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 the year ended March 31, 2009, and (iii) our discussion of risk and uncertainties included within Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 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 the year ended March 31, 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

Despite the continued challenging macroeconomic environment due to the ongoing global recession, our second quarter fiscal 2010 financial performance in terms of revenue, expense management, operating income, earnings per share and operating cash flows was strong. Additionally, the contract value of new transactions that we closed and recorded during the second quarter, which we refer to as bookings, showed sequential improvement within both of our Enterprise Service Management (ESM) and Mainframe Service Management (MSM) businesses. While we continue to see elongated sales cycles in these businesses and ongoing uncertainty remains regarding economic conditions globally, the bookings impact in the second quarter was less severe than in the first quarter, in part due to the completion of various large and more complex transactions that were originally forecasted to close in the first quarter and were delayed due to longer customer approval processes. Additionally, within our MSM business, where bookings are tied largely to the timing and size of renewals and thus are uneven from quarter to quarter, we closed multiple large renewal transactions in the second quarter that positively impacted our bookings. Overall, we believe that our financial performance for the quarter was strong, 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.

We also continue to invest in our business through acquisitions. In August 2009, we acquired MQSoftware, Inc. (MQSoftware), a leading provider of middleware and enterprise application transaction management software, for purchase consideration of $26.5 million. This acquisition expanded our offerings for middleware infrastructure software.

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 Business Service Management (BSM) and the stability of the mainframe market.

The uncertain economic conditions globally, IT spending levels 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         Six Months Ended
                                               September 30,           September 30,
                                             2009        2008        2009         2008
 Revenue:
 License                                      37.7 %      37.6 %      37.4 %       35.9 %
 Maintenance                                  55.7 %      54.7 %      55.8 %       56.4 %
 Professional services                         6.6 %       7.6 %       6.8 %        7.7 %
 Total revenue                               100.0 %     100.0 %     100.0 %      100.0 %
 Operating expenses:
 Cost of license revenue                       5.7 %       6.3 %       6.0 %        6.3 %
 Cost of maintenance revenue                   7.9 %      10.0 %       8.1 %        9.6 %
 Cost of professional services revenue         6.9 %       7.8 %       7.1 %        7.9 %
 Selling and marketing expenses               28.3 %      29.3 %      28.1 %       30.6 %
 Research and development expenses             9.0 %      11.5 %      10.5 %       12.8 %
 General and administrative expenses          11.1 %      10.3 %      11.6 %       11.2 %
 In-process research and development            -           -           -           5.6 %
 Amortization of intangible assets             1.7 %       1.9 %       1.8 %        1.9 %
 Severance, exit costs and related charges     0.1 %       0.3 %       0.2 %        0.9 %
 Total operating expenses                     70.8 %      77.4 %      73.3 %       86.9 %
 Operating income                             29.2 %      22.6 %      26.7 %       13.1 %
 Other income (loss), net                     (0.5 )%      0.7 %      (0.3 )%       1.2 %
 Earnings before income taxes                 28.7 %      23.3 %      26.3 %       14.4 %
 Provision for income taxes                    8.3 %       8.3 %       7.0 %        6.5 %
 Net earnings                                 20.4 %      15.0 %      19.4 %        7.9 %

Revenue

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



                                              Quarter Ended                      Six Months Ended
Software License Revenue                      September 30,                       September 30,
                                             2009      2008     % Change          2009       2008     % Change
                                              (In millions)                       (In millions)
Enterprise Service Management               $ 106.1   $ 104.8        1.2 %     $    202.7   $ 194.4        4.3 %
Mainframe Service Management                   67.9      70.7       (4.0 )%         138.3     130.5        6.0 %

Total software license revenue              $ 174.0   $ 175.5       (0.9 )%    $    341.0   $ 324.9        5.0 %


                                              Quarter Ended                      Six Months Ended
Software Maintenance Revenue                  September 30,                       September 30,
                                             2009      2008     % Change          2009       2008     % Change
                                              (In millions)                       (In millions)
Enterprise Service Management               $ 138.9   $ 138.1        0.6 %     $    274.4   $ 274.8       (0.1 )%
Mainframe Service Management                  118.5     117.4        0.9 %          234.2     235.0       (0.3 )%

