It is important that this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) be read in conjunction with: (i) the attached condensed consolidated financial statements and notes thereto, (ii) the audited financial statements and notes thereto included in our Annual Report on Form 10-K for fiscal 2009, and (iii) our discussion of risk and uncertainties included within Risk Factors in our Annual Report on Form 10-K for fiscal 2009.

This MD&A 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, including but not limited to those summarized under Risk Factors in our Annual Report on Form 10-K for fiscal 2009, 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.

Overview

The global recession that developed in fiscal 2009 continued to create a challenging macroeconomic environment in the first quarter of fiscal 2010. While our first quarter fiscal 2010 financial performance in terms of revenue, expense management, operating income, earnings per share and operating cash flows was strong, the contract value of new transactions that we closed and recorded during the quarter, which we refer to as bookings, fell short of our expectations within both of our Enterprise Service Management (ESM) and Mainframe Service Management (MSM) businesses. We attribute this shortfall primarily to the economic downturn in general, a reduction in the closure rate of larger and more complex transactions in the first quarter and the uneven nature of quarter to quarter bookings in our MSM business, and to a lesser degree our ESM sales execution in the context of the current environment. We do not believe, however, that this shortfall was attributable to a reduction in customer demand for our solutions in general or competitive losses of any significance. The economic downturn as a whole has impacted us across all major geographic regions. As industry analysts and Wall Street firms have noted, IT spending has contracted and has been weaker than expected, and we particularly evidenced this during the first quarter. This downturn contributed to a reduction in the closure rate of our larger and more complex transactions in the quarter, due to elongated sales cycles that we evidenced in our ESM business and to a lesser extent in our MSM business. More so than in past periods, we have observed that our larger transactions are receiving significantly more business case scrutiny as more customers are requiring an increased number of internal approval signoffs from all business levels prior to execution. Another factor that impacted our bookings is the uneven nature of quarter to quarter booking levels inherent in our MSM business. As bookings for our MSM business are tied largely to the timing and size of renewals, MSM bookings can be uneven from quarter to quarter, and this in part contributed to our lower than expected first quarter MSM bookings. Lastly, to a lesser degree, we also believe that our recent transition to a new ESM sales strategy, which included changes in sales leadership, personnel and processes, contributed to our first quarter bookings shortfall in the context of the current environment.

As compared to prior periods, the reduced level of larger and more complex transactions in the first quarter of fiscal 2010 led to a reduction in the percentage of our license revenue that we were required to defer and recognize ratably over the underlying contractual maintenance terms, which in turn resulted in a higher percentage of our first quarter license transactions being recognized as revenue in the current quarter. The primary reasons for license revenue deferral are discussed further under Results of Operations and Financial Condition - Revenue - Software License Revenue in MD&A herein.

Overall, although our transactional bookings in the current quarter were lower than our expectations, we believe that our financial performance for the quarter was solid, in part because of our continued ability to control and manage our expenses. Further, we believe that our ESM and MSM solutions continue to provide tangible value to our customers in both good and difficult economic times and are optimistic that our product development and go-to-market strategies, along with our continued ability to control our expenses, will allow us to meet our full year fiscal 2010 financial performance objectives.

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, the short term 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.

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
                                                           June 30,
                                                   2009                 2008
    Revenue:
    License                                           37.1 %               34.1 %
    Maintenance                                       55.8 %               58.1 %
    Professional services                              7.1 %                7.7 %
    Total revenue                                    100.0 %              100.0 %
    Operating expenses:
    Cost of license revenue                            6.2 %                6.3 %
    Cost of maintenance revenue                        8.3 %                9.3 %
    Cost of professional services revenue              7.4 %                8.0 %
    Selling and marketing expenses                    28.0 %               32.1 %
    Research and development expenses                 11.9 %               14.1 %
    General and administrative expenses               12.1 %               12.2 %
    In-process research and development                    -               11.5 %
    Amortization of intangible assets                  1.8 %                1.9 %
    Severance, exit costs and related charges          0.2 %                1.5 %
    Total operating expenses                          76.0 %               97.0 %
    Operating income                                  24.0 %                3.0 %
    Other income (loss), net                          (0.2 )%               1.9 %
    Earnings before income taxes                      23.9 %                4.9 %
    Provision for income taxes                         5.6 %                4.6 %
    Net earnings                                      18.3 %                0.3 %

