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 ¨ No x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

As of November 30, 2008, 98,545,777 shares of the Registrant’s common stock, $0.01 par value per share, were outstanding.

SERENA Software, Inc. (“SERENA” or the “Company”) is the largest global independent software company in terms of revenue focused solely on managing change across information technology, or IT, environments. The Company’s products and services are used to manage and control change in mission critical technology and business process applications. The Company’s software configuration management, business process management, helpdesk and requirements management solutions enable its customers to improve process consistency, enhance software integrity, mitigate risks, support regulatory compliance and boost productivity. The Company’s revenue is generated by software licenses, maintenance contracts and professional services. The Company’s software products are typically embedded within its customers’ IT environments, and are generally accompanied by renewable annual maintenance contracts.

A reclassification of certain capitalized internal use software costs from property and equipment, net to other intangible assets, net has been made to prior year balances in order to conform to the October 31, 2008 presentation. Such reclassification had no impact on operating income in all periods reported.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.

The Company’s significant accounting policies are described in the notes to the Company’s consolidated financial statements for the years ended January 31, 2006, 2007 and 2008, included in the Company’s Annual Report on Form 10-K filed on April 21, 2008. There have been no changes to the Company’s significant accounting policies.

Capitalized Software Costs—For website development costs and the development costs related to the Company’s on-demand application services, the Company follows the guidance of Emerging Issues Task Force (“EITF”) Issue No. 00-2, Accounting for Web Site Development Costs (“EITF 00-2”), and EITF No. 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware (“EITF 00-3”). EITF 00-2 sets forth the accounting for website development costs based on the website development activity. EITF 00-3 sets forth the accounting for software in a hosting arrangement. As such, the Company follows the guidance set forth in The American Institute of Certified Public Accountants (“AICPA”) Statement of Position 98-1 (“SOP 98-1”) “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” for costs incurred for computer software developed or obtained for internal use. SOP 98-1 requires companies to capitalize qualifying computer software costs, which are incurred during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. The Company capitalized $1.4 million and $4.6 million of costs in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively. These capitalized costs will be amortized on a straight line basis over the expected useful life of the software from the date the application becomes available for its intended use, which is three years.

Effective February 1, 2006, the Company adopted the provisions of, and accounted for stock-based compensation in accordance with, the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment“ which replaced Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation“ and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is typically measured at the grant date based on the fair value of the award over the requisite service period, which is the vesting period. The Company elected the modified-prospective method of adoption, under which prior periods are not revised for comparative purposes. The Company has elected the graded-vesting attribution method for recognizing stock-based compensation expense over the requisite service period for each separately vesting tranche of awards as though the awards were, in substance, multiple awards. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. Estimated compensation for grants that were outstanding as of the effective date are being recognized over the remaining service period using the compensation cost estimated for the SFAS 123 pro forma disclosures.

In connection with the consummation of the merger (the “Merger”) of Spyglass Merger Corp. with and into the Company on March 10, 2006, the Company entered into a restricted stock agreement, dated as of March 10, 2006 with Robert Pender, the Company’s Chief Financial Officer. Pursuant to this agreement, Mr. Pender was issued 307,200 shares of the Company’s common stock. The award to Mr. Pender is unvested and subject to the executive’s continued employment with the Company through June 16, 2010. In addition, if the Company is subject to a “change in control” (as defined in the agreement) while Mr. Pender remains an employee of the Company, his remaining unvested shares will immediately vest in full.

Following the completion of the Merger on March 10, 2006, the Company established a new stock incentive plan, the 2006 Stock Incentive Plan (the “2006 Plan”), which governs, among other things, the grant of options, restricted stock bonuses, and other forms of share-based payments covering shares of the Company’s common stock to our employees (including officers), directors and consultants. The Company’s common stock representing 12% of outstanding common stock on a fully diluted basis as of the date of the Merger is reserved for issuance under the 2006 Plan. Each award under the 2006 Plan will specify the applicable exercise or vesting period, the applicable exercise or purchase price, and such other terms and conditions as deemed appropriate. Stock options granted under the 2006 Plan are either “time options” that will vest and become exercisable over a four-year period or “time and performance options” that will vest based on the achievement of certain performance targets over a five-year period following the date of grant. All options granted under the 2006 Plan will expire not later than ten years from the date of grant, but generally will terminate earlier upon termination of employment. In the event of a sale of substantially all of the assets of the Company, or a merger or acquisition of the Company, the Board of Directors may provide that awards granted under the 2006 Plan will be cashed out, continued, replaced with new awards that substantially preserve the terms of the original awards, or terminated, with acceleration of vesting of the original awards determined at the discretion of the Board of Directors.

As of October 31, 2008, a total of 13,515,536 shares of common stock were reserved for issuance upon the exercise of stock options and for the future grant of stock options or awards under the 2006 Plan.

As of October 31, 2008, total unrecognized compensation cost related to unvested stock options and the restricted stock award was $8.1 million. Unvested stock options are expected to be recognized over a period of 4 to 5 years and the restricted stock award is expected to be recognized over a period of 4 years.

The fair value of each stock option grant under the stock option plans is 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 months and nine months ended October 31, 2008 and 2007.

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.

With respect to the amounts determined under SFAS No. 123R, as set forth above, the Company’s expected volatility is based on the combination of historical volatility of the Company’s common stock and the Company’s peer group’s common stock over the period commensurate with the expected life of the options and the mean historical implied volatility from traded options. To assist management in determining the estimated fair value of the Company’s common stock, the Company engaged a third-party valuation specialist to perform a valuation as of July 31, 2008. In estimating the fair value of the Company’s common stock as of July 31, 2008, the Company employed a two-step approach that first estimated the fair value of the Company as a whole, and then allocated the enterprise value to the Company’s common stock. The risk-free interest rates are derived from the average U.S. Treasury constant maturity rates during the period, which approximate the rate in effect at the time of grant for the respective expected term. The expected terms are based on the observed and expected time to post-vesting exercise or cancellation of options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero. Under SFAS 123R, the Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses forecasted projections to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest.

