Prepared by MERRILL CORPORATION

SERENA SOFTWARE, INC.
(Exact name of registrant as specified in its charter)

500 AIRPORT BOULEVARD, 2ND FLOOR, BURLINGAME, CALIFORNIA 94010-1904
(Address of principal executive offices, including zip code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

The number of shares of the registrant's Common Stock, par value $0.001, outstanding as of August 31, 2001 was 40,207,878.

SERENA SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 31, 2001 AND 2000
(UNAUDITED)

SERENA SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 2001 AND 2000
(UNAUDITED)

SERENA Software, Inc. ("SERENA" or the "Company") is an industry-leading provider of software infrastructure products and consulting best practices that automate enterprise software and Web content changes. Its principal markets are North America, and to a lesser extent, Europe.

The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements, and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, except as otherwise noted, necessary for their fair presentation. These unaudited condensed consolidated financial statements and the notes thereto have been prepared in accordance with the Instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America and Regulation S-X for annual financial statements. For these additional disclosures, readers should refer to the Company's annual report on Form 10-K for the fiscal year ended January 31, 2001. The interim results presented are not necessarily indicative of results for any subsequent quarter or for the fiscal year ending January 31, 2002.

Basic net income per share is computed using the weighted-average number of shares of common stock outstanding. Diluted net income per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, potentially dilutive common shares from restricted stock and options to purchase common stock using the treasury stock method.

The following is a reconciliation of the shares used in the computation of basic and diluted net income per share:

On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangibles."

SFAS No. 141 supercedes Accounting Principles Board Opinion No. 16 ("APB 16"), "Business Combinations." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting and that the use of the pooling-of-interests method will therefore no longer be permitted. The Company adopted the provisions of SFAS No. 141 commencing July 1, 2001. The adoption of SFAS No. 141 has not impacted the Company's financial position or results of operations.

SFAS No. 142 supercedes APB 17 "Intangible Assets." SFAS No. 142 requires that goodwill resulting from a business combination no longer be amortized to earnings, but instead be reviewed for

impairment. The Company is required to adopt SFAS No. 142 as of February 1, 2002. For goodwill resulting from business combinations prior to July 1, 2001, amortization of such goodwill will continue through January 31, 2002, but will cease February 1, 2002. For business combinations occurring on or after July 1, 2001, the associated goodwill will not be amortized. Upon adoption of SFAS No. 142, the Company is required to perform a transitional impairment test for all recorded goodwill within six months and, if necessary, determine the amount of an impairment loss by January 31, 2003. The effects of adopting SFAS No. 142 are currently being determined. The Company believes that some portion of the goodwill and intangible assets currently being amortized will not be amortized in the future. Amortization expense for the three months ended July 31, 2001 totaled $2.1 million.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. SFAS No. 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) and to depreciate that cost over the remaining useful life of the asset. The amount of the asset retirement obligation is revised at the end of each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. The Company is required to adopt SFAS No. 143 as of February 1, 2003. The Company does not expect SFAS No. 143 to have a material impact on its financial position or results of operations.

(3) Registration of Additional Common Stock and Increase in Authorized Common Stock

On June 1, 2001, the Company filed with the Securities and Exchange Commission a Form S-8 Registration Statement Under the Securities Act of 1933 (the "Registration Statement"). In the Registration Statement, the Company registered a total of 2,562,500 shares of the Company's common stock, $.001 par value per share (the "Shares"), of which (i) 1,927,500 Shares were registered under the Amended and Restated 1997 Stock Option and Incentive Plan, (ii) 575,000 Shares were registered under the 1999 Employee Stock Option Plan and (iii) 60,000 Shares were registered under the 1999 Director Option Plan.

On June 29, 2001, the Company at its Annual Meeting of Stockholders approved an amendment to SERENA's Amended and Restated Certificate of Incorporation to increase the authorized number of shares of common stock of SERENA from 60,000,000 to 90,000,000.

On August 6, 2001, in response to the general weakening of the worldwide economy and resulting IT spending slowdown, the Company announced and began to execute its plan to reduce workforce by approximately 12% or 45 positions affecting all parts of the organization. The Company expects to realize cost savings going forward as a result of this reduction and other cost savings initiatives implemented. In connection with these actions, the Company expects to take a one-time restructuring charge in the third fiscal quarter of approximately $2 to $3 million.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements under the private securities reform act of 1995. Certain statements under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report are "forward-looking statements." These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts. When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under "Factors That May Affect Future Results" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in, or incorporated by reference into, this report. Factors that could cause or contribute to such differences include but are not limited to, our reliance on our mainframe products for revenue; the percentage of license revenue typically closed at the end of each quarter making estimation of operating results prior to the end of the quarter extremely uncertain; weak economic conditions world-wide which may continue to affect the overall demand for software and services, which could result in decreased revenues or lower revenue growth rates; changes in revenue mix and seasonality; our ability to deliver our products on the distributed systems platform; dependence on revenues from our installed base; continued demand for additional mainframe MIPS capacity; expansion of our professional services and international organizations; our ability to successfully execute on our restructuring plans including effectively managing our workforce reduction; and our ability to manage our growth. We assume no obligation to update the forward-looking information contained in this report. It is important that the discussion below be read together with the attached condensed consolidated financial statements and notes thereto, with the discussion of such risks and uncertainties and with the audited financial statements and notes thereto, and the "Management's Discussion and Analysis of Financial Condition and Results of Operations," contained in the Company's Form 10-K for fiscal 2001.

Product Renaming to Reflect Enhanced Product Integration and Growth in New Markets

Product names set forth below in this discussion and analysis of SERENA's financial condition and results of operations reflect the Company's product naming convention announced April 30, 2001. The Company has renamed its full line of software change management products, designed to reflect the enhanced integration that the products increasingly share, as well as our entrance into the Web content management market. The Company has organized its integrated suite of products under two primary product families, SERENA ChangeMan and SERENA StarTool. For a listing of the old and new product names and descriptions, please see the Company's Form 10-K for fiscal 2001 filed with the Securities and Exchange Commission on April 30, 2001 and the Company's Press Release "SERENA Announces Product Renaming to Reflect Enhanced Product Integration, Growth in New Markets" dated April 30, 2001.

SERENA Software, Inc. is an industry leading provider of software infrastructure products and consulting best practices that automate enterprise software and Web content changes. SERENA's eBusiness Infrastructure Change Management strategy manages the change process throughout the entire eBusiness lifecycle across multiple platforms—from the mainframe to the Web.

The Company has grown rapidly as total revenue has increased from $32.1 million in fiscal 1998 to $103.6 million in fiscal 2001. The growth in total revenue has been primarily attributable to increased demand for our mainframe products, and to a lesser extent in the last two fiscal years, the introduction of our distributed systems products, primarily ChangeMan DS, into the marketplace. In general, demand has been increasing as a result of greater awareness of and need for automated third party SCM solutions.

However, in the current fiscal year, and more predominantly in the current fiscal quarter ended July 31, 2001, the Company has experienced a decline in its total revenue growth. The overall demand

for the Company's software depends in large part on general economic and business conditions. The recent general weakening of the worldwide economy and resulting slowdown in IT spending contributed to an overall decrease in total revenues.