Revenue

The following table provides information regarding software license and software
maintenance revenue for the quarters ended June 30, 2009 and 2008:



                                                 Quarter Ended
          Software License Revenue                 June 30,
                                                2009      2008     % Change
                                                 (In millions)
          Enterprise Service Management        $  96.6   $  89.6        7.8 %
          Mainframe Service Management            70.4      59.8       17.7 %

          Total software license revenue       $ 167.0   $ 149.4       11.8 %


                                                 Quarter Ended
          Software Maintenance Revenue             June 30,
                                                2009      2008     % Change
                                                 (In millions)
          Enterprise Service Management        $ 135.5   $ 136.7       (0.9 )%
          Mainframe Service Management           115.7     117.6       (1.6 )%

          Total software maintenance revenue   $ 251.2   $ 254.3       (1.2 )%


                                                 Quarter Ended
          Total Software Revenue                   June 30,
                                                2009      2008     % Change
                                                 (In millions)
          Enterprise Service Management        $ 232.1   $ 226.3        2.6 %
          Mainframe Service Management           186.1     177.4        4.9 %

          Total software revenue               $ 418.2   $ 403.7        3.6 %

Software License Revenue

Software license revenue was $167.0 million for the quarter ended June 30, 2009, an increase of $17.6 million, or 11.8%, over the prior year quarter. This increase was attributable to license revenue increases in both our ESM and MSM segments, as further discussed below. Recognition of license revenue that was deferred in prior periods increased $15.6 million for the quarter ended June 30, 2009 as compared to the prior year quarter. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront increased to 74% in the current quarter from 51% in the prior year quarter. During the quarter ended June 30, 2009, we closed 18 transactions with license values over $1 million, with a total license value of $31.6 million, compared with 15 transactions with license values over $1 million, with a total license value of $50.8 million, in the prior year quarter.

ESM license revenue represented $96.6 million, or 57.8%, and $89.6 million, or 60.0%, of our total license revenue for the quarters ended June 30, 2009 and 2008, respectively. ESM license revenue for the quarter ended June 30, 2009 increased by $7.0 million, or 7.8%, over the prior year quarter, primarily due to a current quarter increase in the recognition of previously deferred license revenue, partially offset by a decrease in the amount of upfront license revenue recognized. The current quarter decrease in upfront license revenue recognized was attributable to a decrease in license transaction bookings, partially offset by a higher percentage of such bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms.

MSM license revenue represented $70.4 million, or 42.2%, and $59.8 million, or 40.0%, of our total license revenue for the quarters ended June 30, 2009 and 2008, respectively. MSM license revenue for the quarter ended June 30, 2009 increased by $10.6 million, or 17.7%, over the prior year quarter, primarily due to a current quarter increase in the amount of upfront license revenue recognized and an increase in the recognition of previously deferred license revenue. The current quarter increase in upfront license revenue recognized was attributable to the reduced level of larger and more complex transactions in the current quarter that led to a reduction in the percentage of our license revenue that we were required to defer and recognize ratably over the underlying contractual maintenance terms, which in turn resulted in a higher percentage of our first quarter license transactions being recognized as revenue in the current quarter. This was partially offset by a decrease in license transaction bookings.

Deferred License Revenue

For the quarters ended June 30, 2009 and 2008, our recognized license revenue
was impacted by the changes in our deferred license revenue balance as follows:



                                                                Quarter Ended
                                                                   June 30,
                                                              2009         2008
                                                                (In millions)
   Deferred license revenue balance at beginning of period   $ 610.9      $ 555.4
   Deferrals of license revenue                                 27.5         72.8
   Recognition from deferred license revenue                   (90.4 )      (74.8 )
   Impact of foreign currency exchange rate changes              2.2          0.6

   Deferred license revenue balance at end of period         $ 550.2      $ 554.0

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 June 30, 2009, the deferred license revenue balance was $550.2 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 June 30, 2009 is (in millions):

                       Remainder of fiscal 2010     $ 247.2
                       Fiscal 2011                  $ 172.7
                       Fiscal 2012 and thereafter   $ 130.3

Software Maintenance Revenue

Maintenance revenue was $251.2 million for the quarter ended June 30, 2009, a decrease of $3.1 million, or 1.2%, from the prior year quarter. This decrease was attributable to maintenance revenue decreases in both our ESM and MSM segments.

