Form 10-Q

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 ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No ¨

The number of shares of the registrant’s Common Stock, par value $0.001, outstanding as of August 31, 2003 was 40,002,788.

SERENA Software, Inc. (“SERENA” or the “Company”) is the Enterprise Change Management (“ECM”) industry leader providing software infrastructure products and consulting best practices that automate changes to enterprise code and content. 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, 2003. The interim results presented are not necessarily indicative of results for any subsequent quarter or for the fiscal year ending January 31, 2004.

Certain reclassifications have been made to the January 31, 2003 balances in order to conform to the July 31, 2003 presentation, including the netting of both short and long-term deferred tax liabilities against short and long-term deferred tax assets.

The Company uses the intrinsic value method to account for stock-based compensation. The Company amortizes deferred stock-based compensation on an accelerated basis in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.

The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Since the exercise price of options granted under such plans is generally equal to the market value on the date of grant, no compensation cost has been recognized for grants under its stock option plans and stock purchase plans. In accordance with APB No. 25, the Company does not recognize compensation cost related to its employee stock purchase plan. If compensation cost for the Company’s stock-based compensation plans had been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” the Company’s net income and net income per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):

For the pro forma amounts determined under SFAS No. 123, as set forth above, the fair value of each stock option grant under the stock option plans and the fair value of the employees’ purchase rights under the employee stock purchase plan (“ESPP”) are estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the three and six months ended July 31, 2003 and 2002.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of

highly subjective assumptions including the expected stock price volatility. We used historical volatility rates. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our options.

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 (in thousands):

Options to purchase shares of common stock at a share price which is greater than the average closing market price of the shares for the quarter are not included in the computation of diluted earnings per share because the effect of their inclusion would be anti-dilutive. For both the three and six month periods ended July 31, 2003 and 2002, 1,108,391 and 3,388,314, respectively, options to purchase shares of common stock at an average share price of $26.50 and $20.52, respectively, were excluded from the computation of diluted EPS.

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 an enterprise to record a corresponding amount to the liability as an increase in 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 adopted the provisions of SFAS No. 143 as of February 1, 2003, and the adoption did not have a material impact on the Company’s consolidated financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Interpretation No. 45

requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002 and did not have a material impact on the Company.

The following is a summary of our agreements that the Company has determined are within the scope of Interpretation No. 45, or FIN 45, which are separately grandfathered because the guarantees were in effect prior to December 31, 2002. Accordingly, the Company has no liabilities recorded for these agreements as of July 31, 2003.

As permitted under Delaware law and our by-laws and certificate of incorporation, the Company has agreements whereby the Company indemnifies our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a directors’ and officers’ insurance policy that may enable the Company to recover a portion of any future amounts paid. Assuming the applicability of coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and other policy provisions, the Company believes the estimated fair value of this indemnification obligation is not material. However, no assurances can be given that the insurers will not attempt to dispute the validity, applicability or amount of coverage, which attempts may result in expensive and time-consuming litigation against the insurers.

When, as part of an acquisition, the Company acquires all of the stock or all of the assets and liabilities of a company, the Company assumes the liability for certain events or occurrences that took place prior to the date of acquisition. The maximum potential amount of future payments the Company could be required to make for such obligations is undeterminable at this time. Accordingly, the Company has no liabilities recorded for these types of agreements as of July 31, 2003.

From time to time, the Company engages various professional service firms which require as a condition of their engagement that the Company undertake to indemnify them for all claims and damages arising out of their engagement. In the recent past, the Company has not been subject to any significant claims for such losses and has not incurred any material costs in defending or settling claims related to these indemnification obligations. Accordingly, the Company believes the estimated fair value of these obligations is not material.

The Company undertakes indemnification obligations in our ordinary course of business in connection with, among other things, the licensing of our products and the provision by the Company of consulting services. Pursuant to these agreements, the Company may indemnify the other party for certain losses suffered or incurred by the indemnified party, generally our business partners or customers, in connection with various types of claims, which may include, without limitation, claims of intellectual property infringement, certain tax liabilities, negligence and intentional acts in the performance of services and violations of laws. The term of these indemnification obligations is generally perpetual. In general, the Company attempts to limit the maximum potential amount of future payments the Company could be required to make under these indemnification obligations to the purchase price paid, but in some cases the obligation may not be so limited. In addition, the Company may, in certain situations, warrant that, for a certain period of time from the date of delivery, our software products will be free from defects in media or workmanship. From time to time, the Company may also warrant that our professional services will be performed in a good and workmanlike manner. In addition, it is the Company’s standard policy to seek to disclaim most warranties, including any implied or statutory warranties

such as warranties of merchantability, fitness for a particular purpose, quality and non-infringement, as well as any liability with respect to incidental, consequential, special exemplary, punitive or similar damages. In some states, such disclaimers may not be enforceable. If necessary, the Company would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history. In the recent past, the Company has not been subject to any significant claims for such losses and has not incurred any material costs in defending or settling claims related to these indemnification obligations. Accordingly, the Company believes the estimated fair value of these agreements is not material.

In November 2002, the EITF reached a consensus on EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue-generating activities. EITF No. 00-21 will be effective for interim periods beginning after June 15, 2003. The effect of adopting EITF 00-21 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. The disclosure provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148.

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 and incur costs associated with the closure of facilities. The Company recorded a restructuring charge in the third quarter of fiscal 2002 consisting principally of severance, payroll taxes and other employee benefits totaling $1.5 million and facilities closures totaling $1.0 million. The Company has realized and expects to continue to realize cost savings going forward as a result of this reduction and other cost savings initiatives implemented. The Company’s restructuring is substantially complete with these actions. The nature of the restructuring charges and the amounts paid through and accrued as of July 31, 2003 are summarized as follows (in thousands):

In July 2001, the FASB approved the issuance of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 provides guidance on how to account for goodwill and certain intangible assets after an acquisition is completed. The most substantive change is that goodwill and other indefinite life intangible assets can no longer be amortized but instead should be periodically tested for impairment. In the fiscal quarter ended April 30, 2002, the Company reevaluated its intangible asset lives and no adjustment to any of the useful lives was determined to be necessary. In the fiscal quarter ended July 31, 2002 and in accordance with Statement No. 142, the Company completed its initial transitional goodwill impairment test and concluded that there was no impairment of goodwill as of February 1, 2002. The annual impairment test required by SFAS No. 142 will be performed in the fourth fiscal quarter each year and was performed in the fourth quarter of fiscal 2003. With the annual impairment test in the fourth quarter of fiscal 2003, the Company concluded that there was no impairment of goodwill as of January 31, 2003.