Total software maintenance revenue          $ 257.4   $ 255.5        0.7 %     $    508.6   $ 509.8       (0.2 )%

                                            Quarter Ended                      Six Months Ended
Total Software Revenue                      September 30,                       September 30,
                                           2009      2008     % Change          2009       2008     % Change
                                            (In millions)                       (In millions)
Enterprise Service Management             $ 245.0   $ 242.9        0.9 %     $    477.1   $ 469.2        1.7 %
Mainframe Service Management                186.4     188.1       (0.9 )%         372.5     365.5        1.9 %

Total software revenue                    $ 431.4   $ 431.0        0.1 %     $    849.6   $ 834.7        1.8 %

Software License Revenue

License revenue for the quarter ended September 30, 2009 was $174.0 million, a decrease of $1.5 million, or 0.9%, from the prior year quarter. This decrease was attributable to a license revenue decrease in our MSM segment, partially offset by a license revenue increase in our ESM segment, as further discussed below. Recognition of license revenue that was deferred in prior periods increased $17.6 million for the quarter ended September 30, 2009 as compared to the prior year quarter. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront decreased to 44% for the current quarter from 51% for the prior year quarter. During the quarter ended September 30, 2009, we closed 32 transactions with license values over $1 million, with a total license value of $92.2 million, compared with 35 transactions with license values over $1 million, with a total license value of $104.6 million, in the prior year quarter.

License revenue for the six months ended September 30, 2009 was $341.0 million, an increase of $16.1 million, or 5.0%, over the prior year period. 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 $33.2 million for the six months ended September 30, 2009 as compared to the prior year period. Of the license revenue transactions recorded, the percentage of license revenue recognized upfront increased to 55% for the six months ended September 30, 2009 from 51% for the prior year period. During the six months ended September 30, 2009, we closed 50 transactions with license values over $1 million, with a total license value of $123.8 million, compared with 50 transactions with license values over $1 million, with a total license value of $155.4 million, in the prior year period.

ESM license revenue represented $106.1 million, or 61.0%, and $202.7 million, or 59.4%, of our total license revenue for the quarter and six months ended September 30, 2009, respectively, and $104.8 million, or 59.7%, and $194.4 million, or 59.8%, of our total license revenue for the quarter and six months ended September 30, 2008, respectively. ESM license revenue for the quarter ended September 30, 2009 increased by $1.3 million, or 1.2%, over the prior year quarter. ESM license revenue for the six months ended September 30, 2009 increased by $8.3 million, or 4.3%, over the prior year period. These period over period increases were attributable to current period increases in the recognition of previously deferred license revenue, offset by decreases in upfront license revenue recognized in connection with new transactions. The decrease in upfront license revenue recognized for the quarter ended September 30, 2009 was attributable to a lower volume of license transaction bookings along with a decline in the percentage of such bookings that were recognized upfront rather than ratably over the underlying contractual maintenance terms. The decrease in upfront license revenue recognized for the six months ended September 30, 2009 was attributable to a lower volume of license transaction bookings, partially offset by an increase in the percentage of such bookings that were recognized upfront rather than ratably over the underlying contractual maintenance terms.

MSM license revenue represented $67.9 million, or 39.0%, and $138.3 million, or 40.6%, of our total license revenue for the quarter and six months ended September 30, 2009, respectively, and $70.7 million, or 40.3%, and $130.5 million, or 40.2%, of our total license revenue for the quarter and six months ended September 30, 2008, respectively. MSM license revenue for the quarter ended September 30, 2009 decreased by $2.8 million, or 4.0%, from the prior year quarter, due to a decrease in the amount of upfront license revenue recognized in connection with new transactions, partially offset by a current period increase in the recognition of previously deferred license revenue. The decrease in upfront license revenue recognized was attributable to a lower percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms, partially offset by an increase in license transaction bookings. MSM license revenue for the six months ended September 30, 2009 increased by $7.8 million, or 6.0%, over the prior year period, due to a current year increase in the recognition of previously deferred license revenue and an increase in the amount of upfront license revenue recognized in connection with new transactions. The current year increase in upfront license revenue recognized was attributable to a higher percentage of license transaction bookings that were recognized as revenue upfront rather than ratably over the underlying contractual maintenance terms, partially offset by a decrease in license transaction bookings.