ESM maintenance revenue represented $135.5 million, or 53.9%, and $136.7 million, or 53.8%, of our total maintenance revenue for the quarters ended June 30, 2009 and 2008, respectively. ESM maintenance revenue for the quarter ended June 30, 2009 decreased by $1.2 million, or 0.9%, from the prior year quarter, primarily due to a negative current quarter impact from foreign currency exchange rate fluctuations.

MSM maintenance revenue represented $115.7 million, or 46.1%, and $117.6 million, or 46.2%, of our total maintenance revenue for the quarters ended June 30, 2009 and 2008, respectively. MSM maintenance revenue for the quarter ended June 30, 2009 decreased by $1.9 million, or 1.6%, from the prior year quarter, primarily due to a negative current quarter impact from foreign currency exchange rate fluctuations.

As of June 30, 2009, the deferred maintenance revenue balance was $1,162.8 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 June 30, 2009 is (in millions):

                       Remainder of fiscal 2010     $ 547.7
                       Fiscal 2011                  $ 352.2
                       Fiscal 2012 and thereafter   $ 262.9

Domestic vs. International Revenue



                                                 Quarter Ended
                                                   June 30,
                                                2009      2008     % Change
                                                 (In millions)
         License:
         Domestic                              $  86.1   $  72.5       18.8 %
         International                            80.9      76.9        5.2 %

         Total license revenue                   167.0     149.4       11.8 %

         Maintenance:
         Domestic                                138.4     137.9        0.4 %
         International                           112.8     116.4       (3.1 )%

         Total maintenance revenue               251.2     254.3       (1.2 )%

         Professional services:
         Domestic                                 15.9      13.9       14.4 %
         International                            15.9      19.9      (20.1 )%

         Total professional services revenue      31.8      33.8       (5.9 )%

         Total domestic revenue                  240.4     224.3        7.2 %
         Total international revenue             209.6     213.2       (1.7 )%

         Total revenue                         $ 450.0   $ 437.5        2.9 %

We estimate that the effect of foreign currency exchange rate fluctuations on our international revenue resulted in an approximate $12.4 million reduction in current quarter revenue as compared to the prior year quarter, on a constant currency basis.

License Revenue

Domestic license revenue represented $86.1 million, or 51.6%, and $72.5 million, or 48.5%, of our total license revenue for the quarters ended June 30, 2009 and 2008, respectively. Domestic license revenue for the quarter ended June 30, 2009 increased by $13.6 million, or 18.8%, over the prior year quarter due to a $6.4 million increase in ESM license revenue and a $7.2 million increase in MSM license revenue.

International license revenue represented $80.9 million, or 48.4%, and $76.9 million, or 51.5%, of our total license revenue for the quarters ended June 30, 2009 and 2008, respectively. International license revenue for the quarter ended June 30, 2009 increased by $4.0 million, or 5.2%, over the prior year quarter, due to a $3.4 million increase in MSM license revenue and a $0.6 million increase in ESM license revenue. The MSM license revenue increase was attributable to a $4.2 million increase in our Latin America market, partially offset by a $0.8 million net decrease in our other international markets. The ESM license revenue increase was attributable to a $2.7 million combined increase in our Asia Pacific, Canadian and Latin America markets, offset by a $2.1 million decrease in our Europe, Middle East and Africa (EMEA) market.

Maintenance Revenue

Domestic maintenance revenue represented $138.4 million, or 55.1%, and $137.9 million, or 54.2%, of our total maintenance revenue for the quarters ended June 30, 2009 and 2008, respectively. Domestic maintenance revenue for the quarter ended June 30, 2009 increased by $0.5 million, or 0.4%, over the prior year quarter due to a $1.2 million increase in ESM maintenance revenue, offset by a $0.7 million decrease in MSM maintenance revenue.