The weighted average remaining amortization period for acquired technology is 40 months, trademark/trade name portfolio and customer relationships is 34 months, non-compete agreements is 22 months, and maintenance service contracts is 10 months. The total weighted average remaining amortization period for all intangible assets is 38 months. The aggregate amortization expense of intangible assets was $2.1 million and $3.2 million for the three and six months ended July 31, 2003, respectively, and $1.1 million and $2.3 for the same periods a year ago.

The changes in the net carrying amount of goodwill for the six months ended July 31, 2003 are as follows (in thousands):

In February 2003, the Board of Directors authorized the repurchase of up to 1.0 million shares of the Company’s Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes. Under this program and at various times from February 25, 2003 through April 1, 2003, the Company repurchased in aggregate a total of 484,800 shares of its common stock for cash at an average price of $15.18 per share.

In May 2003, the Board of Directors authorized the repurchase of up to 1.0 million shares of the Company’s Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes. Under this program and at various times from June 9, 2003 through July 1, 2003, the Company repurchased in aggregate a total of 634,500 shares of its common stock for cash at an average price of $20.78 per share.

In August 2003, the Board of Directors authorized the repurchase of up to 1.0 million shares of the Company’s Common Stock from time to time in the open market or in privately negotiated block transactions. The Company will utilize any reacquired shares under this program for reissuance in connection with employee stock programs and general corporate purposes. The timing and size of any future stock repurchases are subject to market conditions, stock prices, our cash position and other cash requirements going forward.

On June 5, 2003, the Company acquired TeamShare, Inc. (“TeamShare”), a privately held company specializing in the development of collaborative process and issue management solutions and a leading supplier of Web-based, team-oriented productivity tools. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of TeamShare are included in the Company’s consolidated financial statements from June 5, 2003.

The acquisition of TeamShare improved the Company’s capabilities and will allow it to compete more effectively in the growing application life cycle management market. The acquisition provides the Company with complimentary request and issue management technology that helps strengthen its ECM solution offering.

The Company acquired 100% of TeamShare’s outstanding common stock in acquiring all of its assets and assuming all of its liabilities. The total purchase price was $18.4 million and consisted of cash consideration of $17.9 million, net of in-the-money options proceeds of $0.1 million, and acquisition costs of $0.5 million. The total purchase price was allocated, based upon a third party valuation, as follows (in thousands):

Acquired technology, consisting of current completed technologies at the date of acquisition and valued on the premise of fair market value in continued use under the discounted cash flow approach, is amortized over a three-year period, the period of time the Company estimates as its economic useful life. Non-compete agreements were entered into with two former TeamShare officers and were valued based on the estimated amount of business that might be lost if these two principals were competing against the Company and are being amortized over their two-year term. Maintenance service contracts, consisting of existing annual renewable maintenance contracts at the date of acquisition are valued on the premise of fair market value of the total future cash flows that would be generated from the renewal of such contracts under the discounted cash flow approach and are amortized over a one-year period. Trademark/Trade name portfolio, consisting of the existing TeamTrack trade name at the date of acquisition is valued on the premise of fair market value of royalties avoided on developed technology revenues under the discounted cash flow approach and is amortized over a three-year period, the period of time the Company estimates as its economic useful life. Customer relationships, consisting of existing TeamShare customer relationships of varying age and size at the date of acquisition, are valued on the premise of fair market value of future cash flows that would be generated with existing customer relationships in place net of what would be generated without the existing relationships in place under the discounted cash flow approach and are amortized over a three-year period, the period of time the Company estimates as its economic useful life. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and is no longer subject to amortization but instead will be measured for impairment annually pursuant to SFAS No. 142.

With respect to acquired TeamShare intangibles, the weighted average remaining amortization period for acquired technology, trademark/trade name portfolio and customer relationships is 34 months, non-compete agreements is 22 months, and maintenance service contracts is 10 months. The total weighted average remaining amortization period for all acquired TeamShare intangible assets is 31 months. All identified intangible assets will be amortized on a straight-line basis over their useful lives. Amortization expense for the current fiscal quarter and fiscal six months ended July 31, 2003 was $1.1 million. The estimated total amortization expense associated with acquired TeamShare intangible assets is $3.2 million for the remaining six months of fiscal 2004, $5.1 million for fiscal 2005, $4.3 million for fiscal 2006, and $1.4 million for fiscal 2007.

In accordance with generally accepted accounting principles of the United States of America, we recorded a deferred tax asset of $4.5 million for the acquired deferred tax assets relating to net operating loss tax credit carryforwards for tax purposes acquired in the transaction. In addition, a deferred tax liability of $6.0 million was recorded for the difference between the assigned values and the tax bases of the intellectual property assets acquired in the transaction.

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

This report contains forward-looking statements under the Private Securities Litigation 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 worldwide which may continue to affect the overall demand for software and services, which has resulted in and could continue to result in decreased revenues or lower revenue growth rates; our ability to successfully integrate our recent acquisition; 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 international organizations; 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 2003.

SERENA is the Enterprise Change Management (“ECM”) industry leader providing infrastructure software to manage change to enterprise applications. Our products and services are used to manage and control application change for organizations whose business operations are dependent on managing information technology, or IT. In our 23 year history, we have developed highly effective solutions for managing software change that enable our customers to improve their return on IT investments by improving application availability, accelerating time to market, and increasing programmer productivity while reducing application development and IT infrastructure maintenance costs. All large companies have a process for managing change to their internally developed applications, including new version releases, “bug fixes,” upgrades and application introductions. Our products help IT managers manage changes to applications by automating and enforcing the process throughout the application life cycle. Our consulting services help companies improve their process by identifying where their current practices deviate from standard practices and making appropriate recommendations. As of July 31, 2003, our products have been installed in over 3,600 customer sites worldwide and our customers include 46 of the Fortune 50 companies.

In the current fiscal quarter and fiscal six months ended July 31, 2003, SERENA experienced increases in total revenues of 8% and 9%, respectively, as total revenues for the quarter were $24.9 million versus $23.0 million in the second quarter of fiscal 2003, and total revenues for the six months were $49.3 million versus $45.0 million in the first six months of fiscal 2003. However, in the most recent completed fiscal year ended January 31, 2003, SERENA experienced a decrease in total revenue as total annual revenues were $95.8 million in fiscal 2003 versus $98.6 million in fiscal 2002 and $103.6 million in fiscal 2001. The overall demand for the Company’s software depends in large part on general and economic business conditions. The recent general weakening of the worldwide economy and resulting slowdown in IT spending contributed to the overall decrease in total revenues.