The following table sets forth the summary of option activity under our stock option programs for the nine months ended October 31, 2008:

Information regarding the stock options outstanding at October 31, 2008 is summarized as follows:

The aggregate intrinsic value of options outstanding and options exercisable as of October 31, 2008 was $15.9 million and $10.1 million, respectively.

Stock-based compensation expense (benefit) for the three months and nine months ended October 31, 2008 and 2007 is categorized as follows (in thousands):

In connection with the Company’s acquisition of Projity, Incorporated, a provider of a project management solution deployed on a SaaS basis, in the fiscal quarter and nine months ended October 31, 2008, the Company accrued $0.2 million in acquisition-related charges. In connection with this acquisition and prior small technology acquisitions, the Company paid $0.4 million in acquisition-related charges in the nine months ended October 31, 2008. The nature of the acquisition-related charges and the amounts paid and accrued as of October 31, 2008 are summarized as follows (in thousands):

Acquisition-related accruals at January 31, 2008 and October 31, 2008 totaling $0.3 million and $0.1 million, respectively, are reflected in accrued expenses in the Company’s condensed consolidated balance sheets.

On October 30, 2008, in response to the general weakening of the worldwide economy, an expected continued slowdown in IT spending and a decline in the Company’s license revenue for the current fiscal quarter, the Company announced and began to execute a plan to reduce its workforce by approximately 10%, or 92 positions, affecting all parts of the organization. The Company has realized and expects to continue to realize cost savings going forward as a result of this restructuring and other cost saving initiatives. This restructuring is substantially complete, and in connection with these actions, the Company recorded a restructuring charge in the fiscal quarter ended October 31, 2008 consisting principally of severance, payroll taxes and other employee benefits totaling $1.6 million and legal and other miscellaneous costs totaling $0.1 million. The nature of the restructuring charges and the amounts paid and accrued as of October 31, 2008 are summarized as follows (in thousands):

Restructuring accruals at January 31, 2008 and October 31, 2008 totaling $0.0 million and $1.5 million, respectively, are reflected in accrued expenses in the Company’s condensed consolidated balance sheets.

The Company accounts for goodwill and certain intangible assets after an acquisition is completed in accordance with SFAS No. 142. As such, goodwill is not amortized but instead periodically tested for impairment. Under SFAS No. 142, goodwill is required to be tested for impairment at least annually and also on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred, such as an adverse change in legal factors, business climate, or regulatory environment. As a result of the general weakening of the worldwide economy, a continued slowdown in IT spending and a decline in the Company’s license revenue, the Company performed Step 1 of the goodwill impairment test required by SFAS No. 142 by comparing the fair value of the reporting unit, which is the Company, to its carrying value. Because the fair value exceeded the carrying value of the reporting unit, the Company was not required to proceed to Step 2 for the goodwill impairment calculation. The Company used a combination of the market approach based on comparable company revenue and EBITDA multiples and a discounted cash flow approach to calculate the fair value of the reporting unit. Factors that could lead to a subsequent recognition of impairment include a continued weakening of the worldwide economy, further deterioration in comparable company stock prices and their associated revenue and EBITDA multiples, reductions in IT spending by the Company’s customers and future declines in the Company’s license revenue. The Company will perform the goodwill impairment test again at the end of its fiscal year and, if there is a further deterioration in one or more of the foregoing factors, it is at least reasonably possible that the Company’s carrying value will exceed its fair value, which would result in the Company recording material goodwill impairment and a material impairment charge in the fiscal quarter ending January 31, 2009.

Significant assumptions and estimates are made when determining if the Company’s goodwill has been impaired or if there are indicators of impairment. The Company bases its estimates on assumptions that it believes to be reasonable, but actual future results may differ from those estimates as the assumptions used by the Company are inherently unpredictable and uncertain. These estimates include estimates of future market growth and trends, forecasted revenue and costs, expected periods of asset utilization, appropriate discount rates and other variables.

The change in the carrying amount of goodwill for the nine months ended October 31, 2008 is as follows (in thousands):

As of October 31, 2008, the weighted average remaining amortization period for acquired technology is 26 months, for trademark/trade name portfolio and customer relationships is 64 months and for capitalized software is 18 months. The total weighted average remaining amortization period for all identifiable intangible assets is 49 months. The aggregate amortization expense of acquired technology and other intangible assets was $18.1 million and $18.0 million in the three months ended October 31, 2008 and 2007, respectively, and $54.0 million in both the nine months ended October 31, 2008 and 2007. There were no impairment charges in the three month and nine month periods ended October 31, 2008 and 2007.

Other intangibles, net include capitalized software, net. In the first nine months of fiscal year 2009, the Company capitalized $4.6 million of software costs. These capitalized software costs will be amortized on a straight line basis over the expected useful life of the software, which is three years. See Notes 1(b) Reclassification and 1(d) Capitalized Software Costs of notes to our unaudited condensed consolidated financial statements for further information regarding capitalized software costs.

We report components of comprehensive loss annually in our consolidated statements of stockholders’ equity (deficit). Comprehensive loss consists of net loss and foreign currency translation adjustments. Total comprehensive loss for the three months and nine months ended October 31, 2008 and 2007 is as follows (in thousands):

In October 2008, the Financial Accounting Standards Board (“FASB’) issued an additional FASB Staff Position that clarifies the application of SFAS No. 157 in a market that is not active. We have adopted the required provisions of SFAS No. 157 beginning in the first quarter of fiscal 2009. The adoption of the required provisions of SFAS No. 157 did not have a material impact on our financial position, results of operations or cash flows. See Note 9 of notes to our unaudited condensed consolidated financial statements for additional information regarding the adoption of this Statement. We have not determined whether the adoption of the deferred provisions of SFAS No. 157 will have a material effect on our consolidated financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP (the GAAP hierarchy). This Statement will not have a material effect on our consolidated results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133.” This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for fiscal years and interim periods beginning after November 15, 2008. This Statement, when adopted, will have no effect on our consolidated results of operations and financial position. With the adoption of this Statement, the Company will provide the enhanced disclosures about derivative instruments and hedging activities as required.

