million. As additional license revenue is deferred in future periods, the amounts to be recognized in future periods will increase. Estimated deferred license revenue that we expect to recognize in future periods as of March 31, 2009 is (in millions):

                     Fiscal 2010                  $     322.2
                     Fiscal 2011                        165.1
                     Fiscal 2012 and thereafter         123.6

                                                  $     610.9

Software Maintenance Revenue

Maintenance revenue was $1,017.8 million, $967.7 million and $918.8 million for fiscal 2009, 2008 and 2007, respectively. Maintenance revenue in fiscal 2009 increased by 5.2%, or $50.1 million, over fiscal 2008. Maintenance revenue in fiscal 2008 increased by 5.3%, or $48.9 million, over fiscal 2007. These increases were attributable to increases in both ESM and MSM maintenance revenue, as discussed below.

ESM maintenance revenue represented 54.0%, or $550.1 million, 53.5%, or $517.4 million, and 52.0%, or $478.1 million, of our total maintenance revenue for fiscal 2009, 2008 and 2007, respectively. ESM maintenance revenue in fiscal 2009 increased by 6.3%, or $32.7 million, over fiscal 2008, and in fiscal 2008 increased by 8.2%, or $39.3 million, over fiscal 2007. These year over year increases were attributable primarily to the expansion of our installed ESM customer license base, including incremental maintenance revenue resulting from our acquisition of BladeLogic in April 2008 and our fiscal 2008 and 2007 acquisitions. Maintenance revenue contributed by BladeLogic products was $17.3 million in fiscal 2009.

MSM maintenance revenue represented 46.0%, or $467.7 million, 46.5%, or $450.3 million, and 48.0% or $440.7 million, of our total maintenance revenue for fiscal 2009, 2008 and 2007, respectively. MSM maintenance revenue in fiscal 2009 increased by 3.9%, or $17.4 million, over fiscal 2008, and in fiscal 2008 increased by 2.2%, or $9.6 million, over fiscal 2007. These year over year increases were attributable primarily to the expansion of our installed MSM customer license base and increasing capacities of the current installed base.

As of March 31, 2009, the deferred maintenance revenue balance was $1,159.1 million. As new customers are added and/or current contracts are renewed and additional maintenance revenue is deferred in future periods, the amounts to be recognized in future periods will increase. Estimated deferred maintenance revenue that we expect to recognize in future periods as of March 31, 2009 is (in millions):

                    Fiscal 2010                  $       637.6
                    Fiscal 2011                          301.1
                    Fiscal 2012 and thereafter           220.4

                                                 $     1,159.1

Domestic vs. International Revenue



                                                                                      Percentage Change

                                           Year Ended March 31,                     2009             2008
                                                                                 Compared to      Compared to
                                  2009             2008             2007            2008             2007
                                               (In millions)
License:
Domestic                      $       361.7    $       306.2    $       279.5           18.1 %            9.6 %
International                         348.0            341.4            290.3            1.9 %           17.6 %

Total license revenue                 709.7            647.6            569.8            9.6 %           13.7 %

Maintenance:
Domestic                              555.5            525.5            507.4            5.7 %            3.6 %
International                         462.3            442.2            411.4            4.5 %            7.5 %

Total maintenance revenue           1,017.8            967.7            918.8            5.2 %            5.3 %

Professional services:
Domestic                               62.8             47.1             36.6           33.3 %           28.7 %
International                          81.6             69.2             55.2           17.9 %           25.4 %

Total professional
services revenue                      144.4            116.3             91.8           24.2 %           26.7 %

Total revenue                 $     1,871.9    $     1,731.6    $     1,580.4            8.1 %            9.6 %

We estimate that the effect of foreign currency exchange rate fluctuations on our international revenue resulted in an approximate $9.0 million reduction in total fiscal 2009 revenue as compared to fiscal 2008 and an approximate $47.0 million increase in total fiscal 2008 revenue as compared to fiscal 2007, on a constant currency basis.

Domestic License Revenue

Domestic license revenue represented 51.0%, or $361.7 million, 47.3%, or $306.2 million, and 49.1%, or $279.5 million, of our total license revenue for fiscal 2009, 2008 and 2007, respectively.

Domestic license revenue increased 18.1%, or $55.5 million, from fiscal 2008 to fiscal 2009, due to a $66.2 million increase in ESM license revenue, including incremental license revenue of $40.5 million resulting from our acquisition of BladeLogic, offset by a $10.7 million decrease in MSM license revenue.

Domestic license revenue increased 9.6%, or $26.7 million, from fiscal 2007 to fiscal 2008, due to increases of $23.6 million and $3.1 million in MSM and ESM license revenues, respectively.

International License Revenue

International license revenue represented 49.0%, or $348.0 million, 52.7%, or $341.4 million, and 50.9%, or $290.3 million, of our total license revenue for fiscal 2009, 2008 and 2007, respectively.

International license revenue increased 1.9%, or $6.6 million, from fiscal 2008 to fiscal 2009, due to a $19.4 million increase in ESM license revenue, including incremental license revenue of $17.0 million resulting from our acquisition of BladeLogic, offset by a $12.8 million decrease in MSM license revenue. The ESM license revenue increase was attributable to a $15.5 million increase in our Europe, Middle East and Africa (EMEA) markets, principally due to incremental revenue resulting from our acquisition of BladeLogic, and a $6.0 million increase in our Asia Pacific market, partially offset by a $2.1 million net decrease in our other international markets. The MSM license revenue decrease was attributable primarily to decreases of $7.2 million and $5.7 million in our EMEA and Latin American markets, respectively.

International license revenue increased 17.6%, or $51.1 million, from fiscal 2007 to fiscal 2008, due to a $33.7 million increase in MSM license revenue and a $17.4 million increase in ESM license revenue. The MSM license revenue increase was attributable primarily to increases of $19.4 million and $13.9 million in our EMEA and Latin American markets, respectively. The ESM license revenue increase was attributable to increases of $13.3 million and $7.1 million in our EMEA and Latin American markets, respectively, partially offset by a $3.0 million net decrease in other international markets.

Domestic Maintenance Revenue

. . .