Prior to fiscal 2002, SERENA had grown rapidly as total revenue increased incrementally from $32.1 million in fiscal 1998 to $103.6 million in fiscal 2001. The growth in total revenue was primarily attributable to increased demand for our mainframe products, and to a lesser extent beginning in the second half of fiscal 2000, the introduction of our distributed systems products, primarily ChangeMan DS, into the marketplace. In general, demand had been increasing as a result of greater awareness of and need for automated third party ECM solutions. We derive our revenue from software licenses, maintenance and professional services.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and judgements, including those related to revenue recognition, trade accounts receivable and allowance for doubtful accounts, impairment or disposal of long-lived assets, and employee stock-based compensation.

Revenue Recognition. SERENA recognizes revenues in accordance with SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, and generally recognizes revenues when all of the following criteria are met as set forth in paragraph 8 of SOP 97-2: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable and (4) collectibility is probable. SERENA defines each of these four criteria as follows:

Persuasive evidence of an arrangement exists. It is SERENA’s customary practice to have a written contract, which is signed by both the customer and SERENA, or a purchase order from those customers who have previously negotiated a standard license arrangement with SERENA. In cases where shrink wrap licenses apply, the Company accepts purchase orders as persuasive evidence of an arrangement.

Delivery has occurred. SERENA’s software is physically delivered to the customer. If an arrangement includes undelivered products or services that are essential to the functionality of the delivered product, delivery is not considered to have occurred until these products or services are delivered.

The fee is fixed or determinable. SERENA’s policy is to not provide customers the right to a refund of any portion of their license fees paid. SERENA may agree to extended payment terms with a foreign customer based on local customs. Generally, at least 80% of the arrangement fees are due within one year or less. Arrangements with payment terms extending beyond these customary payment terms are considered not to be fixed or determinable, and revenues from such arrangements are recognized as payments become due and payable.

Collectibility is probable. Collectibility is assessed on a customer-by-customer basis. SERENA typically sells to customers for whom there is a history of successful collection. If it is determined from the outset of an arrangement that collectibility is not probable, revenues are recognized as cash is collected.

For contracts with multiple elements (e.g., license and maintenance), revenue is allocated to each component of the contract based on vendor specific objective evidence (“VSOE”) of its fair value, which is the price charged when the elements are sold separately. Since VSOE has not been established for license transactions, the residual method is used to allocate revenue to the license portion of multiple-element transactions.

The Company sells its products to its end users and distributors under license agreements. Each new mainframe license includes maintenance, which includes the right to receive telephone support, “bug fixes” and unspecified upgrades and enhancements, for a specified duration of time, usually one year. The fee associated

with such agreements is allocated between software license revenue and maintenance revenue based on the residual method. Software license revenue from these agreements is recognized upon receipt and acceptance of a signed contract and delivery of the software, provided the related fee is fixed and determinable, collectibility of the revenue is probable and the arrangement does not involve significant customization of the software. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period, as defined in the applicable software license agreement.

The Company recognizes maintenance revenue ratably over the life of the related maintenance contract. Maintenance contracts on perpetual licenses generally renew annually. The Company typically invoices and collects maintenance fees on an annual basis at the anniversary date of the license. Professional services revenue includes fees derived from the delivery of training, installation, and consulting services. Revenue from training, installation, and consulting services is recognized on a time and materials basis as the related services are performed. These services do not involve significant production, modification or customization of the software and the services are not essential to the functionality of the software. Deferred revenue represents amounts received by the Company in advance of performance of the maintenance obligation.

Based on our interpretation of SOP 97-2 and SOP 98-9, we believe that our current sales contract terms and business arrangements have been properly reported. However, the AICPA and its Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying the relevant standards to a wide range of sales contract terms and business arrangements that are prevalent in the software industry. Also, the Securities and Exchange Commission (SEC) has issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. Future interpretations of existing accounting standards or changes in our business practices could result in future changes in our revenue accounting policies that could have a material adverse effect on our business, financial condition and results of operations.

Trade Accounts Receivable and Allowance for Doubtful Accounts. Trade accounts receivable are recorded net of allowance for doubtful accounts. We regularly review the adequacy of our allowance for doubtful accounts through identification of specific receivables where we expect that payment will likely not be received, and we have established a general reserve policy that is applied to all amounts that are not specifically identified. In determining specific receivables where collection may not be received, we review past due receivables and give consideration to prior collection history, changes in the customer’s overall business condition, the potential risk associated with the customer’s industry or political and economic environment among other factors. We establish a general reserve for all receivable amounts that have not been specifically identified, by applying a graduated percentage to each invoice’s relative aging category. The graduated percentage is based on our historical receivable write-off experience. The allowance for doubtful accounts reflects our best estimate as of the reporting dates. Changes may occur in the future, which may make us reassess the collectibility of amounts and at which time we may need to provide additional allowances in excess of that currently provided.

Impairment or Disposal of Long-Lived Assets. The Company reviews its goodwill for impairment when events indicate that its carrying amount may not be recoverable or, at least once a year. The Company is required to test goodwill for impairment at the reporting unit level. The Company has determined that it has only one reporting unit. The test for impairment is a two-step process:

Step 1: The Company compares the carrying amount of its reporting unit, which is the book value of the entire Company, to the fair value of its reporting unit, which corresponds to our market capitalization. If the carrying amount of our reporting unit exceeds its fair value, the Company is required to perform the second step of the process. If not, no further work is needed.

Step 2: The Company compares the implied fair value of its reporting unit to its carrying amount. If the carrying amount of our reporting unit’s goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess.

The Company completed Step 1 of this test during the fourth quarter of fiscal 2003 and the Company was not required to record an impairment loss on goodwill.

The Company reviews its long-lived assets, including property and equipment and other intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Such comparisons are done when the Company determines that one or more impairment indicators are present for an asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. If an asset is to be disposed of, it is reported at the lower of the carrying amount or fair value less costs to sell.

Some of the events that the Company considers as impairment indicators for its long-lived assets, including goodwill, are the following:

To date, there have been no significant impairment indicators of long-lived assets and the Company does not expect to record an impairment loss on its long-lived assets in the near future.

Employee Stock-Based Compensation. The Company uses the intrinsic value method to account for stock-based compensation. The Company amortizes deferred stock-based compensation on an accelerated basis in accordance with FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.

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, 2003 to the condensed consolidated statements of income and comprehensive income for the three and six month periods ended July 31, 2002. Historical results include the post-acquisition results of TeamShare from June 5, 2003.

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.