In February 2008, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions,” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP FAS 157-1 removes leasing from the scope of SFAS No. 157, “Fair Value Measurements.” FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a

recurring basis (at least annually). See Note 9 of notes to our unaudited condensed consolidated financial statements for further discussion regarding SFAS No. 157 and fair value measurements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations“, (“SFAS 141(R)”), a revision of Statement of Financial Accounting Standards No. 141 (“SFAS 141”). This Statement requires assets and liabilities acquired in a business combination, contingent consideration and certain acquired contingencies, to be measured at their fair value as of the date of acquisition. This Statement also requires that acquisition-related costs and restructuring costs be recognized separately from the business combination. This Statement is effective for fiscal years beginning after December 15, 2008 and will be effective for business combinations entered into on or after January 1, 2009. The Company will apply the guidance of SFAS 141(R) to business combinations completed on or after January 1, 2009. Its effects on future periods will depend on the nature and significance of any acquisitions subject to this Statement.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115,” which became effective February 1, 2008. SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. The Company adopted this Statement as of February 1, 2008 and the adoption of this Statement did not have a material effect on our consolidated results of operations or financial position.

Debt as of October 31, 2008 and January 31, 2008 consisted of the following (in thousands):

In connection with the consummation of the merger (“Merger”) of Spyglass Merger Corp. (“Spyglass”) with and into Serena on March 10, 2006, the Company entered into a senior secured credit agreement pursuant to a debt commitment that we obtained from affiliates of the initial purchasers of our senior subordinated notes (the “Credit Facility”).

General. The borrower under the Credit Facility initially was Spyglass and immediately following completion of the Merger became the Company. The Credit Facility provides for (1) a seven-year term loan in the amount of $400.0 million, which will amortize at a rate of 1.00% per year on a quarterly basis for the first six and three-quarters years after the closing date of the Merger, with the balance paid at maturity, and (2) a six-year revolving credit facility that permits loans in an aggregate amount of up to $75.0 million, which includes a letter

of credit facility and a swing line facility. In addition, subject to certain terms and conditions, the credit facility provides for one or more uncommitted incremental term loan or revolving credit facilities in an aggregate amount not to exceed $150.0 million. Proceeds of the term loan on the initial borrowing date were used to partially finance the Merger, to refinance certain indebtedness of the Company and to pay fees and expenses incurred in connection with the Merger. Proceeds of the revolving credit facility and any incremental facilities will be used for working capital and general corporate purposes of the Company and its subsidiaries.

In the quarters ended July 31, 2006, April 30, 2007 and January 31, 2008, the Company made principal payments on the $400.0 million senior secured term loan totaling $25.0 million, $30.0 million and $25.0 million, respectively. Any principal amount that has been repaid or prepaid under the senior secured term loan may not be reborrowed under the senior secured credit agreement.

In the quarter ended October 31, 2008, the Company borrowed $65.0 million under the six-year revolving credit facility. Proceeds from the revolving credit facility will be used for working capital and general corporate purposes of the Company and its subsidiaries. During the fiscal quarter ended October 31, 2008, we provided a notice of borrowing to Lehman Commercial Paper, Inc. (“LCPI”), as the administrative agent under our senior secured credit agreement, seeking to borrow $75 million under commitments to fund the revolving credit facility. Based on our notice of borrowing, participating lenders funded $65 million and LCPI failed to fund $10 million of the revolving credit facility. In September 2008, Lehman Brothers Holdings Inc., of which LCPI is a subsidiary, filed a petition under Chapter 11 of the U.S. Bankruptcy Code. We do not expect LCPI to fund, or another lender to assume LCPI’s commitment to fund its portion of the revolving credit facility and, as a result, consider the revolving credit facility as being fully drawn. The six-year revolving credit facility is due March 10, 2012 and currently incurs interest at 5.75% per annum, which is equal to the base rate of 4.5% plus a spread of 1.25%.

As of October 31, 2008, we have outstanding $188.6 million principal amount of senior subordinated notes, which bear interest at a rate of 10.375%, payable semi-annually on March 15 and September 15, and which mature on March 15, 2016. Each of our domestic subsidiaries that guarantees the obligations under our senior secured credit agreement will jointly, severally and unconditionally guarantee the notes on an unsecured senior subordinated basis. We presently do not have any domestic subsidiaries and, accordingly, there are no guarantors. The notes are our unsecured, senior subordinated obligations, and the guarantees, if any, will be unsecured, senior subordinated obligations of the guarantors. The notes are subject to redemption at our option under terms and conditions specified in the indenture related to the notes, and may be redeemed at the option of the holders at 101% of their face amount, plus accrued and unpaid interest, upon certain change of control events.

In May 2008 and July 2008, the Company repurchased, in privately negotiated transactions, $9.4 million and $2.0 million, respectively, of principal amount of its original outstanding $200.0 million senior subordinated notes. The repurchases resulted in a gain of $0.6 million from the extinguishment of debt in the fiscal quarter ended July 31, 2008 which has been included in interest expense in the condensed consolidated statement of operations.

In November 2008 and December 2008, subsequent to the most recent fiscal quarter ended October 31, 2008, the Company repurchased, in four separate privately negotiated transactions, an aggregate of $14.2 million of principal amount of its senior subordinated notes. The repurchases will result in a gain of $5.1 million from the extinguishment of debt in the fiscal quarter ending January 31, 2009, which will be included in interest expense in the condensed consolidated statement of operations in the fiscal quarter ending January 31, 2009.

The senior subordinated notes and the Credit Facility contain various covenants including limitations on additional indebtedness, capital expenditures, restricted payments, the incurrence of liens, transactions with affiliates and sales of assets. In addition, the Credit Facility requires the Company to comply with certain financial covenants, including leverage and interest coverage ratios and capital expenditure limitations. The Company was in compliance with all of the covenants of the Credit Facility as of October 31, 2008. The Company expects to be in compliance with these financial covenants as of January 31, 2009.