On August 6, 2001, in response to the aforementioned weakening in the worldwide economy and resulting decline in IT spending, the Company announced and began to execute its plan to reduce workforce by approximately 12% or 45 positions affecting all parts of the organization. The Company expects to realize cost savings going forward as a result of this reduction and other cost savings initiatives implemented. In connection with these actions, the Company expects to take a one-time restructuring charge in the third fiscal quarter of approximately $2 to $3 million.

References to the dollar and percentage increases or decreases set forth below in this discussion and analysis of SERENA's results of operations are derived from comparisons between SERENA's condensed consolidated statements of income and comprehensive income for the three and six month periods ended July 31, 2001 to the condensed consolidated statements of income and comprehensive income for the three and six month periods ended July 31, 2000.

The following table sets forth our results of operations expressed as a percentage of total revenue. These operating results for the periods presented are not necessarily indicative of the results for the full fiscal year or any other period.

			Percentage of Revenue Three Months Ended July 31,				Percentage of Revenue Six Months Ended July 31,
			2001		2000		2001		2000
Revenue:
	Software licenses		49.4	%	56.5	%	51.3	%	55.8	%
	Maintenance		43.7	%	36.0	%	40.7	%	37.6	%
	Professional services		6.9	%	7.5	%	8.0	%	6.6	%

		TOTAL REVENUE	100.0	%	100.0	%	100.0	%	100.0	%

Cost of revenue:
	Software licenses		0.8	%	1.8	%	0.6	%	2.0	%
	Maintenance		6.2	%	6.0	%	5.7	%	6.8	%
	Professional services		7.0	%	6.3	%	7.3	%	5.7	%

		TOTAL COST OF REVENUE	14.0	%	14.1	%	13.6	%	14.5	%

		GROSS PROFIT	86.0	%	85.9	%	86.4	%	85.5	%

Operating expenses:
	Sales and marketing		33.8	%	27.9	%	31.5	%	28.8	%
	Research and development		15.7	%	9.4	%	14.4	%	9.5	%
	General and administrative		7.7	%	9.9	%	6.5	%	10.9	%
	Stock-based compensation		0.1	%	0.2	%	0.2	%	0.3	%
	Amortization of intangible assets		8.8	%	2.9	%	8.2	%	2.7	%
	Acquired in-process research and development		—		1.9	%	—		1.1	%

		TOTAL OPERATING EXPENSES	66.1	%	52.2	%	60.8	%	53.3	%

OPERATING INCOME			19.9	%	33.7	%	25.6	%	32.2	%
Interest and other income, net			6.7	%	8.2	%	6.4	%	8.3	%

	Income before income taxes		26.6	%	41.9	%	32.0	%	40.5	%
Income taxes			10.9	%	18.4	%	13.1	%	17.6	%

	NET INCOME		15.7	%	23.5	%	18.9	%	22.9	%

We derive revenue from software licenses, maintenance and professional services. Our total revenue decreased $1.8 million or 7% to $23.4 million in the current fiscal quarter ended July 31, 2001 from $25.2 million in the same quarter a year ago. For the six months ended July 31, 2001, total revenue increased $4.6 million or 10% to $50.9 million from $46.3 million in the same six month period a year ago. International sales represented approximately 19% and 22% of our total revenue in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to 15% and 14% in the same quarter and six months a year ago.

Software Licenses. Software licenses revenue as a percentage of total revenue was 49% and 51% in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to 57% and 56% in the same quarter and six months a year ago. Software licenses revenue decreased $2.7 million or 19% to $11.6 million in the current fiscal quarter from $14.3 million in the same quarter a year ago. For the six month period ended July 31, 2001, software licenses revenue increased $0.3 million or 1% to $26.1 million from $25.8 million in the same six months a year ago. For the quarter, the dollar decrease is generally attributed to a slowdown in IT spending across all products as a result of the weak economic conditions in the U.S. and abroad and, to a lesser extent, sales execution delays and customers negotiating more aggressively on price and terms. Our StarTool suite of products, primarily StarTool FDM and StarTool IOO, accounted for 25% of total software licenses revenue in both the current fiscal quarter and fiscal six months ended July 31, 2001, up from 11% and 10% in the same quarter and six months, respectively, a year ago. ChangeMan for z/OS & OS/390, StarTool FDM and ChangeMan DS together make up a significant portion of total software licenses revenue. These products accounted for $6.8 million or 59% and $16.5 million or 63% of total software licenses revenue in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to $7.5 million or 53% and $15.2 million or 59% in the same quarter and six months a year ago, respectively.

Maintenance. Maintenance revenue as a percentage of total revenue was 44% and 41% in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to 36% and 38% in the same quarter and six months a year ago. Maintenance revenue increased $1.2 million or 13% to $10.3 million in the current fiscal quarter from $9.1 million in the same quarter a year ago. For the six months ended July 31, 2001, maintenance revenue increased $3.3 million or 19% to $20.7 million from $17.4 million in the same six months a year ago. For both the quarter and six months, the dollar increase reflects growth in installed software licenses base, as new licenses generally include one year of maintenance, renewals of maintenance agreements by existing customers and, to a lesser extent, maintenance price increases; all partially offset by some cancellations of Comparex maintenance contracts.

Professional Services. Professional services revenue as a percentage of total revenue was 7% and 8% in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to 8% and 7% in the same quarter and six months a year ago. Professional services revenue decreased $0.3 million or 15% to $1.6 million in the current fiscal quarter from $1.9 million in the same quarter a year ago. For the six months ended July 31, 2001, professional services revenue increased $1.0 million or 34% to $4.1 million from $3.1 million in the same six months a year ago. For the fiscal quarter ended July 31, 2001, the dollar decrease is predominantly the result of a weak U.S. economy which generated declining license revenues and therefore fewer consulting opportunities and the deferral of existing consulting projects. For the fiscal six months ended July 31, 2001, the dollar increase is generally attributable to greater consulting opportunities in the first fiscal quarter resulting from our larger installed customer base and our expanded consulting service capabilities, all partially offset by the weak U.S. economy.

Cost of revenue, which consists of cost of software licenses, cost of maintenance and cost of professional services, was $3.3 million or 14% and $6.9 million or 14% of total revenue in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to $3.6 million or 14% and $6.7 million or 15% in the same quarter and six months a year ago. Cost of revenue decreased $0.3 million or 8% to $3.3 million in the current fiscal quarter from $3.6 million in the same quarter a year ago. For the six months ended July 31, 2001, cost of revenue increased $0.2 million or 3% to $6.9 million from $6.7 million in the same six months a year ago. As a percentage of total revenue, cost of revenue has remained relatively constant at 14% for the current fiscal quarter and fiscal six months and the same periods a year ago as margin improvements in software licenses and maintenance have been offset by margin declines in professional services.

Software Licenses. Cost of software licenses consists principally of fees associated with our StarTool FDM products and more recently, and to a lesser extent, fees associated with integrating third party technology into our ChangeMan DS and ChangeMan ALM distributed systems products. In the first quarter of fiscal 2001, cost of software licenses also included sublicense fees associated with our StarTool FDM and ChangeMan SSM products. Cost of software licenses as a percentage of total software licenses revenue was 2% and 1% in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to 3% and 4% in the same quarter and six months a year ago. Cost of software licenses decreased $0.3 million to $0.2 million in the current fiscal quarter from $0.5 million in the same quarter a year ago. For the six months ended July 31, 2001, cost of software licenses decreased $0.6 million to $0.3 million from $0.9 million in the same six months a year ago. For both the quarter and six months, when compared to the same periods a year ago, the decreases in absolute dollars and the margin improvements are attributable to the decline of sublicense fees associated with our ChangeMan SSM and StarTool FDM products in the second and third quarters of fiscal 2001, respectively.