We derive revenue from software licenses, maintenance and professional services. Our total revenue increased $1.9 million or 8% to $24.9 million in the current fiscal quarter ended July 31, 2003 from $23.0 million in the same quarter a year ago. For the six months ended July 31, 2003, total revenue increased $4.2 million or 9% to $49.3 million from $45.1 million in the same six month period a year ago. International sales represented approximately 38% and 35% of our total revenue in the current fiscal quarter and fiscal six months ended July 31, 2003, respectively, as compared to 23% and 27% in the same quarter and six months a year ago. No single customer accounted for 10% or more of total revenue in the first six months of fiscal 2004, and a single international customer accounted for 15% of total revenue in the first six months of fiscal 2003.

Software Licenses. Software licenses revenue as a percentage of total revenue was 40% and 42% in the current fiscal quarter and fiscal six months ended July 31, 2003, respectively, as compared to 45% and 44% in the same quarter and six months a year ago. Software licenses revenue decreased $0.3 million or 3% to $10.0 million in the current fiscal quarter from $10.3 million in the same quarter a year ago. For the six month period ended July 31, 2003, software licenses revenue increased $0.9 million or 5% to $20.9 million from $20.0 million in the same six months a year ago. For the current fiscal quarter, when compared to the same quarter a year ago,

the dollar decrease is predominantly due to lower sales from our mainframe StarTool products as a result of the continued slowdown in IT spending and the fact that we had a large StarTool transaction with a single international customer in the second fiscal quarter a year ago, all partially offset by higher sales of our core software change management products, and in particular our distributed systems products, each which grew 6% and 11%, respectively, over the same quarter a year ago. For the current fiscal six months ended July 31, 2003, when compared to the same six months a year ago, the dollar increase is predominantly due to higher sales of our core software change management products, which grew 37% over the first six months a year ago, and in particular, our distributed systems products, which grew 39% over a year ago, all partially offset by lower sales of our StarTool products as a result of the continued slowdown in IT spending and the fact that we had a large StarTool transaction with a single international customer in the first half of fiscal 2003. In particular, sales of our core software change management products continue to make up a significant portion of our total software licenses revenue. These products accounted for $6.7 million or 66% and $14.4 million or 69% of total software licenses revenue in the current fiscal quarter and fiscal six months ended July 31, 2003, respectively, as compared to $6.3 million or 61% and $10.5 million or 52% in the same quarter and six months a year ago. The Company expects that its distributed systems revenues as a percentage of software licenses revenue will increase over time, and that core software change management will continue to account for a substantial portion of software licenses revenue in the future. We may experience a decrease or little growth in license revenue in the near term.

Maintenance. Maintenance revenue as a percentage of total revenue was 50% in both the current fiscal quarter and fiscal six months ended July 31, 2003, as compared to 48% and 49% in the same quarter and six months, respectively, a year ago. Maintenance revenue increased $1.4 million or 13% to $12.4 million in the current fiscal quarter from $11.0 million in the same quarter a year ago. For the six months ended July 31, 2003, maintenance revenue increased $2.6 million or 12% to $24.4 million from $21.8 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 in Comparex maintenance contracts particularly beginning in fiscal 2002 when the general weakening of the economy in the U.S. and abroad caused some customers to reevaluate and restrict IT spending. We expect maintenance revenue to grow slightly in absolute dollars in the near term.

Professional Services. Professional services revenue, as a percentage of total revenue was 10% and 8% in the current fiscal quarter and fiscal six months ended July 31, 2003, respectively, as compared to 7% in both the same quarter and six months a year ago. Professional services revenue increased $0.7 million or 44% to $2.4 million in the current fiscal quarter from $1.7 million in the same quarter a year ago. For the six months ended July 31, 2003, professional services revenue increased $0.7 million or 22% to $4.0 million from $3.3 million in the same six months a year ago. For both the quarter and six months, the dollar increase is predominantly due to a recovery in the current fiscal quarter of the consulting business fueled in part by a few large engagements. In general, professional services revenue is attributable to consulting opportunities resulting from our installed customer base and our expanded consulting service capabilities, all partially offset by the continued weak U.S. economy, price pressures on consulting rates, and the deferral of existing consulting projects. We may experience little or no growth in professional services revenue in the near term.

Cost of revenue, which consists of cost of software licenses, cost of maintenance and cost of professional services, was 16% and 15% of total revenue in the current fiscal quarter and fiscal six months ended July 31, 2003, respectively, as compared to 14% in both the same quarter and six months a year ago. Cost of revenue increased $0.8 million or 25% to $4.1 million in the current fiscal quarter from $3.3 million in the same quarter a year ago. For the six months ended July 31, 2003, cost of revenue increased $1.2 million or 20% to $7.5 million from $6.3 million in the same six months a year ago. For both the current fiscal quarter and fiscal six months, in absolute dollar terms, the increase is consistent with the increase in total revenues. As a percentage of total

revenue, cost of revenue has increased when comparing the current fiscal quarter and fiscal six months to the same quarter and six months a year ago, predominantly due to lower margin professional services revenue being a larger percentage of total revenue.

Software Licenses. Cost of software licenses consists principally of fees associated with our StarTool FDM products and, to a lesser extent, salaries, bonuses and other costs associated with our product release organization, and fees associated with integrating third party technology into our ChangeMan DS, ChangeMan ALM and ChangeMan ECP distributed systems products. Cost of software licenses as a percentage of total software licenses revenue was 2% in both the current fiscal quarter and fiscal six months ended July 31, 2003, as compared to 3% in both the same quarter and six months a year ago. Cost of software licenses decreased $0.2 million or 49% to $0.2 million in the current fiscal quarter from $0.4 million in the same quarter a year ago. For the six months ended July 31, 2003, cost of software licenses decreased $0.2 million or 34% to $0.4 million from $0.6 million in the same six months a year ago. In both percentage and absolute dollar terms, the decrease is primarily due to decreases in fees associated with our StarTool FDM product as a result of lower revenues.

Maintenance. Cost of maintenance consists primarily of salaries, bonuses and other costs associated with our customer support organizations. Cost of maintenance as a percentage of total maintenance revenue was 13% in the current fiscal quarter and fiscal six months ended July 31, 2003 and the same quarter and six months a year ago. Cost of maintenance increased $0.2 million or 13% to $1.6 million in the current fiscal quarter from $1.4 million in the same quarter a year ago. For the six months ended July 31, 2003, cost of maintenance increased $0.3 million or 12% to $3.1 million from $2.8 million in the same six months a year ago. For both the quarter and six months, the absolute dollar increase in cost of maintenance is primarily attributable to increases in expenses associated with our customer support organizations as a result of the growth in both maintenance revenue and our installed customer base.