Our senior secured credit agreement requires us to maintain a consolidated “Adjusted EBITDA” to consolidated interest expense ratio of a minimum of 1.75x by the end of the fiscal year ending January 31, 2009 and 2.00x by the end of the fiscal year ending January 31, 2010. For further information regarding a description and definition of Adjusted EBITDA, see the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008 filed with the SEC on April 21, 2008, and specifically, Part II Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Consolidated interest expense is defined in the senior secured credit agreement as consolidated cash interest expense less cash interest income and is further adjusted for certain non-cash interest expenses and other items. We are also required to maintain a consolidated total debt to consolidated Adjusted EBITDA ratio at a maximum of 6.00x by the end of the fiscal year ending January 31, 2009, 5.50x by the end of the fiscal year ending January 31, 2010 and 5.00x by the end of the fiscal year ending January 31, 2011. Consolidated total debt is defined in the senior secured credit agreement as total debt other than certain indebtedness and is reduced by the amount of cash and cash equivalents on our consolidated balance sheet in excess of $5.0 million. As of October 31, 2008, our consolidated total debt for purposes of computing compliance with the covenant was $479.5 million. Failure to satisfy these ratio requirements would constitute a default under the senior secured credit agreement. If our lenders failed to waive any such default, our repayment obligations under the senior secured credit agreement could be accelerated, which would also constitute a default under the indenture governing the senior subordinated notes.

Our ability to incur additional debt and make certain restricted payments under the indenture governing the senior subordinated notes, subject to specified exceptions, is tied to an Adjusted EBITDA to fixed charges ratio of at least 2.0x, except that we may incur certain debt and make certain restricted payments and certain permitted investments without regard to the ratio, such as our ability to incur up to an aggregate principal amount of $545.0 million under our senior secured credit agreement (which amount represents the total amount of borrowings originally available under our senior secured credit agreement less $80.0 million of principal payments), to acquire persons engaged in a similar business that become restricted subsidiaries and to make other investments equal to the greater of $25.0 million or 2% of our consolidated assets. Fixed charges is defined in the indenture governing the senior subordinated notes as consolidated interest expense less interest income, adjusted for acquisitions, and further adjusted for non-cash interest expense.

The income tax benefit was $7.5 million and $16.0 million in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to $4.0 million and $17.0 million in the same quarter and nine months, respectively, a year ago. Our projected effective income tax benefit rate for the twelve months of fiscal year 2009 is 44%. Our effective income tax benefit rate for the twelve months of fiscal year 2008 was 45%. Our effective income tax benefit rate is greater than the statutory rate due to the impacts of permanently reinvested foreign earnings and the domestic production deduction.

In connection with the preparation of its Quarterly Report on Form 10-Q for the quarter ended October 31, 2008, the Company determined that it had incorrectly under-reported a tax benefit of approximately $0.8 million in the fiscal year ended January 31, 2008 resulting from an error in which the Company failed to include in taxable income foreign income under Subpart F, Section 956, and Section 78 and the offsetting benefit from foreign tax credits. Because the effect of correcting this error in the current quarter’s financial statements is quantitatively material, the Company considered the guidance set forth in paragraph 29 of APB Opinion No. 28 in concluding that the correction of this error in the current quarter is in accordance with the guidance, which states that in determining materiality for the purpose of reporting the correction of an error, amounts should be related to the estimated income for the full fiscal year and also to the effect on the trend of earnings. This error was material with respect to an interim period but not material with respect to the estimated income for the full fiscal year or to the trend of earnings. Accordingly, the Company has corrected this error in the quarter ended October 31, 2008.

At January 31, 2008, we had total federal, state and foreign unrecognized tax benefits of $11.7 million, including interest of $2.0 million. Of the total unrecognized tax benefits, $1.8 million, if recognized, would reduce our effective tax rate in the period of recognition. During the fiscal nine months ended October 31, 2008, we accrued immaterial amounts in interest and penalties. With respect to these unrecognized tax benefits, we are currently unable to make a reasonably reliable estimate as to the period of cash settlement, if any, with the respective taxing authorities. The Company believes that it is reasonably possible that its unrecognized tax benefits will decrease by approximately $0.3 million in the next twelve months due to the anticipated settlement of certain state tax audits.

Our income tax returns are routinely audited by federal, state and foreign tax authorities. We are currently under examination by the Internal Revenue Service for the January 31, 2006 tax year and by various state, local and foreign tax jurisdictions. The statute of limitations on our federal tax return filings remains open for the years ended January 31, 2004 through January 31, 2008. The statute of limitations on U.K. income tax filings remain open for the years ended January 31, 1999 through January 31, 2007. There are differing interpretations of tax laws and regulations, and as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. While we believe our positions comply with applicable laws, we periodically evaluate our exposures associated with our tax filing positions.

We record liabilities related to uncertain tax positions in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes. We do not believe any such uncertain tax positions currently pending will have a material adverse effect on our condensed consolidated financial statements as a whole, although an adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period.

As described in Note 6 of notes to our unaudited condensed consolidated financial statements, the Company adopted the provisions of SFAS No. 157 as amended by FSP FAS 157-1 and FSP FAS 157-2 on February 1, 2008. Pursuant to the provisions of FSP FAS 157-2, the Company will not apply the provisions of SFAS No. 157 until February 1, 2009 for any nonfinancial assets and nonfinancial liabilities included in the consolidated statement of financial position. The Company recorded no change to its opening balance of retained earnings as of February 1, 2008 as it did not have any financial instruments requiring retrospective application under the provisions of SFAS No. 157.

SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs). In accordance with SFAS No. 157, these two types of inputs have created the following fair value hierarchy:

SFAS No. 157 requires the use of observable market data if such data is available without undue cost and effort.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at October 31, 2008 consistent with the fair value hierarchy provisions of SFAS No. 157 (in thousands):

At October 31, 2008, the Company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

The Company is involved in various legal proceedings that have arisen during the ordinary course of its business. The final resolution of these matters, individually or in the aggregate, is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include, but are not limited to, statements about financial projections, operational plans and objectives, future economic performance and other projections and estimates contained in this report. When used in this report, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, they are subject to important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, including those risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2008 and Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2008. We assume no obligation to update any forward-looking statements contained in this report. It is important that the discussion below be read together with the attached condensed consolidated financial statements and notes thereto and the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2008 and Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2008.

We are the largest global independent software company focused solely on managing change across information technology, or IT, environments. Our products and services are used to manage and control change in mission critical technology and business process applications. Our software configuration management, business process management, helpdesk and requirements management solutions enable our customers to improve process consistency, enhance software integrity, mitigate risks, support regulatory compliance and boost productivity. Our revenue is generated by software licenses, maintenance contracts and professional services. Our customers rely on our software products, which are typically embedded within their IT environments, and are generally accompanied by renewable annual maintenance contracts.