Maintenance. Cost of maintenance consists primarily of salaries, bonuses and other costs associated with our customer support organizations. In the first quarter of fiscal 2001, cost of maintenance also included sublicense fees associated with our StarTool FDM and ChangeMan SSM products. Cost of maintenance as a percentage of total maintenance revenue was 14% in both the current fiscal quarter and fiscal six months ended July 31, 2001, as compared to 17% and 18% in the same quarter and six months, respectively, a year ago. Cost of maintenance decreased $0.1 million or 4% to $1.4 million in the current fiscal quarter from $1.5 million in the same quarter a year ago. For the six months ended July 31, 2001, cost of maintenance decreased $0.3 million or 9% to $2.9 million from $3.2 million in the same six months a year ago. The decreases, both in absolute dollar terms and as a percentage of total maintenance revenue, is attributable to the decline of sublicense fees associated with our StarTool FDM and ChangeMan SSM products, all partially offset by increased expenses associated with our customer support organization including personnel additions needed to support the maintenance revenue growth.

Professional Services. Cost of professional services consists of salaries, bonuses and other costs associated with supporting our professional services organization. Cost of professional services as a percentage of total professional services revenue was 102% and 91% in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to 84% and 87% in the same quarter and six months a year ago. Cost of professional services was unchanged at $1.6 million for both the current fiscal quarter and the same quarter a year ago. For the current fiscal six months ended July 31, 2001, cost of professional services increased $1.1 million or 40% to $3.7 million from $2.6 million in the same six months a year ago. In absolute dollar terms and as a percentage of total professional services revenues, increases are predominantly due to the rates of increases in expenses associated with our professional services organization, including personnel additions and other infrastructure costs needed to support the professional services revenue, being greater than rates of increases in professional services revenue.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses, payroll taxes, and employee benefits as well as travel, entertainment and marketing expenses. Sales and marketing expenses as a percentage of total revenue were 34% and 32% in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to 28% and 29% in the same quarter and six months a year ago. Sales and marketing expenses increased $0.9 million or 13% to $7.9 million in the current fiscal quarter from $7.0 million in the same quarter a year ago. For the six months ended July 31, 2001, sales and marketing expenses increased $2.7 million or 20% to $16.1 million from $13.4 million in the same six months a year ago. For both the quarter and six months, the dollar increases are due primarily to our continued expansion of our direct sales and marketing organizations to support license revenue growth, and to a lesser extent, our marketing initiatives surrounding our distributed systems products and the development of our international sales and telesales efforts. As a percentage of total revenue, sales and marketing expenses increased for both the quarter and six months, when compared to the same periods a year ago, due to the expansion of the sales and marketing organizations which preceded the recent weakening of the worldwide economy and resulting decline in IT spending that contributed to the decline in revenues.

Research and Development. Research and development expenses consist primarily of salaries, bonuses, payroll taxes, and employee benefits and costs attributable to research and development activities. Research and development expenses as a percentage of total revenue were 16% and 14% in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to 9% and 10% in the same quarter and six months a year ago. Research and development expenses increased $1.3 million or 55% to $3.7 million in the current fiscal quarter from $2.4 million in the same quarter a year ago. For the six months ended July 31, 2001, research and development expenses increased $2.9 million or 67% to $7.3 million from $4.4 million in the same six months a year ago. In absolute dollar terms and as a percentage of total revenue, the increases are primarily due to increases in salary, bonus, payroll tax, employee benefits and other headcount-related costs which resulted from the expansion of our research and development efforts to enhance existing products and develop our distributed systems products, and is also due to the Company's acquisition of UltiMIS and the StarTool asset purchase late in fiscal 2001.

General and Administrative. General and administrative expenses consist primarily of salaries, bonuses, payroll taxes, and benefits and certain non-allocable administrative costs, including legal and accounting fees and bad debts. General and administrative expenses as a percentage of total revenue were 8% and 7% in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to 10% and 11% in the same quarter and six months a year ago. General and administrative expenses decreased $0.7 million or 27% to $1.8 million in the current fiscal quarter from $2.5 million in the same quarter a year ago. For the six months ended July 31, 2001, general and administrative expenses decreased $1.7 million or 34% to $3.3 million from $5.0 million in the same six months a year ago. In absolute dollars and as a percentage of total revenue, the decreases are predominantly the result of efficiency gains and cost and growth controls put in place within our administrative infrastructure, and to a lesser extent, a decrease in legal fees as a result of the Company's lawsuit settlement in the third quarter of fiscal 2001.

Amortization of Goodwill and Other Intangible Assets. In connection with the acquisitions of Optima Software, Inc. in September 1998, Diamond in June 1999, HPS in May 2000 and UltiMIS in September 2000, and the StarTool asset purchase in August 2000, the Company has recorded $66.6 million in intangible assets, of which $54.3 million is unamortized as of July 31, 2001. Combined, intangible assets are being amortized over periods of one year or less on $0.9 million, two to seven years on $44.5 million and fifteen years on the remaining $21.2 million. Of the total intangible assets, $2.1 million and $4.2 million was amortized in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to $0.7 million and $1.3 million in the same quarter and six

months a year ago. We expect to amortize an additional $2.1 million per quarter over the next two quarters through the end of fiscal 2002.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles," which we intend to adopt on February 1, 2002. Upon adoption, goodwill with identifiable intangible assets with indefinite lives will no longer be amortized. This statement will require that we evaluate our goodwill and identifiable intangible assets with indefinite useful lives for impairment. The Company is currently evaluating the provisions of SFAS No. 142. See Note 2 of Notes to Condensed Consolidated Financial Statements.

Acquired In-Process Research and Development. In connection with SERENA's acquisition of High Power Software, Inc. in the second quarter of fiscal 2001, the Company recorded a one-time charge of $0.5 million for acquired in-process research and development.

Interest and Other Income, net. Interest and other income, net decreased $0.5 million or 23% to $1.6 million and $0.6 million or 16% to $3.3 million in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, from $2.1 million and $3.9 million in the same quarter and six months a year ago. The dollar decreases in interest and other income, net are generally due to reduced market interest rates, partially offset by increases in balances on interest-bearing accounts, such as cash and cash equivalents, and both short and long-term investments, resulting from accumulation of earnings.

Income Taxes. Income taxes in absolute dollar terms and effective income tax rates were $2.6 million or 41% and $6.7 million or 41% in the current fiscal quarter and fiscal six months ended July 31, 2001, respectively, as compared to $4.7 million or 44% and $8.2 million or 43% in the same quarter and six months a year ago. The Company's effective income tax rate has decreased in the current fiscal quarter, when compared to the same quarter a year ago, predominantly due to a decrease in nondeductible charges of $0.1 million. For the six months ended July 31, 2001, when compared to the same six months a year ago, the Company's effective income tax rate decreased predominantly due to increased revenue growth offset in part by an increase in nondeductible charges of $0.3 million. SERENA's effective income tax rate has historically benefited from the United States research and experimentation tax credit and tax benefits generated from export sales made from the United States.