Deferred License Revenue

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



                                                       Quarter Ended             Six Months Ended
                                                       September 30,              September 30,
                                                     2009         2008          2009          2008
                                                                     (In millions)
Deferred license revenue balance at beginning of
period                                              $ 550.2      $ 554.0      $  610.9      $  555.4
Deferrals of license revenue                          100.2         92.3         127.7         165.1
Recognition from deferred license revenue             (96.2 )      (78.6 )      (186.6 )      (153.4 )
Impact of foreign currency exchange rate changes        2.0         (2.0 )         4.2          (1.4 )

Deferred license revenue balance at end of period   $ 556.2      $ 565.7      $  556.2      $  565.7

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. At September 30, 2009, the deferred license revenue balance was $556.2 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 September 30, 2009 is (in millions):

                       Remainder of fiscal 2010     $ 187.2
                       Fiscal 2011                  $ 203.8
                       Fiscal 2012 and thereafter   $ 165.2

Software Maintenance Revenue

Maintenance revenue for the quarter ended September 30, 2009 was $257.4 million, an increase of $1.9 million, or 0.7%, over the prior year quarter. Maintenance revenue for the six months ended September 30, 2009 was $508.6 million, a decrease of $1.2 million, or 0.2%, from the prior year period. These changes were attributable to nominal increases in ESM and MSM maintenance revenue for the quarter ended September 30, 2009 and nominal decreases in ESM and MSM maintenance revenue for the six months ended September 30, 2009, as discussed below.

ESM maintenance revenue represented $138.9 million, or 54.0%, and $274.4 million, or 54.0%, of our total maintenance revenue for the quarter and six months ended September 30, 2009, respectively, and $138.1 million, or 54.1%, and $274.8 million, or 53.9%, of our total maintenance revenue for the quarter and six months ended September 30, 2008, respectively. ESM maintenance revenue for the quarter ended September 30, 2009 increased by $0.8 million, or 0.6%, over the prior year quarter. ESM maintenance revenue for the six months ended September 30, 2009 decreased by $0.4 million, or 0.1%, from the prior year period.

MSM maintenance revenue represented $118.5 million, or 46.0%, and $234.2 million, or 46.0%, of our total maintenance revenue for the quarter and six months ended September 30, 2009, respectively, and $117.4 million, or 45.9% and $235.0 million, or 46.1%, of our total maintenance revenue for the quarter and six months ended September 30, 2008, respectively. MSM maintenance revenue for the quarter ended September 30, 2009 increased by $1.1 million, or 0.9%, over the prior year quarter. MSM maintenance revenue for the six months ended September 30, 2009 decreased by $0.8 million, or 0.3%, from the prior year period.

Deferred Maintenance Revenue

At September 30, 2009, the deferred maintenance revenue balance was $1,127.1 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 at September 30, 2009 is (in millions):

                       Remainder of fiscal 2010     $ 379.9
                       Fiscal 2011                  $ 406.0
                       Fiscal 2012 and thereafter   $ 341.2

Domestic vs. International Revenue



                                            Quarter Ended                      Six Months Ended
                                            September 30,                       September 30,
                                           2009      2008     % Change          2009       2008     % Change
                                            (In millions)                       (In millions)
License:
Domestic                                  $  90.6   $  98.5       (8.0 )%    $    176.7   $ 171.0        3.3 %
International                                83.4      77.0        8.3 %          164.3     153.9        6.8 %

Total license revenue                       174.0     175.5       (0.9 )%         341.0     324.9        5.0 %

Maintenance:
Domestic                                    140.6     138.0        1.9 %          279.0     275.9        1.1 %
International                               116.8     117.5       (0.6 )%         229.6     233.9       (1.8 )%

Total maintenance revenue                   257.4     255.5        0.7 %          508.6     509.8       (0.2 )%

Professional services:
Domestic                                     14.2      15.9      (10.7 )%          30.1      29.8        1.0 %
International                                16.2      19.8      (18.2 )%          32.1      39.7      (19.1 )%

Total professional services revenue          30.4      35.7      (14.8 )%          62.2      69.5      (10.5 )%

Total domestic revenue                      245.4     252.4       (2.8 )%         485.8     476.7        1.9 %
Total international revenue                 216.4     214.3        1.0 %          426.0     427.5       (0.4 )%

Total revenue                             $ 461.8   $ 466.7       (1.0 )%    $    911.8   $ 904.2        0.8 %

We estimate that the effect of foreign currency exchange rate fluctuations on our international revenue resulted in an approximate $5.8 million and $18.2 million reduction in revenue for the quarter and six months ended September 30, 2009, respectively, compared to the prior year periods, on a constant currency basis.