We derive our revenue from software licenses, maintenance and professional services. Our distributed systems products are licensed on a per user seat basis. Customers typically purchase mainframe products under million instructions per second, or MIPS-based, perpetual licenses. Mainframe software products and applications are generally priced based on hardware computing capacity—the higher a mainframe computer’s MIPS capacity, the higher the cost of the software license.

With the introduction of our software-as-a-service, or SaaS, business in the first quarter of fiscal 2009, we also derive revenue from subscription and support, which are comprised of subscription fees from customers accessing our on-demand application service. The revenue generated from our SaaS business was immaterial to our consolidated financial results for the fiscal quarter and fiscal nine months ended October 31, 2008.

We also provide ongoing maintenance, which includes technical support, version upgrades and enhancements, for an annual fee of approximately 21% of the discounted list price of the licensed product for our distributed systems products and approximately 17% to 18% of the discounted list price of the licensed product for our mainframe products. We recognize maintenance revenue over the term of the maintenance contract on a straight-line basis.

Professional services revenue is derived from technical consulting and educational services. Our professional services are typically billed on a time and materials basis and revenue is recognized as the related services are performed. Maintenance revenue and professional services revenue have lower gross profit margins than software license revenue as a result of the costs inherent in operating our customer support and professional services organizations.

In the fiscal quarter ended October 31, 2008, when compared to the same quarter a year ago, total revenues decreased 10%, as total revenues were $61.8 million in the current fiscal quarter versus $68.5 million in the same

quarter a year ago. In the fiscal nine months ended October 31, 2008, when compared to the same nine months a year ago, total revenues increased by 1%, as total revenues were $194.9 million in the current fiscal nine months versus $194.2 million in the same nine months a year ago. The decrease in total revenues in the current fiscal quarter, when compared to the same quarter a year ago, was primarily the result of the general weakening of the worldwide economy that resulted in a decline in our sales of our products and services across all product lines and geographies, all partially offset by increases in maintenance revenue from consistent renewal rates and growth in our installed software licenses base and, to a lesser extent, maintenance price increases. Total revenues were relatively flat in the current fiscal nine months, when compared to the same nine months a year ago, due to the general weakening of the worldwide economy that took effect predominantly in the most recent fiscal quarter and resulted in a decline in sales of our products and services across all product lines and geographies.

Over the course of the past year, the global economic environment has deteriorated significantly. Negative developments include declining values in real estate, restricted availability of credit and capital, liquidity concerns over and the failure of major financial institutions, and recent significant declines and volatility in our global financial markets. The United States and other countries have also experienced declines in economic activity and increases in unemployment. The recent global financial crisis and the continuing decline and uncertainty in global economic conditions has negatively affected, and could continue to negatively affect, our business, results of operations and financial condition.

In response to the general weakening of the worldwide economy, an expected continued slowdown in IT spending and a decline in our license revenue for the current fiscal quarter, management implemented a plan to reduce its workforce by approximately 10%, or 92 positions, affecting all parts of the organization. We have realized and expect to continue to realize cost savings going forward as a result of this restructuring and other cost savings initiatives. The restructuring is substantially complete, and in connection with these actions, we recorded a restructuring charge in the fiscal quarter ended October 31, 2008 consisting principally of severance, payroll taxes and other employee benefits totaling $1.6 million and legal and other miscellaneous costs totaling $0.1 million.

In the fiscal quarter and fiscal nine months ended October 31, 2008, 60% and 63%, respectively, of our total software license revenue came from our distributed systems products, as compared to 59% and 63%, respectively, in the same quarter and nine months a year ago. In the fiscal quarter and fiscal nine months ended October 31, 2008, 40% and 37%, respectively, of our total software license revenue came from our mainframe products, as compared to 41% and 37%, respectively, in the same quarter and nine months a year ago.

Historically, our revenue has been generally attributable to sales in North America, Europe and to a lesser extent Asia Pacific. Revenue attributable to sales in North America accounted for approximately 72% and 65% of our total revenue in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to 69% and 67% in the same quarter and nine months, respectively, a year ago.

Our international revenue is attributable principally to our European operations. International revenue accounted for approximately 28% and 35% of our total revenue in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to 31% and 33% in the same quarter and nine months, respectively, a year ago.

This discussion 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 judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in

the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by us. If actual results differ significantly from these estimates, the resulting changes could have a material adverse effect on our future reported financial results.

On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, trade accounts receivable and allowance for doubtful accounts, impairment or disposal of long-lived assets, accounting for income taxes, projections used in purchase accounting, impairment of goodwill, valuation of our common stock, and assumptions related to valuation of our options and restricted stock, among other things. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We refer to accounting estimates of this type as critical accounting policies.

We believe the following are critical accounting policies and estimates used in the preparation of our consolidated financial statements.

In the third quarter of fiscal year 2009, there has been no change in the above critical accounting policies or the underlying assumptions and estimates used in their application. See our Annual Report on Form 10-K for the fiscal year ended January 31, 2008 filed with the SEC on April 21, 2008 for further information regarding our critical accounting policies and estimates.

For a description of recent accounting pronouncements and their anticipated effect on our consolidated financial statements, see Note 6 of notes to our unaudited condensed consolidated financial statements.

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 decreased $6.6 million, or 10%, to $61.9 million in the fiscal quarter ended October 31, 2008 from $68.5 million in the same quarter a year ago. For the fiscal nine months ended October 31, 2008, total revenue increased $0.7 million, or less than 1%, to $194.9 million from $194.2 million in the same nine months a year ago.