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 94% and 101% in the current fiscal quarter and fiscal six months ended July 31, 2003, respectively, as compared to 89% in both the same quarter and six months a year ago. Cost of professional services increased $0.8 million or 52% to $2.3 million in the current fiscal quarter from $1.5 million in the same quarter a year ago. For the six months ended July 31, 2003, cost of professional services increased $1.1 million or 38% to $4.0 million from $2.9 million in the same six months a year ago. For both the quarter and six months, the increases as a percentage of total professional services revenue and in absolute dollars, are predominantly due to increases in expenses associated with our professional services organization to support higher professional services revenue, and increases in third party contractor costs.

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 28% in both the current fiscal quarter and fiscal six months ended July 31, 2003 as compared to 29% in both the same quarter and six months a year ago. Sales and marketing expenses increased $0.4 million or 6% to $7.0 million in the current fiscal quarter from $6.6 million in the same quarter a year ago. For the six months ended July 31, 2003, sales and marketing expenses increased $0.7 million or 5% to $13.7 million from $13.0 million in the same six months a year ago. For both the current fiscal quarter and fiscal six months, when compared to the same quarter and six months a year ago, sales and marketing expenses as a percentage of total revenue decreased slightly as the rate of growth in total revenue was greater than the rate of growth in sales and marketing expenses. In absolute dollar terms, we expect sales and marketing expenses to increase as we continue to hire additional sales and marketing personnel, market our distributed systems products and undertake additional marketing programs.

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 14% and 13% in the current fiscal quarter and fiscal six months ended July 31, 2003, respectively, as compared to 13% in both the same quarter and six months a year ago. Research and development expenses increased $0.4 million or 15% to $3.4 million in the current fiscal quarter from $3.0 million in the same quarter a year ago. For the six months ended July 31, 2003, research and development expenses increased $0.6 million or 10% to $6.5 million from $5.9 million in the same six months a year ago. For both the current fiscal quarter and fiscal six months, when compared to the same quarter and six months a year ago, the increase in research and development expenses in absolute dollar terms is primarily attributable to our acquisition of TeamShare and continued expansion of our research and development efforts to enhance existing products and develop our distributed systems products. We expect research and development expenses to increase, both in absolute dollar terms and as a percentage of total revenue, as we continue to hire additional research and development personnel primarily to develop our distributed systems product suite.

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 7% for the current fiscal quarter and fiscal six months ended July 31, 2003 and the same quarter and six months a year ago. General and administrative expenses increased $0.1 million or 3% to $1.7 million in the current fiscal quarter from $1.6 million in the same quarter a year ago. For the six months ended July 31, 2003, general and adiminstrative expenses increased $0.1 million or 2% to $3.5 million from $3.4 million in the same six months a year ago. For both the current fiscal quarter and fiscal six months, when compared to the same quarter and six months a year ago, the slight increase in absolute dollars was predominantly due to increases in infrastructure and insurance costs. We expect general and administrative expenses to increase in absolute dollar terms as we expand our infrastructure and our operations in the future.

Amortization of Intangible Assets. Amortization of intangible assets are in connection with the Company’s acquisitions of Diamond in June 1999, HPS in May 2000, UltiMIS in September 2000 and most recently TeamShare in June 2003, and the StarTool asset purchase in August 2000. Amortization of intangible assets increased $1.0 million or 86% to $2.1 million in the current fiscal quarter from $1.1 million in the same quarter a year ago. For the six months ended July 31, 2003, amortization of intangible assets increased $0.9 million or 40% to $3.2 million from $2.3 million in the same six months a year ago. For both the current fiscal quarter and fiscal six months, when compared to the same quarter and six months a year ago, the increase is predominantly due to the TeamShare acquisition in the current fiscal quarter which added $15.1 million in amortizable intangible assets, and offset to a lesser extent, by the expiration of non-competes in the third quarter of fiscal 2003 associated with the Company’s UltiMIS acquisition. See Notes 5 and 7 of Notes to Condensed Consolidated Financial Statements for additional information related to intangibles amortization and the TeamShare acquisition.

Interest and Other Income, net. Interest and other income, net decreased $0.4 million or 32% to $0.8 million in the current fiscal quarter from $1.2 million in the same quarter a year ago. For the six months ended July 31, 2003, interest and other income, net decreased $0.6 million or 24% to $1.8 million from $2.4 million in the same six months a year ago. For both the current fiscal quarter and fiscal six months, when compared to 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 and decreases in cash balances of $20.6 million and $19.4 million due to the Company’s stock repurchase program implemented in the first and second quarters of fiscal 2004 and

TeamShare acquisition in June 2003, respectively, all 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. The Company’s effective income tax rate was 36% in the current fiscal quarter ended July 31, 2003, as compared to 38% in all of fiscal 2003 and the first quarter of fiscal 2004. Income taxes in absolute dollars were $2.7 million and $6.2 million in the current fiscal quarter and fiscal six months ended July 31, 2003, respectively, as compared to $3.2 million and $6.3 million in the same quarter and six months a year ago. The decrease in the effective income tax rate was in part due to increases in research and experimentation tax credits as a result of the recent TeamShare acquisition and changes in pre-tax income projections. For the current fiscal quarter, when compared to the same quarter a year ago, the decrease in income taxes in absolute dollars is due to a decrease in taxable income and, to a lesser extent, a lower effective tax rate. For the current fiscal six months ended July 31, 2003, when compared to the same six months a year ago, the decrease in income taxes in absolute dollars is due to a lower blended effective tax rate partially offset by a slight increase in taxable income. 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, 2003, SERENA had $98.0 million in cash and cash equivalents and an additional $19.0 million and $55.7 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 $12.6 million and $14.5 million in the current fiscal six months ended July 31, 2003 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 the inclusion of non-cash expenses in net income, a decrease in trade accounts receivable, decreases on stockholder notes net of accrued interest, and cash collections in advance of revenue recognition for maintenance contracts; all partially offset by decreases in income taxes payable and accrued expenses. In the same six months a year ago, SERENA’s cash flows provided by operating activities exceeded net income principally due to the inclusion of non-cash expenses in net income, an increase in income taxes payable, and cash collections in advance of revenue recognition for maintenance contracts; all partially offset by a decrease in accrued expenses and an increase in trade accounts receivable. In the current fiscal six months, SERENA’s cash used in investing activities were primarily related to the cash paid for the TeamShare acquisition, net of cash received totaling $19.4 million, offset by the net sale of short and long-term investments totaling $10.8 million. In the year ago six months, cash used in investing activities were primarily related to the net purchase of short and long-term investments totaling $14.1 million, and to a lesser extent, purchases of computer equipment and office furniture and equipment totaling $1.3 million and cash paid for the UltiMIS earn-out totaling $0.7 million. In the current fiscal six months, SERENA’s cash flows used in financing activities related to the repurchase of the Company’s common stock under the stock repurchase plan totaling $20.5 million; partially offset by payments received on stockholder notes totaling $5.8 million, the exercise of stock options under the employee stock option plan totaling $2.9 million, and the sale of common stock under the employee stock purchase plan totaling $0.8 million. In the same six months a year ago, SERENA’s cash flows provided by financing activities related to the sale of common stock under the employee stock purchase plan totaling $0.8 million, and the exercise of stock options under the employee stock option plan totaling $0.2 million.