Since SERENA's inception, we have financed our operations and met our capital requirements through cash flows from operations. As of July 31, 2001, SERENA had $91.3 million in cash and cash equivalents and an additional $33.3 million and $9.3 million in short and long-term investments, respectively, consisting principally of high grade commercial paper, certificates of deposit, and short and long-term bonds. Cash flows provided by operating activities were $17.3 million and $13.3 million in the current fiscal six months ended July 31, 2001 and the same six months a year ago, respectively. In the current fiscal six months, SERENA's cash flows provided by operating activities exceeded net income principally due to a decrease in trade accounts receivable, the inclusion of non-cash expenses in net income and cash collections in advance of revenue recognition for maintenance contracts; all partially offset by decreases in income taxes payable. In the same six months a year ago, SERENA's cash flows provided by operating activities exceeded net income principally due to cash collections in advance of revenue recognition for maintenance contracts and the inclusion of non-cash expenses in net income; all partially offset by an increase in trade accounts receivable. Cash used in investing activities were predominantly related to the purchase of short and long-term investments totaling $15.2 million in the current fiscal six months ended July 31, 2001 and $5.0 million in the same six months a year ago, and to a lesser extent, purchases of computer equipment and office furniture and equipment in both six

month periods. For the six months ended July 31, 2000 from the prior fiscal year, cash used in investing activities also included $1.6 million which the Company paid, net of cash acquired, for acquisitions. Cash flows provided by financing activities were entirely related to the exercise of stock options under the employee stock option plan totaling $2.4 million and $0.6 million in the current fiscal six months and the same six months a year ago, respectively; payment of principal on notes receivable from stockholders totaling $1.4 million and $0.2 million, respectively; and the sale of common stock under the employee stock purchase plan totaling $1.0 million and $0.8 million, respectively.

At July 31, 2001, the Company did not have any material commitments for capital expenditures and had no revolving credit agreements or other term loan agreements with any banks or other financial institutions.

At July 31, 2001, the Company had working capital of $114.7 million, trade accounts receivable, net of allowances, of $12.5 million and total deferred revenues of $25.9 million.

We believe that current cash and short-term investments, and cash flows from operations will satisfy our working capital and capital expenditure requirements for at least the next twelve months.

This report, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements under the Private Securities Reform Act of 1995 and other prospective information relating to future events. These forward-looking statements and other prospective information are subject to certain risks and uncertainties that could cause results to differ materially from historical results or anticipated results, including but not limited to, our reliance on our mainframe products for revenue; the percentage of license revenue typically closed at the end of each quarter making estimation of operating results prior to the end of the quarter extremely uncertain; weak economic conditions world-wide which may continue to affect the overall demand for software and services, which could result in decreased revenues or lower revenue growth rates; changes in revenue mix and seasonality; our ability to deliver our products on the distributed systems platform; dependence on revenues from our installed base; continued demand for additional mainframe MIPS capacity; expansion of our professional services and international organizations; our ability to successfully execute on our restructuring plans including effectively managing our workforce reduction; our ability to manage our growth; and the following:

There Are Many Factors, Including Some Beyond Our Control, That May Cause Fluctuations in Our Quarterly Operating Results

Our quarterly operating results have varied greatly in the past and may vary greatly in the future depending upon a number of factors described below and elsewhere in this "Factors That May Affect Future Results" section of this report, including many that are beyond our control. As a result, we believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful, and you should not rely on them as an indication of our future performance.

Our software license revenue in any quarter depends on orders booked and shipped in the last month, weeks or days of that quarter. At the end of each quarter, we typically have either minimal or no backlog of orders for the subsequent quarter. If a large number of orders or several large orders do not occur or are deferred, our revenue in that quarter could be substantially reduced. This would materially adversely affect our operating results and could impair our business in future periods.

Because we do not know when, or if, our potential customers will place orders and finalize contracts, we cannot accurately predict our revenue and operating results for future quarters. Historically, a majority of our revenue has been attributable to the licenses of our mainframe software products. Changes in the mix of software products and services sold by us, including the mix between higher margin software products and lower margin maintenance and services, could materially affect our operating results for future quarters.

Seasonal Trends in Sales of Our Software Products May Affect Our Quarterly Operating Results

We have experienced and expect to continue to experience seasonality in sales of our software products. These seasonal trends materially affect our quarter-to-quarter operating results. Revenue and operating results in our quarter ending January 31 are typically higher relative to our other quarters, because many customers make purchase decisions based on their calendar year-end budgeting requirements. In addition, our January quarter tends to reflect the effect of the incentive compensation structure for our sales organization, which is based on satisfaction of fiscal year-end quotas. As a result, we have historically experienced a substantial decline in revenue in the first quarter of each fiscal year relative to the preceding quarter. We are also currently attempting to expand our presence in international markets, particularly in Europe. We expect our quarter ending October 31 to reflect the effects of summer slowing of international business activity and spending activity generally associated with that time of year.

Ecomonic Conditions Could Adversely Affect Our Revenue Growth and Ability to Forecast Revenue

The revenue growth and profitability of our business depends on the overall demand for eBusiness application software and services. Because our sales are primarily to major corporate and government customers, our business also depends on general economic and business conditions. The general weakening of the worldwide economy has caused the Company to experience a decrease in the growth rate of its software licenses revenues in the first six months of fiscal 2002. A softening of demand for computer software caused by a continued weakening of the economy, domestically or internationally, may result in a continued decrease in revenues and revenue growth rates.

Management identify, track and forecast future revenues, backlog and trends in our business. Our sales personnel monitor the status of all proposals, such as the estimated date when they estimate that a transaction will close and the potential dollar amount of such sale. We aggregate these estimates periodically in order to generate a sales pipeline and then evaluate the pipeline at various times to look for trends in our business. While this pipeline analysis provides visibility to our potential customers and the associated revenues for budgeting and planning purposes, these pipeline estimates may not consistently correlate to revenues in a particular quarter or ever. A slowdown in the economy, domestically or internationally, has caused and may continue to cause customer purchasing decisions to be delayed, reduced in amount or cancelled, all of which have reduced and could continue to reduce the rate of conversion of the pipeline into contracts. A variation in the pipeline or in the conversion of the pipeline into contracts could cause us to plan or budget improperly and thereby could adversely affect our business or results of operations. In addition, primarily due to a substantial portion of our software licenses revenue contracts closing in the latter part of a quarter, management may not be able to adjust the Company's cost structure in response to a variation in the conversion of the pipeline into contracts in a timely manner, and thereby adversely affect our business or results of operations.

We Expect That Our Operating Expenses Will Increase Substantially in the Future and These Increased Expenses May Adversely Affect Our Future Operating Results and Financial Condition

Although SERENA has been profitable in recent years, we may not remain profitable on a quarterly or annual basis in the future. We anticipate that our expenses will increase substantially in the foreseeable future as we:

With these additional expenses, in order to maintain our current levels of profitability, we will be required to increase our revenue correspondingly. Any failure to significantly increase our revenue as we implement our product, service and distribution strategies would materially adversely affect our business, quarterly and annual operating results and financial condition. Although our revenue has grown in recent years, we do not believe that we will maintain this rate of revenue growth. In addition, we may not experience any revenue growth in the future, and our revenue could in fact decline. Our efforts to expand our software product suites, sales and marketing activities, direct and indirect distribution channels and professional service offerings and to pursue strategic relationships or acquisitions may not succeed or may prove more expensive than we currently anticipate. As a result, we cannot predict our future operating results with any degree of certainty.