Domestic License Revenue

Domestic license revenue represented $90.6 million, or 52.1%, and $176.7 million, or 51.8%, of our total license revenue for the quarter and six months ended September 30, 2009, respectively, and $98.5 million, or 56.1%, and $171.0 million, or 52.6%, of our total license revenue for the quarter and six months ended September 30, 2008, respectively.

Domestic license revenue for the quarter ended September 30, 2009 decreased by $7.9 million, or 8.0%, from the prior year quarter, due to a $7.7 million decrease in ESM license revenue and a $0.2 million decrease in MSM license revenue.

Domestic license revenue for the six months ended September 30, 2009 increased by $5.7 million, or 3.3%, over the prior year period, due to a $7.0 million increase in MSM license revenue partially offset by a $1.3 million decrease in ESM license revenue.

International License Revenue

International license revenue represented $83.4 million, or 47.9%, and $164.3 million, or 48.2%, of our total license revenue for the quarter and six months ended September 30, 2009, respectively, and $77.0 million, or 43.9%, and $153.9 million, or 47.4% of our total license revenue for the quarter and six months ended September 30, 2008, respectively.

International license revenue for the quarter ended September 30, 2009 increased by $6.4 million, or 8.3%, over the prior year quarter, due to a $9.1 million increase in ESM license revenue, partially offset by a $2.7 million decrease in MSM license revenue. The ESM license revenue increase was attributable to increases of $7.7 million and $2.7 million in our Europe, Middle East and

Africa (EMEA) and Canada markets, respectively, partially offset by a $1.3 million net decrease in our other international markets. The MSM license revenue decrease was attributable to decreases of $2.1 million and $1.4 million in our EMEA and Latin America markets, respectively, offset by a $0.8 million net increase in our other international markets.

International license revenue for the six months ended September 30, 2009 increased by $10.4 million, or 6.8%, over the prior year period, due to a $9.7 million increase in ESM license revenue and a $0.7 million increase in MSM license revenue. The ESM license revenue increase was attributable to increases of $5.6 million, $3.6 million and $1.9 million in our EMEA, Canada and Asia Pacific markets, respectively, partially offset by a $1.4 million decrease in our Latin America market. The MSM license revenue increase was attributable to a $2.0 million increase in our Latin America market, offset by a combined $1.3 million decrease in our other international markets.

Domestic Maintenance Revenue

Domestic maintenance revenue represented $140.6 million, or 54.6%, and $279.0 million, or 54.9%, of our total maintenance revenue for the quarter and six months ended September 30, 2009, respectively, and $138.0 million, or 54.0%, and $275.9 million, or 54.1%, of our total maintenance revenue for the quarter and six months ended September 30, 2008, respectively.

Domestic maintenance revenue for the quarter ended September 30, 2009 increased by $2.6 million, or 1.9%, over the prior year quarter, due to a $2.9 million increase in MSM maintenance revenue offset by a $0.3 million decrease in ESM maintenance revenue.

Domestic maintenance revenue for the six months ended September 30, 2009 increased by $3.1 million, or 1.1%, over the prior year period, due to a $2.2 million increase in MSM maintenance revenue and $0.9 million increase in ESM maintenance revenue.

International Maintenance Revenue

International maintenance revenue represented $116.8 million, or 45.4%, and $229.6 million, or 45.1%, of our total maintenance revenue for the quarter and six months ended September 30, 2009, respectively, and $117.5 million, or 46.0%, and $233.9 million, or 45.9%, of our total maintenance revenue for the quarter and six months ended September 30, 2008, respectively.

International maintenance revenue for the quarter ended September 30, 2009 decreased by $0.7 million, or 0.6%, from the prior year quarter, due to a $1.9 million decrease in MSM maintenance revenue, partially offset by a $1.2 million . . .