At July 31, 2003, 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, 2003, the Company had working capital of $98.1 million, trade accounts receivable, net of allowances, of $16.1 million and total deferred revenues of $37.2 million.

The Company has noncancelable operating lease agreements for office space that expire between calendar 2003 and 2008. Minimum lease payments are as follows (in thousands):

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.

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 an enterprise to record a corresponding amount to the liability as an increase in 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 adopted the provisions of SFAS No. 143 as of February 1, 2003, and the adoption did not have a material impact on the Company’s consolidated financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 eliminates Emerging Issues Task Force, or EITF, Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” Under SFAS No. 146, liabilities for costs associated with an exit or disposal activity are recognized when the liabilities are incurred, as opposed to being recognized at the date of entity’s commitment to an exit plan under EITF No. 94-3. Furthermore, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liabilities. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Interpretation No. 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002 and did not have a material impact on the Company. See Note 3 to Condensed Consolidated Financial Statements for a summary of our agreements that we have determined are within the scope of Interpretation No. 45 which are separately grandfathered because the guarantees were in effect prior to December 31, 2002.

In November 2002, the EITF reached a consensus on EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue-generating activities. EITF No. 00-21 will be effective for interim periods beginning after June 15, 2003. The effect of adopting EITF 00-21 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. The disclosure provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148.

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 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 worldwide which may continue to affect the overall demand for software and services, which has resulted in and could continue to result in decreased revenues or lower revenue growth rates; our ability to successfully integrate our recent acquisition; 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 international organizations; 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. In addition, as a result of the economic slowdown worldwide, a number of customers have delayed discretionary spending for software and hardware, which has reduced our revenue. Additionally, sales cycles beginning in fiscal 2002 lengthened as customers delayed decisions to purchase our products and increase capacity on mainframe computers. 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.

Economic Conditions Worldwide 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 application software and services. Because our sales are primarily to major corporate 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 revenues and revenue growth rates of its software licenses. 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. Our license revenues have fluctuated in recent years and we may not experience any license revenue growth in the future and our license revenues could in fact decline.

Management personnel 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 and 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 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. Our mainframe products have been responsible for a significant portion of our revenue. In the current fiscal quarter ended July 31, 2003 and the same quarter a year ago, sales of our mainframe products accounted for approximately 65% and 69% of our total software licenses revenue. 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 Future Revenue Is Substantially Dependent Upon Our Installed Customers Renewing Maintenance Agreements for Our Products and Licensing or Upgrading Additional SERENA ECM 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 ECM 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 Expect That Our Operating Expenses Will Increase 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 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 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. Our revenue has fluctuated in recent years and 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.

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 introduced our ChangeMan DS product in fiscal 2000, our ChangeMan ALM and ChangeMan ECP products in fiscal 2001, our ChangeMan WCM product in the first quarter of fiscal 2002 and our ChangeMan ZDD product in the first quarter of fiscal 2003. In the current fiscal quarter ended July 31, 2003, we acquired the TeamTrack product with our acquisition of TeamShare effective June 5, 2003. While license revenues from our distributed systems products were 35% of total license revenues in the second quarter of fiscal 2004, they may fluctuate materially from quarter to quarter and could in fact decline. We are currently developing new products and enhancing our product suite to support additional distributed systems products. 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. 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. 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.

In January 2002, we entered into an OEM Agreement with IBM Corporation (“IBM”) whereby IBM acquired the rights to resell our StarTool APM technology. IBM provides SERENA a quarterly royalty report one month after each of IBM’s calendar quarters detailing licenses and maintenance sold through to end users during the quarter. While license revenues from our IBM OEM relationship were 11% of total license revenues in the second quarter of fiscal 2004, they may fluctuate materially from quarter to quarter and could in fact decline. We recognized our first revenue from this arrangement in the second quarter of fiscal 2003. Because we have little or no visibility during the quarter on pipelines, sales forecasts, sales volumes or the amount of license revenue that will be reported, we cannot accurately predict the IBM revenue or our operating results for the quarter or any future quarter. Because the IBM OEM license revenue may be significant to our total license revenue in any fiscal quarter, any decline in revenue could materially adversely affect our business and our future quarterly and annual operating results.

Acquisitions May be Difficult to Integrate, Disrupt Our Business, Dilute Stockholder Value or Divert the Attention of Our Management

In June 2003, we acquired TeamShare, Inc. and we may acquire or make investments in other companies and technologies. In the event of any acquisitions or investments, we could:

If we fail to achieve the financial and strategic benefits of past and future acquisitions or investments, our operating results will suffer. Acquisitions and investments involve numerous other risks, including:

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 eighteen 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. Beginning in fiscal 2002, we have experienced an overall lengthening of sales cycles as customers delayed purchases or customers reduced budgets as a result of economic conditions. Additionally, the emerging market for ECM 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.

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 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.

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.

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 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, although more slowly than in prior years, 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, or if these operations experience declining revenue growth, this could materially adversely affect our business and quarterly and annual operating results. 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 38% and 23% of our total revenue in the current fiscal quarter ended July 31, 2003 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 and euro. 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.

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 / TeamTrack, 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 IBM/Rational Software, Computer Associates, MERANT, Microsoft, Telelogic and other smaller private companies.

Future Competition. We may face competition in the future from established companies who have not previously entered the mainframe or distributed systems SCM market, or from emerging 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.

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.

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.

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 fluctuate 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.

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.

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 Company does not have 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 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, 2003. 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, a hypothetical 10% fluctuation in interest rates would not have a material impact on the fair value of these securities.

Sales to foreign countries accounted for approximately 38% of the total revenue during the quarter ended July 31, 2003. Because the Company invoices certain of its foreign sales in currencies other than the United States dollar, predominantly the British pound and euro, 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, 2003 and net cash flows for the most recent fiscal six months then ended and fiscal year ended January 31, 2003, the Company does not believe that a hypothetical 10% fluctuation in foreign currency exchange rates would have a material impact on its financial position or results of operations.

Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the Company’s principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

There were no significant changes in the Company’s internal control over the financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting, or in other factors that could significantly affect these controls subsequent to the date of their last evaluation by the Company’s principal executive officer and principal financial officer, including any corrective actions with regard to significant deficiencies and material weaknesses.

PROPOSAL 2—Ratification and approval of the appointment of KPMG LLP as independent auditors of the Company for the fiscal year ending January 31, 2004.

Section 10A(i)(2) of the Securities Exchange Act of 1934, as added in Section 202 of the Sarbanes-Oxley Act of 2002, requires us to disclose the approval by our Audit Committee of any non-audit services to be performed by KPMG LLP, our external auditor. Non-audit services are defined as services other than those provided in connection with an audit or review of the financial statements of a company. The Audit Committee of the Board of Directors of SERENA has approved the engagement of KPMG LLP for non-audit services including, among other things, the performance of certain tax-related services.

We furnished the following Current Report on Form 8-K during the quarter ended July 31, 2003:

We furnished a Current Report on Form 8-K dated May 19, 2003, announcing that the Company has signed a definitive agreement to acquire TeamShare, Inc. and attached a press release related thereto.

We furnished a Current Report on Form 8-K dated May 22, 2003, announcing financial results for the quarter ended April 30, 2003 and attached a press release related thereto. Such report was “furnished” but not “filed” with the SEC.

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant, SERENA Software, Inc., a corporation organized and existing under the laws of the State of Delaware, has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SERENA SOFTWARE, INC. (Registrant)

By:		/s/ ROBERT I. PENDER, JR.

		Robert I. Pender, Jr. Vice President, Finance And Administration, Chief Financial Officer (Principal Financial And Accounting Officer) And Director

		Page
PART I FINANCIAL INFORMATION
Item 1	Financial Statements:

	Condensed Consolidated Balance Sheets as of July 31, 2003 and January 31, 2003	3

	Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Six Months Ended July 31, 2003 and 2002	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2003 and 2002	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4	Controls and Procedures	33

PART II OTHER INFORMATION
Item 1	Legal Proceedings	34

Item 2	Change in Securities and Use of Proceeds	34

Item 3	Defaults Upon Senior Securities	34

Item 4	Submission of Matters to a Vote of Security Holders	34

Item 5	Other Information	34

Item 6	Exhibits and Reports on Form 8-K	35

SIGNATURES		36

CERTIFICATIONS

	July 31, 2003			January 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	97,951		$	105,402
Short-term investments		19,004			37,672
Accounts receivable, net of allowance of $1,010 and $869 at July 31 and January 31, 2003, respectively		16,058			16,514
Deferred taxes, net of liabilities		4,862			6,549
Prepaid expenses and other current assets		1,410			744

Total current assets		139,285			166,881
Long-term investments		55,722			48,374
Property and equipment, net		3,208			3,078
Deferred taxes, net of liabilities		259			103
Goodwill and other intangible assets, net		64,296			45,360
Other assets		300			269

TOTAL ASSETS	$	263,070		$	264,065

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,298		$	533
Income taxes payable		3,951			7,921
Accrued expenses		7,437			8,266
Deferred revenue		28,523			26,010

Total current liabilities		41,209			42,730
Deferred revenue, net of current portion		8,711			8,373

Total liabilities		49,920			51,103

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 shares authorized; 39,927,739 and 40,645,508 shares issued and outstanding at July 31 and January 31, 2003, respectively		40			41
Additional paid-in capital		109,096			126,006
Notes receivable from stockholders		(1,482	)		(8,519	)
Accumulated other comprehensive income		237			709
Retained earnings		105,259			94,725

Total stockholders’ equity		213,150			212,962

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	263,070		$	264,065

	Three Months Ended July 31,					Six Months Ended July 31,
	2003			2002		2003			2002
Revenue:
Software licenses	$	10,047		$	10,305	$	20,899		$	19,956
Maintenance		12,449			11,016		24,360			21,792
Professional services		2,417			1,677		4,021			3,296

Total revenue		24,913			22,998		49,280			45,044

Cost of revenue:
Software licenses		171			332		383			582
Maintenance		1,605			1,415		3,109			2,787
Professional services		2,278			1,500		4,044			2,922

Total cost of revenue		4,054			3,247		7,536			6,291

Gross profit		20,859			19,751		41,744			38,753

Operating expenses:
Sales and marketing		7,014			6,637		13,667			13,001
Research and development		3,420			2,973		6,459			5,892
General and administrative		1,728			1,679		3,468			3,389
Stock-based compensation		—			6		—			17
Amortization of intangible assets		2,136			1,146		3,217			2,291

Total operating expenses		14,298			12,441		26,811			24,590

Operating income		6,561			7,310		14,933			14,163
Interest and other income, net		814			1,198		1,819			2,395

Income before income taxes		7,375			8,508		16,752			16,558
Income taxes		2,655			3,233		6,218			6,292

Net income	$	4,720		$	5,275	$	10,534		$	10,266

Comprehensive income:
Net income	$	4,720		$	5,275	$	10,534		$	10,266
Other comprehensive income (loss):
Foreign currency translation adjustment		(65	)		61		45			42
Unrealized (loss) gain on marketable securities		(449	)		346		(517	)		245

Other comprehensive (loss) income		(514	)		407		(472	)		287

Total comprehensive income	$	4,206		$	5,682	$	10,062		$	10,553

Net income per share:
Basic	$	0.12		$	0.13	$	0.26		$	0.25

Diluted	$	0.12		$	0.13	$	0.26		$	0.25

Weighted average shares used in per share calculations:
Basic		40,102			40,288		40,276			40,228

Diluted		41,028			40,655		40,973			40,658

	Six Months Ended July 31,
	2003			2002
Cash flows from operating activities:
Net income	$	10,534		$	10,266
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		740			662
Provision in allowance for bad debts		84			450
Accrued interest on notes receivable from stockholders, net of cash received		1,243			(340	)
Amortization of deferred stock-based compensation		—			17
Amortization of intangible assets		3,217			2,291
Changes in operating assets and liabilities:
Accounts receivable		1,609			(983	)
Prepaid expenses and other assets		(509	)		(266	)
Accounts payable		656			(135	)
Income taxes payable		(3,986	)		2,064
Accrued expenses		(1,873	)		(1,180	)
Deferred revenue		878			1,608

Net cash provided by operating activities		12,593			14,454

Cash flows used in investing activities:
Purchases of property and equipment		(351	)		(1,267	)
Sales (purchases) of short-term and long-term investments		10,803			(14,124	)
Cash paid for UltiMIS Corporation earn-out		—			(710	)
Cash paid for TeamShare Inc., net of cash received		(19,425	)		—

Net cash used in investing activities		(8,973	)		(16,101	)