If We Are Unable to Manage Our Announced Workforce Reduction, Our Business Could be Adversely Affected

In August 2001, we announced and began to execute a plan to reduce our workforce, which affected all parts of the organization. If we are unable to effectively manage this workforce reduction or the potential legal risks associated with terminations of employees, particularly internationally, our business operations could be subject to disruption and our business and results of operations could be adversely affected.

Our Future Revenue is Substantially Dependent Upon Our Installed Customers Renewing Maintenance Agreements for Our Products and Licensing or Upgrading Additional SERENA SCM Products; Our Future Professional Service and Maintenance Revenue is Dependent on Future Sales of Our Software Products

We depend on our installed customer base for future revenues from maintenance renewal fees and licenses or upgrades of additional SCM products. If our customers do not purchase additional products, upgrade existing products or cancel or fail to renew their maintenance agreements, this could materially adversely affect our business and future quarterly and annual operating results. The terms of our standard license arrangements provide for a one-time license fee and a prepayment of one year of software maintenance and support fees. The maintenance agreements are renewable annually at the option of the customers and there are no minimum payment obligations or obligations to license additional software. Therefore, our current customers may not necessarily generate significant maintenance revenue in future periods. In addition, our customers may not necessarily purchase additional products, upgrades or professional services. Our professional service revenue and maintenance revenue are also dependent upon the continued use of these services by our installed customer base. Any downturn in our software license revenue would have a negative impact on the growth of our professional service revenue and maintenance revenue in future quarters.

We Have Relied and Expect to Continue to Rely on Sales of Our Mainframe Products for Our Revenue

Historically, the majority of our software license revenue has resulted from the sale of our mainframe products. Any factors adversely affecting the pricing of, demand for or market acceptance of our mainframe products, such as competition or technological change, could materially adversely affect our business and quarterly and annual operating results. In particular, ChangeMan for z/OS & OS/390 and Comparex, two of our mainframe products, have been responsible for a substantial majority of our revenue. In the current fiscal quarter ended July 31, 2001 and the same quarter from a year ago, sales of ChangeMan z/OS & OS/390 and Comparex together accounted for approximately 59% and 65% of our total software licenses revenue, respectively. We expect that these products will continue to account for a large portion of our software licenses revenue for the foreseeable future. Our future operating results depend on the continued market acceptance of our mainframe products, including future enhancements.

Our Introduction of SERENA SCM Products for Distributed Systems May Not Be Successful

We introduced our ChangeMan DS product in fiscal 2000, our ChangeMan ALM and ChangeMan ECP products in fiscal 2001 and our ChangeMan WCM product in the first quarter of fiscal 2002. We are currently developing new products and enhancing our product suite to support additional distributed systems platforms. If we do not successfully develop, market, sell and support our distributed systems products, this would materially adversely affect our business and our future quarterly and annual operating results. Historically, the majority of our products have been designed for the mainframe platform, and the majority of our software license revenue, maintenance revenue and professional services revenue to date have been attributable to licenses for these mainframe products. We have limited experience developing, marketing, selling or supporting distributed systems products. Developing, marketing and selling our distributed systems products will require significant resources that we may not have. Our sales and marketing organizations have historically focused exclusively on sales of our products for the mainframe and have limited experience marketing and selling distributed systems products. Additionally, we have limited experience in providing support services for distributed systems products. Competition for experienced software engineers, sales personnel and support staff is intense and if we fail to attract qualified personnel this would impair our ability to support our distributed systems products. Many of our competitors have substantially greater experience providing distributed systems compatible software products than we do, and many also have significantly greater financial and organizational resources.

If the SCM Market Does Not Evolve as We Anticipate, Our Business Will Be Adversely Affected

If we fail to properly assess and address the SCM market or if our products and services fail to achieve market acceptance for any reason, our business and quarterly and annual operating results would be materially adversely affected. The SCM market is in an early stage of development. IT organizations have traditionally addressed SCM needs internally and have only recently become aware of the benefits of third-party SCM solutions as their SCM requirements have become more complex. Since the market for our products is still evolving, it is difficult to assess the competitive environment or the size of the market that may develop. Our future financial performance will depend in large part on the continued growth in the number of businesses adopting third-party SCM products and the expansion of their use on a company-wide basis. The SCM market for third-party products may grow more slowly than we anticipate. In addition, technologies, customer requirements and industry standards may change rapidly. If we cannot improve or augment our products as rapidly as existing technologies, customer requirements and industry standards evolve, our products or services could become obsolete. The introduction of new or technologically superior products by competitors could also make our products less competitive or obsolete. As a result of any of these factors, our position in existing markets or potential markets could be eroded.

Our Business is Dependent on the Continued Market for IBM and IBM-Compatible Mainframes

We are substantially dependent upon the continued use and acceptance of IBM and IBM-compatible mainframes and the growth of this market. If the role of the mainframe does not increase as we anticipate, or if it in any way decreases, this would materially adversely affect our business, future quarterly and annual operating results and financial condition. Additionally, if there is a wide acceptance of other platforms or if new platforms emerge that provide enhanced enterprise server capabilities, our business and future operating results may be materially adversely affected. The majority of our software license revenue to date has been attributable to sales of our mainframe products. We expect that, for the foreseeable future, the majority of our software license revenue will continue to come from sales of our mainframe products. As a result, future sales of our existing products and associated maintenance revenue and professional service revenue will depend on continued use of mainframes.

We May Experience Delays in Developing Our Products Which Could Adversely Affect Our Business

If we are unable, for technological or other reasons, to develop and introduce new and improved products in a timely manner, this could materially adversely affect our business and future quarterly and annual operating results. We have experienced product development delays in new version and update releases in the past and may experience similar or more significant product delays in the future. To date, none of these delays has materially affected our business. Difficulties in product development could delay or prevent the successful introduction or marketing of new or improved products or the delivery of new versions of our products to our customers. Any delay in releasing our new distributed systems products, for whatever reason, would impair our revenue growth.

We Have Experienced Significant Growth in Our Business in Recent Periods and Our Ability to Manage this Growth and Any Future Growth Will Affect Our Business

Our ability to compete effectively and to manage our recent growth, any future growth and our future quarterly and annual operating results will depend in part on our ability to implement and expand operational, customer support and financial control systems and to hire, train and manage our employees. We may not be able to augment or improve existing systems and controls or implement new systems and controls in response to future growth, if any. Any failure to manage growth could materially adversely affect our business. Our business has grown substantially in recent years, with total revenue increasing from $48.3 million in fiscal 1999 to $75.4 million in fiscal 2000 and to $103.6 million in fiscal 2001. In connection with this revenue growth, we continue to expand our sales, marketing and professional service activities and organizations. Additionally, our acquisitions of Diamond, HPS, the StarTool product and UltiMIS expanded our research and development organization. This growth has resulted, and any future growth will result, in new and increased responsibilities for management personnel.