The following table summarizes software licenses, maintenance and professional services revenues for the periods indicated (in thousands, except percentages):

Software Licenses. Software licenses revenue as a percentage of total revenue was 21% and 24% in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to 29% and 27% in the same quarter and nine months, respectively, a year ago. For the fiscal quarter ended October 31, 2008, when compared to the same quarter a year ago, and to a lesser extent for the fiscal nine months ended October 31, 2008, when compared to the same nine months a year ago, the decrease in software licenses revenue both in absolute dollars and as a percentage of total revenue is due to the general weakening of the worldwide economy that accelerated in the current fiscal quarter which resulted in a decline in software license revenue across all product lines during the current fiscal quarter, offset in part by increases in software license sales over the nine months ended October 31, 2008 when compared to the same nine months a year ago, from our Mariner and Serena Business Mashups products. Distributed systems products accounted for $7.8 million or 60% and $30.0 million or 63% of total software licenses revenue in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to $11.7 million or 59% and $33.0 million or 63% in the same quarter and nine months, respectively, a year ago. We expect that our Dimensions, ZMF and Serena Business Mashups products will continue to account for a substantial portion of our software license revenue in the future. We expect our software license revenue for the quarter ending January 31, 2009 to increase over the current fiscal quarter due to our historically strong sales in our fiscal quarter ending January 31, but decline year over year as a result of the expected continuation of adverse worldwide economic conditions and reduced IT spending.

Maintenance. Maintenance revenue as a percentage of total revenue was 66% and 63% in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to 58% and 59% in the same quarter and nine months, respectively, a year ago. For both the fiscal quarter and fiscal nine months, when compared to the same quarter and nine months a year ago, the increase in maintenance revenue, in both absolute dollars and as a percentage of total revenue, is due to the growth in our installed software license base, as new licenses generally include one year of maintenance, maintenance price increases, and the impact of the maintenance revenue write-down to fair value recorded in connection with purchase accounting for the March 2006 merger totaling $0.1 and $0.8 million in the current fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to an impact of $0.5 million and $1.9 million in the same quarter and nine months, respectively, a year ago. We expect maintenance revenue to grow in absolute dollars in the near term as maintenance contracts renew.

Professional Services. Professional services revenue as a percentage of total revenue was 13% in both the fiscal quarter and fiscal nine months ended October 31, 2008, as compared to 13% and 14% in the same quarter and nine months, respectively, a year ago. For both the current fiscal quarter and fiscal nine months, when compared to the same quarter and nine months a year ago, the decrease in absolute dollars is predominantly due to a decline in the number of smaller consulting engagements primarily as a result of lower software license revenue and the general weakening of the worldwide economy. In general, professional services revenue is attributable to consulting opportunities resulting from our installed customer base and our consulting service capabilities.

Cost of revenue, which consists of cost of software licenses, cost of maintenance, cost of professional services and amortization of acquired technology, was 34% and 33% of total revenue in the current fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to 31% and 33% in the same quarter and nine months, respectively, a year ago.

The following table summarizes cost of revenue for the periods indicated (in thousands, except percentages):

Software Licenses. Cost of software licenses consists principally of fees associated with integrating third party technology into our PVCS and Dimensions distributed systems products and, to a lesser extent, salaries, bonuses and other costs associated with our product release organization. Cost of software licenses as a percentage of total software licenses revenue was 3% in both the fiscal quarter and fiscal nine months ended October 31, 2008, as compared to 0% and 2% in the same quarter and nine months, respectively, a year ago. For both the fiscal quarter and fiscal nine months ended October 31, 2008, when compared to the same quarter and nine months a year ago, the increase in absolute dollars was primarily due to certain OEM agreement adjustments reflected in the prior year’s fiscal quarter ended October 31, 2007, partially offset by a current year decrease in absolute dollars due to decreased sales of our distributed systems products with associated fees for integrated third party technology.

Maintenance. Cost of maintenance consists primarily of salaries, bonuses and other costs associated with our customer support organization. Cost of maintenance as a percentage of total maintenance revenue was 10% in both the fiscal quarter and fiscal nine months ended October 31, 2008, as well as in both the same quarter and nine months a year ago. For the current fiscal quarter and fiscal nine months, when compared to the same quarter and nine months a year ago, in absolute dollar terms, the increase in cost of maintenance was primarily attributable to increases in expenses associated with our customer support organization resulting from the growth in both our maintenance revenue and installed customer base.

Professional Services. Cost of professional services consists of salaries, bonuses and other costs associated with supporting and growing our professional services organization. Cost of professional services as a percentage of total professional services revenue was 96% and 97% in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to 93% and 92% in the same quarter and nine months, respectively, a year ago. For both the current fiscal quarter and fiscal nine months, when compared to the same quarter and nine months a year ago, the decrease in the cost of professional services in absolute dollars was predominantly due to a decline in the number of smaller professional services engagements. As a percentage of total professional services revenue, the increase in both the current fiscal quarter and fiscal nine months ended

October 31, 2008, when compared to the same quarter and nine months a year ago, was the result of the rate of decline in costs associated with our professional services organizations being less than the rate of decline in professional services revenue.

Amortization of Acquired Technology. In connection with our merger in March 2006, and to a lesser extent small technology acquisitions in March 2006, October 2006 and September 2008, we have recorded $181.9 million in acquired technology, reduced by accumulated amortization totaling $97.7 million as of October 31, 2008. For the fiscal quarter ended October 31, 2008, when compared to the same quarter a year ago, the slight increase in amortization expense was predominantly due to the increase in amortization expense associated with the newly added acquired technology from the small technology acquisition in September 2008. For the fiscal nine months ended October 31, 2008, when compared to the same nine months a year ago, the slight decline in amortization expense was predominantly due to the decline in amortization expense coming from the acquired technology recorded in connection with a smaller technology acquisition in October 2006. Amortization expense is predominantly due to the acquired technology recorded in the merger and remained relatively unchanged for all periods presented. Assuming there are no impairments and no acquisitions, we expect to record $9.0 million in amortization expense in the remaining quarter of fiscal year 2009 and quarterly thereafter for approximately the following two fiscal years.

The following table summarizes operating expenses for the periods indicated (in thousands, except percentages):

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 31% in both the fiscal quarter and fiscal nine months ended October 31, 2008, as compared to 29% in both the same quarter and nine months a year ago. For the fiscal quarter ended October 31, 2008, when compared to the same quarter a year ago, the decrease in absolute dollars is the result of lower direct costs, such as travel and sales commissions, associated with lower software licenses revenue, and decreases in stock-based compensation expenses. For the fiscal nine months ended October 31, 2008, when compared to the same nine months a year ago, in both absolute dollars and as a percentage of total

revenue, the increase was the result of the expansion of our direct sales and marketing organizations to support license revenue growth and marketing activities related to our products and services, all partially offset by lower direct costs associated with lower software licenses revenue and decreases in stock-based compensation expenses. In absolute dollar terms, we expect sales and marketing expenses to decrease as a result of the restructuring described below through the end of the current fiscal year.