International maintenance revenue represented $112.8 million, or 44.9%, and $116.4 million, or 45.8%, of our total maintenance revenue for the quarters ended June 30, 2009 and 2008, respectively. International maintenance revenue for the quarter ended June 30, 2009 decreased by $3.6 million, or 3.1%, from the prior year quarter, due to a $2.4 million decrease in ESM maintenance revenue and a $1.2 million decrease in MSM maintenance revenue. The ESM maintenance revenue decrease was attributable to a $1.9 million decrease in our EMEA market and a $0.5 million net decrease in our other international markets. The MSM maintenance revenue decrease was attributable to a $0.8 million decrease in our EMEA market and a $0.4 million net decrease in our other international markets.

Professional Services Revenue

Professional services revenue for the quarter ended June 30, 2009 decreased by $2.0 million, or 5.9%, from the prior year quarter, which is reflective of a $2.0 million, or 14.4%, increase in domestic professional services revenue offset by a $4.0 million, or 20.1%, decrease in international professional services revenue quarter over quarter. The increase in domestic professional services revenue was attributable primarily to an increase in implementation and consulting services associated with our BSM solutions. The decrease

in international professional services revenue was attributable primarily to a negative current quarter impact from foreign currency exchange rate fluctuations.

Operating Expenses



                                                    Quarter Ended
                                                      June 30,
                                                   2009      2008     % Change
                                                    (In millions)
      Cost of license revenue                     $  28.1   $  27.6        1.8  %
      Cost of maintenance revenue                    37.3      40.5       (7.9 )%
      Cost of professional services revenue          33.2      35.2       (5.7 )%
      Selling and marketing expenses                125.9     140.4      (10.3 )%
      Research and development expenses              53.7      61.8      (13.1 )%
      General and administrative expenses            54.6      53.5        2.1  %
      In-process research and development               -      50.3             *
      Amortization of intangible assets               8.0       8.5       (5.9 )%
      Severance, exit costs and related charges       1.0       6.4      (84.4 )%

      Total operating expenses                    $ 341.8   $ 424.2      (19.4 )%

* - not meaningful.

We estimate that the effect of foreign currency exchange rate fluctuations on our international expenses resulted in an approximate $19.3 million reduction in current quarter operating expenses as compared to the prior year quarter, on a constant currency basis.

Cost of License Revenue

Cost of license revenue consists primarily of the amortization of capitalized software costs for internally developed products, the amortization of acquired technology for products acquired through business combinations, license-based royalties to third parties and production and distribution costs for initial product licenses. For the quarters ended June 30, 2009 and 2008, cost of license revenue represented $28.1 million, or 6.2%, and $27.6 million, or 6.3%, of total revenue, respectively, and 16.8% and 18.5% of license revenue, respectively. Cost of license revenue in the current year quarter increased by $0.5 million, or 1.8%, as compared to the prior year quarter. This increase was attributable primarily to an increase in license-based royalty expense due to a change in the relative mix of products sold.

Cost of Maintenance Revenue

Cost of maintenance revenue consists primarily of the costs associated with customer support and research and development personnel that provide maintenance, enhancement and support services to our customers. For the quarters ended June 30, 2009 and 2008, cost of maintenance revenue represented $37.3 million, or 8.3%, and $40.5 million, or 9.3%, of total revenue, respectively, and 14.8% and 15.9% of maintenance revenue, respectively. Cost of maintenance revenue in the current year quarter decreased by $3.2 million, or 7.9%, as compared to the prior year quarter. This decrease was attributable primarily to a $2.2 million reduction in personnel and related costs, due primarily to a decrease in resources dedicated to maintenance projects and a quarter over quarter decrease in customer support headcount, and a $0.8 million decrease in share-based compensation expense.

Cost of Professional Services Revenue

Cost of professional services revenue consists primarily of salaries, related personnel costs and third-party fees associated with implementation, integration and education services that we provide to our customers and the related infrastructure to support this business. For the quarters ended June 30, 2009 and 2008, cost of professional services revenue represented $33.2 million, or . . .