Cash flows from financing activities:
Exercise of stock options under the employee stock option plan		2,852			194
Sale of common stock under the employee stock option plan		779			813
Payment of principal on notes receivable from stockholders		5,794			—
Common stock repurchased under the stock repurchase plan		(20,541	)		—

Net cash (used in) provided by financing activities		(11,116	)		1,007

Effect of exchange rate changes on cash		45			42

Net decrease in cash and cash equivalents		(7,451	)		(598	)
Cash and cash equivalents at beginning of period		105,402			85,954

Cash and cash equivalents at end of period	$	97,951		$	85,356

Supplemental disclosures of cash flow information:
Income taxes paid	$	10,494		$	4,549

Non-cash investing and financing activity:
Unrealized (loss) gain on marketable securities	$	(517	)	$	245

Contingent consideration accrued for the UltiMIS acquisition, net	$	—		$	(290	)

	Three Months Ended July 31,						Six Months Ended July 31,
	2003			2002			2003			2002
Net income, as reported	$	4,720		$	5,275		$	10,534		$	10,266
Add: stock-based employee compensation expense included in reported net income, net of tax		—			4			—			11
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of tax		(2,783	)		(2,948	)		(5,337	)		(5,686	)

Pro forma net income	$	1,937		$	2,331		$	5,197		$	4,591

Basic net income per share:
As reported	$	0.12		$	0.13		$	0.26		$	0.25

Pro forma	$	0.05		$	0.06		$	0.13		$	0.11

Diluted net income per share:
As reported	$	0.12		$	0.13		$	0.26		$	0.25

Pro forma	$	0.05		$	0.06		$	0.13		$	0.11

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

	Stock Option Plans		ESPP		Stock Option Plans		ESPP
	Three Months Ended July 31,				Six Months Ended July 31,
	2003	2002	2003	2002	2003	2002	2003	2002
Expected life (in years)	4.5	4.5	0.5	0.5	4.5	4.5	0.5	0.5
Risk-free interest rate	2.8%	2.8%	1.1%	1.1%	2.8%	2.8%	1.1%	1.1%
Volatility	106%	109%	54%	89%	106%	109%	54%	89%
Dividend yield	none	none	none	none	none	none	none	none

	Three Months Ended July 31,		Six Months Ended July 31,
	2003	2002	2003	2002
Basic net income per share—weighted average number of common shares outstanding	40,102	40,288	40,276	40,228
Effect of potentially dilutive securities outstanding—unvested stock options	926	367	697	430

Shares used in diluted net income per share computation	41,028	40,655	40,973	40,658

			As of July 31, 2003
	Total		Paid		Adjustments			Accrued
Severance, payroll taxes and other employee benefits	$	1,483	$	1,135	$	(195	)	$	153
Facilities closures		875		957		195			113
Legal and other miscellaneous		70		65		—			5

Total restructuring accrual		2,428	$	2,157	$	—		$	271

Fixed asset impairment		101

Total restructuring charges	$	2,529

	As of July 31, 2003			As of January 31, 2003
Goodwill	$	35,980		$	28,877

Other intangible assets:
Non-compete agreements		1,634			944
Acquired technology		37,476			27,626
Maintenance service contracts		1,800			—
Trademark/Trade name portfolio		200			—
Customer relationships		2,510			—

		43,620			28,570
Accumulated amortization		(15,304	)		(12,087	)

	$	28,316		$	16,483

Aggregate amortization expense:
Six Months Ended July 31, 2003	$	3,217

Estimated intangible amortization expense:
For the remaining six months of Fiscal 2004	$	5,328
For year ended January 31, 2005		9,216
For year ended January 31, 2006		7,748
For year ended January 31, 2007		4,398
For year ended January 31, 2008		1,626
Thereafter		—

Total	$	28,316

Balance as of January 31, 2003	$	28,877
Activity during the first six months of fiscal 2004:
Goodwill acquired in TeamShare acquisition		7,103
Impairment losses recognized		—

Balance as of July 31, 2003	$	35,980

Tangible assets	$	1,601
Assumed liabilities		(3,814	)
Acquired technology		9,850
Non-compete agreements		690
Maintenance service contracts		1,800
Trademark / Trade name portfolio		200
Customer relationships		2,510
Deferred tax asset		4,491
Deferred tax liability		(6,020	)
Goodwill		7,103

Total consideration	$	18,411

	Percentage of Revenue Three Months Ended July 31,				Percentage of Revenue Six Months Ended July 31,
	2003		2002		2003		2002
Revenue:
Software licenses	40	%	45	%	42	%	44	%
Maintenance	50	%	48	%	50	%	49	%
Professional services	10	%	7	%	8	%	7	%

Total revenue	100	%	100	%	100	%	100	%

Cost of revenue:
Software licenses	1	%	1	%	1	%	1	%
Maintenance	6	%	6	%	6	%	6	%
Professional services	9	%	7	%	8	%	7	%

Total cost of revenue	16	%	14	%	15	%	14	%

Gross profit	84	%	86	%	85	%	86	%

Operating expenses:
Sales and marketing	28	%	29	%	28	%	29	%
Research and development	14	%	13	%	13	%	13	%
General and administrative	7	%	7	%	7	%	7	%
Stock-based compensation	—		—		—		—
Amortization of intangible assets	8	%	5	%	7	%	5	%

Total operating expenses	57	%	54	%	55	%	54	%

Operating income	27	%	32	%	30	%	32	%
Interest and other income, net	3	%	5	%	4	%	5	%

Income before income taxes	30	%	37	%	34	%	37	%
Income taxes	11	%	14	%	13	%	14	%

Net income	19	%	23	%	21	%	23	%

Fiscal Year Ending January 31,
2004 (remaining six months)	$	656
2005		1,410
2006		1,359
2007		1,328
2008		722
Thereafter		120

	$	5,595

Board Nominees	Common For	Common Withheld
Douglas D. Troxel	38,446,732	328,137
Mark E. Woodward	38,372,803	402,066
Robert I. Pender, Jr.	38,443,225	331,644
Jerry T. Ungerman	29,033,336	9,741,533
J. Hallam Dawson	36,898,258	1,876,611
Gregory J. Owens	29,076,588	9,698,281
David G. DeWalt	37,844,625	930,244

Common For		Common Against		Abstained
37,105,330		1,664,872		4,667

Exhibit Number		Exhibit Title
10.18	(a)	Amendment to the Bylaws of Serena Software, Inc. Effective July 28, 2003

31.1	(a)	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	(a)	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	(a)	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit No.		Description
10.18		Amendment to the Bylaws of Serena Software, Inc. Effective July 28, 2003

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002