Research and Development. Research and development expenses consist primarily of salaries, bonuses, payroll taxes, employee benefits and costs attributable to research and development activities. Research and development expenses as a percentage of total revenue were 15% and 14% in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to 15% and 16% in the same quarter and nine months, respectively, a year ago. For both the fiscal quarter and fiscal nine months ended October 31, 2008, when compared to the same quarter and nine months a year ago, the decrease in research and development expenses in absolute dollars is primarily attributable to redeploying development resources to our on-demand application service projects where costs totalling $1.4 million and $4.6 million of costs in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively, were capitalized in accordance with generally accepted accounting principles and, to a lesser extent, decreases in stock-based compensation expenses. We expect research and development expenses to decrease in absolute dollar terms as a result of the restructuring through the end of the current fiscal year, partially offset by reduced efforts on projects where costs may be capitalized in accordance with generally accepted accounting principles.

General and Administrative. General and administrative expenses consist primarily of salaries, bonuses, payroll taxes, 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% and 8% in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to 6% and 8% in the same quarter and nine months, respectively, a year ago. For both the fiscal quarter and fiscal nine months ended October 31, 2008, when compared to the same quarter and nine months a year ago, the decrease in general and administrative expenses in absolute dollars is primarily attributable to decreases in stock-based compensation expenses, partially offset by general growth in our general and administrative infrastructure to support the expansion of our sales and marketing organizations and research and development efforts. We expect general and administrative expenses to remain relatively flat in absolute dollar terms through the end of the current fiscal year.

Amortization of Intangible Assets. In connection with our merger in March 2006, and to a lesser extent two small technology acquisitions in March 2006 and October 2006, and in connection with our capitalizing certain software costs including more recently software development costs related to our on-demand applications beginning in the first quarter of fiscal year 2009, we have recorded $304.9 million in identifiable intangible assets, reduced by accumulated amortization totaling $101.4 million as of October 31, 2008. For both the fiscal quarter and fiscal nine months ended October 31, 2008 and the same quarter and nine months a year ago, amortization expense was entirely due to the identifiable intangible assets recorded in connection with the March 2006 merger and the smaller technology acquisition in October 2006. Assuming there are no impairments and no acquisitions, we expect to record $9.2 million in amortization expense in the remaining quarter of the current fiscal year and quarterly thereafter for approximately the following two fiscal years.

Restructuring, Acquisition and Other Charges. In connection with our merger in March 2006 and our restructuring plan that was implemented in the fiscal quarter ended October 31, 2008, we have incurred and expect to incur transaction, restructuring, acquisition and other charges related to the merger and the restructuring plan that are not part of ongoing operations. For both the fiscal quarter and fiscal nine months ended October 31, 2008 and the same quarter and nine months a year ago, restructuring, acquisition and other charges include certain employee payroll, severance and other employee related costs associated with transitional activities that are not expected to be part of our ongoing operations, and travel and other direct costs associated with the merger.

The following table summarizes other income (expense) for the periods indicated (in thousands, except percentages):

Interest Income. For both the fiscal quarter and fiscal nine months ended October 31, 2008, when compared to the same quarter and nine months a year ago, the dollar decrease in interest income is predominantly due to decreases in cash balances resulting from paying down debt, and lower yields on interest-bearing accounts, partially offset by increases in cash balances resulting from the accumulation of free cash flows from operations and $65.0 million in borrowings under the revolving credit facility obtained late in the fiscal quarter ended October 31, 2008.

Interest Expense. For both the fiscal quarter and fiscal nine months ended October 31, 2008, when compared to the same quarter and nine months a year ago, the dollar decrease in interest expense is predominantly due to our paying down principal on the term loan totaling $30.0 million in the fiscal first quarter ended April 30, 2007 and repurchasing senior subordinated notes totaling $11.4 million in the fiscal quarter ended July 31, 2008, and to a lesser extent, lower variable rates on the senior secured term loan, all partially offset by an increase in interest expense resulting from the $65.0 million borrowing under the revolving credit facility obtained late in the fiscal quarter ended October 31, 2008. In connection with our repurchase of our senior subordinated notes in the fiscal quarter ended July 31, 2008, we recorded a gain of $0.6 million from the early extinguishment of debt. The gain was recorded in the fiscal nine months ended October 31, 2008 as a reduction of interest expense. See Note 7 of notes to our unaudited condensed consolidated financial statements included elsewhere in this report for additional information related to our debt.

Change in the Fair Value of Derivative Instrument. We use an interest rate swap as part of our interest rate risk management strategy. In the second fiscal quarter ended July 31, 2006, we entered into an interest rate swap transaction to effectively convert the variable interest rate on a portion of the $400.0 million senior secured term loan to a fixed rate. The swap, which expires on April 10, 2010, is recorded on the balance sheet at fair value in accordance with SFAS 133. The swap has not been designated as a hedge, and accordingly, changes in the fair value of the derivative are recognized in the consolidated statement of operations. The notional amount of the swap was $250.0 million initially which reduces over time to $126.0 million at the time the swap transaction expires on April 10, 2010. Under the terms of the swap, we will make interest payments based on a fixed rate equal to 5.38% and will receive interest payments based on the LIBOR setting rate, set in arrears. In the fiscal quarter and fiscal nine months ended October 31, 2008, we recorded $0.0 in expense and $2.9 million in income,

respectively, related to the changes in the fair value of the derivative, as compared to $1.8 million and $2.2 million in expense in the same quarter and nine months, respectively, a year ago, related to the changes in the fair value of the derivative.