We Intend to Expand Our International Operations and May Encounter a Number of Problems in Doing So; There Are Also a Number of Factors Associated With International Operations that Could Adversely Affect Our Business

Expansion of International Operations. We intend to expand the scope of our international operations and currently have sales subsidiaries in the United Kingdom, Germany, France and Belgium. If we are unable to expand our international operations successfully and in a timely manner, this could materially adversely affect our business and quarterly and annual operating results. Our continued growth and profitability will require continued expansion of our international operations, particularly in Europe. We have only limited experience in marketing, selling and supporting our products internationally. Additionally, we do not have any experience in developing foreign language versions of our products. Such development may be more difficult or take longer than we anticipate. We may not be able to successfully market, sell, deliver and support our products internationally.

Risks of International Operations. International sales represented approximately 25% and 17% of our total licenses revenue in the current fiscal quarter ended July 31, 2001 and the same quarter a year ago, respectively. Our international revenue is attributable principally to our European operations. Our international operations are, and any expanded international operations will be, subject to a variety of risks associated with conducting business internationally that could materially adversely affect our business and future quarterly and annual operating results, including the following:

Fluctuations in the Value of Foreign Currencies Could Result in Currency Transaction Losses for SERENA

A majority of our international business is conducted in foreign currencies, principally the British pound, the German deutsche mark and French franc. Fluctuations in the value of foreign currencies relative to the U.S. dollar will continue to cause currency transaction gains and losses. We cannot predict the effect of exchange rate fluctuations upon future quarterly and annual operating results. We may experience currency losses in the future. To date, we have not adopted a hedging program to protect SERENA from risks associated with foreign currency fluctuations.

Any Delays in Our Normally Lengthy Sales Cycles Could Result in Significant Fluctuations in Our Quarterly Operating Results

Our sales cycle typically takes six to 18 months to complete and varies from product to product. Any delay in the sales cycle of a large license or a number of smaller licenses could result in significant fluctuations in our quarterly operating results. The length of the sales cycle may vary depending on a number of factors over which we may have little or no control, including the size and complexity of a potential transaction and the level of competition that we encounter in our selling activities. Additionally, the emerging market for SCM products and services contributes to the lengthy sales process in that during the sales cycle we often have to teach potential customers about the use and benefits of our products. In certain circumstances, we license our software to customers on a trial basis to assist the customers in their evaluation of our products. Our sales cycle can be further extended for product sales made through third party distributors.

We May Be Unable to Successfully Complete Strategic Relationships or Acquisitions

We may be unable to successfully complete strategic relationships or acquisitions in pursuit of our growth strategy. One component of our growth strategy, entering into strategic relationships or the strategic acquisition of businesses, involves certain risks, including, among others, the following:

In addition, any such acquisition could materially adversely affect our financial results due to dilutive issuances of equity securities, the incurrence of additional debt and the amortization of expenses related to goodwill and other intangible assets, if any.

Our Executive Officers and Certain Key Personnel Are Critical to Our Business and Such Officers and Key Personnel May Not Remain with SERENA in the Future

Our success will depend to a significant extent on the continued service of our senior executives and certain other key employees, including certain sales, consulting, technical and marketing personnel. If we lost the services of one or more of our executives or key employees, including if one or more of

our executives or key employees decided to join a competitor or otherwise compete directly or indirectly with SERENA, this could materially adversely affect our business. In particular, we have historically relied on the experience and dedication of our product authors. With the exception of Douglas D. Troxel, SERENA's founder, Chief Technology Officer and Chairman of SERENA's board of directors, the employment of all of our senior and key employees, including key product authors, is at will. Mr. Troxel's employment is on a year-to-year basis. In addition, we do not maintain key man life insurance on our employees and have no plans to do so.

SERENA is Subject to Intense Competition in the SCM Industry and We Expect to Face Increased Competition in the Future, Including Competition in the SCM Distributed Systems Market

We may not be able to compete successfully against current or future competitors and such inability would materially adversely affect our business, quarterly and annual operating results and financial condition. The market for our products is highly competitive and diverse. Moreover, the technology for SCM products may change rapidly. New products are frequently introduced, and existing products are continually enhanced. Competition may also result in changes in pricing policies by SERENA or our competitors which could materially adversely affect our business and future quarterly and annual operating results. Competitors vary in size and in the scope and breadth of the products and services that they offer. Many of our current and potential competitors have greater financial, technical, marketing and other resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the development, promotion and sale of their products than we can.

Mainframe Competition. We currently face competition from a number of sources, including:

Competition in the Distributed Systems SCM Market. We also face significant competition as we develop, market and sell our distributed systems products, including ChangeMan DS, ChangeMan ALM, ChangeMan ECP and ChangeMan WCM. If we are unable to successfully penetrate the distributed systems SCM market, our business and future quarterly and annual operating results will be materially adversely affected. Penetrating the existing distributed systems SCM market will be difficult. Competitors in the distributed systems market include Rational Software, Computer Associates, MERANT, Microsoft, Interwoven, Documentum, Vignette and other smaller private companies.

Future Competition. We may face competition in the future from established companies who have not previously entered the mainframe SCM market, from emerging software companies, or from other web content management software companies. Barriers to entry in the software market are relatively low. Increased competition may materially adversely affect our business and future quarterly and annual operating results due to price reductions, reduced gross margins and reduction in market share. Established companies may not only develop their own mainframe or distributed systems SCM solutions, but they may also acquire or establish cooperative relationships with our current competitors, including cooperative relationships between large, established companies and smaller private companies. Because larger companies have significant financial and organizational resources available, they may be able to quickly penetrate the mainframe or distributed systems SCM market through acquisitions or strategic relationships and may be able to leverage the technology and expertise of smaller companies and develop successful SCM products for the mainframe. We expect that the software industry, in general, and providers of SCM solutions, in particular, will continue to consolidate. It is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.

Bundling or Compatibility Risks. Our ability to sell our products also depends, in part, on the compatibility of our products with other third party products, particularly those provided by IBM. Developers of these third party products may change their products so that they will no longer be compatible with our products. These third party developers may also decide to bundle their products with other SCM products for promotional purposes. If that were to happen, our business and future quarterly and annual operating results may be materially adversely affected as we may be priced out of the market or no longer be able to offer commercially viable products.

Third Parties in the Future Could Assert That Our Products Infringe Their Intellectual Property Rights, Which Could Adversely Affect Our Business

Third parties may claim that our current or future products infringe their proprietary rights. Any claims of this type could affect our relationships with existing customers and may prevent future customers from licensing our products. Because we are dependent upon a limited number of products, any such claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or license agreements may not be available on acceptable terms or at all. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the software industry segment grows and the functionality of products in different industry segments overlaps. As a result of these factors, infringement claims could materially adversely affect our business.

Our future success will likely depend in large part on our ability to attract and retain additional experienced sales, technical, marketing and management personnel. In addition, we will need to attract and retain sufficient numbers of qualified software engineers, as well as sales and marketing and support personnel, and successfully develop, market and support our distributed systems product suite. Competition for such personnel in the computer software industry is intense, and in the past we have experienced difficulty in recruiting qualified personnel, especially developers and sales personnel. We expect competition for qualified personnel to remain intense, and we may not succeed in attracting or retaining such personnel. If we do not, this could materially adversely affect our business and future quarterly and annual operating results. In addition, new employees generally require substantial training in the use of our products. This training will require substantial resources and management attention.

International Operations. We intend to expand the scope of our international operations and these plans will require us to attract experienced management, service, marketing, sales and support personnel for our international offices. Competition for such personnel is intense, and we may not be able to attract or retain such experienced personnel.

Non-U.S. Citizens Working in the United States. To achieve our business objectives, we may recruit and employ skilled technical professionals from other countries to work in the United States. Limitations imposed by federal immigration laws and the availability of visas could materially adversely affect our ability to attract necessary qualified personnel. This may have a material adverse effect on our business and future quarterly and annual operating results.

Our Industry Changes Rapidly Due to Evolving Technology Standards And Our Future Success Will Depend on Our Ability to Continue to Meet the Sophisticated Needs of Our Customers

Our future success will depend on our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging hardware, software, database and networking platforms particularly for our distributed systems products. We will have to develop and introduce enhancements to our existing products and new products on a timely basis to keep pace with technological developments, evolving industry standards and changing customer requirements. We expect that we will have to respond quickly to rapid technological change, changing customer needs, frequent new product

introductions and evolving industry standards that may render existing products and services obsolete. As a result, our position in existing markets or potential markets could be eroded rapidly by product advances. The life cycles of our products are difficult to estimate. Our growth and future financial performance will depend in part upon our ability to enhance existing applications, develop and introduce new applications that keep pace with technological advances, meet changing customer requirements and respond to competitive products. We expect that our product development efforts will continue to require substantial investments. We may not have sufficient resources to make the necessary investments. Any of these events could have a material adverse effect on our business, quarterly and annual operating results and financial condition.

Errors in Our Products or the Failure of Our Products to Conform to Specifications Could Result in Our Customers Demanding Refunds from Us or Asserting Claims for Damages Against Us

Because our software products are complex, they often contain errors or "bugs" that can be detected at any point in a product's life cycle. While we continually test our products for errors and work with customers through our customer support services to identify and correct bugs in our software, we expect that errors in our products will continue to be found in the future. Although many of these errors may prove to be immaterial, certain of these errors could be significant. Detection of any significant errors may result in, among other things, loss of, or delay in, market acceptance and sales of our products, diversion of development resources, injury to our reputation, or increased service and warranty costs. These problems could materially adversely affect our business and future quarterly and annual operating results. In the past we have discovered errors in certain of our products and have experienced delays in the shipment of our products during the period required to correct these errors. These delays have principally related to new version and product update releases. To date none of these delays have materially affected our business. However, product errors or delays in the future, including any product errors or delays associated with the introduction of our distributed systems products, could be material. In addition, in certain cases we have warranted that our products will operate in accordance with specified customer requirements. If our products fail to conform to such specifications, customers could demand a refund for the software license fee paid to us or assert claims for damages.

Product Liability Claims Asserted Against Us in the Future Could Adversely Affect Our Business

We may be subject to claims for damages related to product errors in the future. A material product liability claim could materially adversely affect our business. Our license agreements with our customers typically contain provisions designed to limit exposure to potential product liability claims. SERENA's standard software licenses provide that if our products fail to perform, we will correct or replace such products. If these corrective measures fail, we may be required to refund the license fee for such non-performing product. However, our standard license agreement limits our liability for non-performing products to the amount of license fee paid, if the license has been in effect for less than one year, or to the amount of the licensee's current annual maintenance fee, if the license is more than one year old. Our standard license also provides that SERENA shall not be liable for indirect or consequential damages caused by the failure of our products. Such limitation of liability provisions may, however, not be effective under the laws of certain jurisdictions to the extent local laws treat certain warranty exclusions as unenforceable. Although we have not experienced any product liability claims to date, the sale and support of our products entail the risk of such claims.

The market price of our common shares has fluctuated significantly in recent months, and we expect that the market price of our common shares may fluctuate substantially as a result of variations in our quarterly operating results and market conditions. These fluctuations may be exaggerated if the

trading volume of our common shares is low. In addition, the market price of our common shares may fall dramatically in response to a variety of factors, including:

Because of this volatility, we may fail to meet the expectations of our stockholders or of securities analysts at some time in the future and the trading prices of our securities could decline as a result.

In addition, equity securities of many technology companies have recently experienced significant price and volume fluctuations. These price and volume fluctuations are sometimes unrelated to the operating performance of the affected companies. Volatility in the market price of our common shares could result in securities class action litigation. This type of litigation, regardless of the outcome, could result in substantial costs to us and a diversion of our management's attention and resources.

The Company does not use derivative financial instruments in its investment portfolio and has no foreign exchange contracts. Its financial instruments consist of cash and cash equivalents, short and long-term investments, trade accounts and contracts receivable and accounts payable. The Company considers investments in highly liquid instruments purchased with a remaining maturity of 90 days or less to be cash equivalents. All of the Company's cash equivalents and short and long-term investments principally consist of commercial paper and debt securities, and are classified as available-for-sale as of July 31, 2001. The Company's exposure to market risk for changes in interest rates relates primarily to its short and long-term investments and short-term obligations, thus, fluctuations in interest rates would not have a material impact on the fair value of these securities.

Sales to foreign countries accounted for approximately 19% and 22% of the total revenue during the quarter and six months, respectively, ended July 31, 2001. Because the Company invoices certain of its foreign sales in currencies other than the United States dollar, predominantly the British pound sterling and German deutsche mark, and does not hedge these transactions, fluctuations in exchange rates could adversely affect the translated results of operations of the Company's foreign subsidiaries. Therefore, foreign exchange fluctuation could create a risk of significant balance sheet gains or losses on the Company's consolidated financial statements. However, given the Company's foreign subsidiaries' net book values as of July 31, 2001 and net cash flows for the most recent fiscal quarter and six months then ended, and fiscal year ended January 31, 2001, the Company believes that such foreign denominated balances and activity are not material.

Intangible Asset Risk. We have a substantial amount of intangible assets. Although at July 31, 2001 we believe our intangible assets are recoverable, changes in the economy, the business in which we operate and our own relative performance could change the assumptions used to evaluate intangible asset recoverability. We continue to monitor those assumptions and their consequent effect on the estimated recoverability of our intangible assets.

Board Nominees	Common For	Common Withheld
Douglas D. Troxel	36,673,196	162,341
Mark E. Woodward	36,669,422	166,155
Richard A. Doerr	36,673,339	162,198
Alan H. Hunt	36,263,486	572,051
Jerry T. Ungerman	36,692,764	142,773
Robert I. Pender, Jr.	36,670,296	165,241

Common For		Common Against		Abstained
36,386,922		210,468		238,147

Common For		Common Against		Abstained
36,800,622		28,822		6,093

No reports on Form 8-K were filed by the Company during the quarter ended July 31, 2001.

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Page
	PART I FINANCIAL INFORMATION

Item 1	Financial Statements:
	Condensed Consolidated Balance Sheets as of July 31, 2001 and January 31, 2001	3
	Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Six Months Ended July 31, 2001 and 2000	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2001 and 2000	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3	Quantitative and Qualitative Disclosures About Market Risk	23
	PART II OTHER INFORMATION
Item 1	Legal Proceedings	24
Item 2	Change in Securities and Use of Proceeds	24
Item 4	Submission of Matters to a Vote of Security Holders	24
Item 5	Other Information	24
Item 6	Exhibits and Reports on Form 8-K	24
	Signatures	25

			July 31, 2001			January 31, 2001
ASSETS
Current assets:
	Cash and cash equivalents		$	91,347,020		$	85,178,946
	Short-term investments			33,277,695			27,479,016
	Accounts receivable, net of allowance of $804,370 and $1,071,670 at July 31 and January 31, 2001, respectively			12,475,846			20,904,067
	Deferred taxes			7,875,267			7,875,267
	Prepaid expenses and other current assets			1,085,381			1,429,828

		Total current assets		146,061,209			142,867,124
	Long-term investments			9,336,767			—
	Property and equipment, net			3,524,573			3,308,908
	Goodwill and other intangible assets, net			54,296,337			57,472,005
	Other assets			178,406			169,650

		TOTAL ASSETS	$	213,397,292		$	203,817,687

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	454,757		$	904,433
	Income taxes payable			650,722			6,498,967
	Accrued expenses			11,656,206			12,090,817
	Deferred revenue			18,643,053			18,362,375

		Total current liabilities		31,404,738			37,856,592
Deferred revenue, net of current portion				7,303,735			5,847,141
Deferred taxes				2,969,561			2,969,561

		Total liabilities		41,678,034			46,673,294


Commitments and contingencies

Stockholders' equity:
	Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding			—			—
	Common stock, $0.001 par value; 90,000,000 and 60,000,000 shares authorized; 40,186,760 and 39,688,513 shares issued and outstanding at July 31 and January 31, 2001, respectively			40,187			39,689
	Additional paid-in capital			119,922,621			116,454,758
	Deferred stock-based compensation			(55,895	)		(157,438	)
	Notes receivable from stockholders			(10,789,880	)		(12,113,518	)
	Accumulated other comprehensive loss			(63,096	)		(140,965	)
	Retained earnings			62,665,321			53,061,867

		Total stockholders' equity		171,719,258			157,144,393

		TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	213,397,292		$	203,817,687

			Three Months Ended July 31,					Six Months Ended July 31,
			2001			2000		2001			2000
Revenue:
	Software licenses		$	11,586,162		$	14,253,439	$	26,129,055		$	25,866,459
	Maintenance			10,256,504			9,064,782		20,712,160			17,427,156
	Professional services			1,605,501			1,890,657		4,100,230			3,070,554

		Total revenue		23,448,167			25,208,878		50,941,445			46,364,169

Cost of revenue:
	Software licenses			186,121			441,272		308,863			904,876
	Maintenance			1,455,749			1,523,554		2,876,552			3,173,311
	Professional services			1,630,131			1,591,340		3,725,948			2,656,439

		Total cost of revenue		3,272,001			3,556,166		6,911,363			6,734,626

		Gross profit		20,176,166			21,652,712		44,030,082			39,629,543

Operating expenses:
	Sales and marketing			7,936,444			7,019,148		16,060,245			13,360,634
	Research and development			3,686,324			2,372,974		7,325,768			4,380,784
	General and administrative			1,814,406			2,497,701		3,322,853			5,063,611
	Stock-based compensation			25,842			56,259		101,541			140,118
	Amortization of goodwill and other intangible assets			2,053,833			723,748		4,175,670			1,260,190
	Acquired in-process research and development			—			490,576		—			490,576

		Total operating expenses		15,516,849			13,160,406		30,986,077			24,695,913

Operating income				4,659,317			8,492,306		13,044,005			14,933,630
Interest and other income, net				1,581,401			2,071,901		3,233,036			3,852,925

	Income before income taxes			6,240,718			10,564,207		16,277,041			18,786,555
Income taxes				2,558,695			4,650,074		6,673,587			8,160,783

	Net income		$	3,682,023		$	5,914,133	$	9,603,454		$	10,625,772

Comprehensive income:
	Net income		$	3,682,023		$	5,914,133	$	9,603,454		$	10,625,772
	Other comprehensive income (loss):
		Foreign currency translation adjustment		3,742			46,724		114,002			(25,738	)
		Unrealized gain (loss) on marketable equity securities		(117,872	)		38,969		(36,133	)		5,607

Other comprehensive income (loss)				(114,130	)		85,693		77,869			(20,131	)

		Total comprehensive income	$	3,567,893		$	5,999,826	$	9,681,323		$	10,605,641

Net income per share:
	Basic		$	0.09		$	0.15	$	0.24		$	0.28

	Diluted		$	0.09		$	0.15	$	0.24		$	0.27

Weighted average shares used in per share calculations:
	Basic			39,714,201			38,390,009		39,542,360			38,181,078

	Diluted			40,726,195			40,360,865		40,594,264			40,072,234

				Six Months Ended July 31,
				2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income			$	9,603,454		$	10,625,772
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation			744,917			556,484
		Increase (decrease) in allowance for bad debts			(267,300	)		326,430
		Loss on sale of property and equipment			6,624			—
		Accrued interest on notes receivable from stockholders, net of cash received			(91,679	)		(613,519	)
		Amortization of deferred stock-based compensation			101,541			140,118
		Amortization of goodwill and other intangible assets			4,175,670			1,260,190
		Acquired in-process research and development			—			490,576
		Changes in operating assets and liabilities:
			Accounts receivable		8,593,226			(1,799,504	)
			Prepaid expenses and other assets		426,558			(527,685	)
			Accounts payable		(448,757	)		111,211
			Income taxes payable		(5,835,656	)		(285,887	)
			Accrued expenses		(1,574,699	)		765,241
			Deferred revenue		1,873,044			2,232,598

			Net cash provided by operating activities		17,306,941			13,282,025

CASH FLOWS USED IN INVESTING ACTIVITIES:
	Purchases of property and equipment				(964,969	)		(718,675	)
	Purchases of short-term and long-term investments, net				(15,171,579	)		(4,984,161	)
	Cash paid for acquisitions, net of cash acquired				—			(1,602,104	)

		Net cash used in investing activities			(16,136,548	)		(7,304,940	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Exercise of stock options under the employee stock option plan				2,442,106			616,869
	Sale of common stock under the employee stock purchase plan				1,026,255			751,595
	Payment of principal on notes receivable from stockholders				1,415,317			169,383

		Net cash provided by financing activities			4,883,678			1,537,847

EFFECT OF EXCHANGE RATE CHANGES ON CASH					114,002			(25,738	)

NET INCREASE IN CASH AND CASH EQUIVALENTS					6,168,074			7,489,194
Cash and cash equivalents at beginning of period					85,178,946			80,930,648

Cash and cash equivalents at end of period				$	91,347,020		$	88,419,842

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Income taxes paid			$	12,492,446		$	8,325,275

NONCASH INVESTING AND FINANCING ACTIVITIES:
	Common stock issued in business acquisitions			$	—		$	1,836,617

	Restricted stock issued for notes receivable from stockholders			$	—		$	9,294,001

	Unrealized gain (loss) on marketable equity securities			$	(36,133	)	$	5,607

	Contingent consideration accrued for the UltiMIS acquisition			$	1,000,000		$	—

	Three Months Ended July 31,		Six Months Ended July 31,
	2001	2000	2001	2000
Basic net income per share—weighted average number of common shares outstanding	39,714,201	38,390,009	39,542,360	38,181,078
Effect of potentially dilutive securities outstanding—restricted stock and options	1,011,994	1,970,856	1,051,904	1,891,156

Shares used in diluted net income per share computation	40,726,195	40,360,865	40,594,264	40,072,234