Amortization and Write-Off of Debt Issuance Costs. In connection with the March 2006 merger, we recorded $16.1 million in debt issuance costs, reduced by accumulated amortization totaling $5.8 million as of October 31, 2008. In the fiscal quarter and fiscal nine months ended October 31, 2008, we recorded $0.4 million and $1.3 million, respectively, in amortization of debt issuance costs, as compared to $0.4 million and $0.7 million in the same quarter and nine months, respectively, a year ago. The increase in amortization expense in the fiscal nine months ended October 31, 2008, when compared to the same nine months a year ago, is predominantly due to the write-off of unamortized debt issuance costs of approximately $0.2 million recorded in the fiscal quarter ended July 31, 2008 and associated with the early extinguishment of the senior subordinated notes. Assuming we do not incur additional debt or early extinguish senior subordinated notes, we expect to record $0.4 million in amortization expense over the remaining quarter of fiscal year 2009 and $0.4 to $0.5 million quarterly thereafter for approximately the following four fiscal years.

Goodwill Impairment. The carrying amount of our goodwill as of October 31, 2008 was $785.5 million. We account for goodwill and certain intangible assets after an acquisition is completed in accordance with SFAS No. 142. As such, goodwill is not amortized but instead periodically tested for impairment. Under SFAS No. 142, goodwill is required to be tested for impairment at least annually and also on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred, such as an adverse change in legal factors, business climate, or regulatory environment. As a result of the general weakening of the worldwide economy, a continued slowdown in IT spending and a decline in our license revenue, we performed Step 1 of the goodwill impairment test required by SFAS No. 142 by comparing the fair value of the reporting unit, which is the company, to its carrying value. Because the fair value exceeded the carrying value of the reporting unit, we were not required to proceed to Step 2 for the goodwill impairment calculation and, as a result, did not record goodwill impairment in the quarter ended October 31, 2008. In performing Step 1 of the goodwill impairment test, we used a combination of the market approach based on comparable company revenue and EBITDA multiples and a discounted cash flow approach to calculate the fair value of the reporting unit. Factors that could lead to a subsequent recognition of goodwill impairment include a continued weakening of the worldwide economy, further deterioration in comparable company stock prices and their associated revenue and EBITDA multiples, reductions in IT spending by the Company’s customers and future declines in our license revenue. We will perform the goodwill impairment test again at the end of the fiscal year ending January 31, 2009 and, if there is a further deterioration in one or more of the foregoing factors, the reporting unit’s carrying value could exceed its fair value, which would result in our recording material goodwill impairment and a material impairment charge in the fiscal quarter ending January 31, 2009. Such an impairment charge would materially adversely affect our results of operations for the fiscal quarter ending January 31, 2009.

The following table summarizes income tax (benefit) expense for the periods indicated (in thousands, except percentages):

Income Tax Benefit. Income tax benefit was $7.5 million and $16.0 million in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively, as compared to $4.0 million and $17.0 million in the same quarter and nine months, respectively, a year ago. Our projected effective income tax benefit rate for the twelve

months of fiscal year 2009 is 44%. Our effective income tax benefit rate for the twelve months of fiscal year 2008 was 45%. Our effective income tax benefit rate is greater than the statutory rate due to the impacts of permanently reinvested foreign earnings and the domestic production deduction. We believe that it is reasonably possible that our unrecognized tax benefits will decrease by approximately $0.3 million in the next twelve months due to the anticipated settlement of certain state tax audits. See Note 8 of notes to our unaudited condensed consolidated financial statements included elsewhere in this report for further information regarding income taxes and the impact of our adoption of FIN 48 on our consolidated results of operations and financial position.

In connection with the preparation of its Quarterly Report on Form 10-Q for the quarter ended October 31, 2008, we determined that we had incorrectly under-reported a tax benefit of approximately $0.8 million in the fiscal year ended January 31, 2008 resulting from an error in which we failed to include in taxable income foreign income under Subpart F, Section 956, and Section 78 and the offsetting benefit from foreign tax credits. Because the effect of correcting this error in the current quarter’s financial statements is quantitatively material, we considered the guidance set forth in paragraph 29 of APB Opinion No. 28 in concluding that the correction of this error in the current quarter is in accordance with the guidance, which states that in determining materiality for the purpose of reporting the correction of an error, amounts should be related to the estimated income for the full fiscal year and also to the effect on the trend of earnings. This error was material with respect to an interim period but not material with respect to the estimated income for the full fiscal year or to the trend of earnings. Accordingly, we have corrected this error in the quarter ended October 31, 2008 as reflected in the above table.

Cash and Cash Equivalents. Since our inception, we have financed our operations and met our capital expenditure requirements primarily through cash flows from operations and, to a lesser extent, debt and equity financing. As of October 31, 2008, we had $99.1 million in cash and cash equivalents.

Net Cash Provided by Operating Activities. Cash flows provided by operating activities were $7.0 million and $15.3 million in the fiscal nine months ended October 31, 2008 and the same nine months a year ago, respectively. In the fiscal nine months ended October 31, 2008, our cash flows provided by operating activities exceeded net loss principally due to the inclusion of non-cash expenses in net loss, a decrease in accounts receivable and an increase in accounts payable, all partially offset by interest payments made on the term credit facility and subordinated notes totaling $37.1 million, decreases in deferred income taxes payable, cash collections in advance of revenue recognition for maintenance contracts and a decrease in accrued expenses. In the fiscal nine months ended October 31, 2007, our cash flows provided by operating activities exceeded net loss principally due to the inclusion of non-cash expenses in net loss, a decrease in accounts receivable and an increase in income taxes payable, all partially offset by interest payments made on the term credit facility and subordinated notes totaling $40.5 million, cash collections in advance of revenue recognition for maintenance contracts and a decrease in accrued expenses.

Net Cash Used in Investing Activities. Net cash used in investing activities was $10.5 million and $3.2 million in the fiscal nine months ended October 31, 2008 and the same nine months a year ago, respectively. In the fiscal nine months ended October 31, 2008, net cash used in investing activities related to the purchase of computer equipment and office furniture and equipment totaling $3.9 million, capitalized software totaling $4.7 million and acquisition-related costs paid in connection with acquisitions totaling $1.9 million. In the fiscal nine months ended October 31, 2007, net cash used in investing activities related to the purchase of computer equipment and office furniture and equipment totaling $2.8 million and acquisition-related costs paid in connection with acquisitions totaling $0.4 million.

Net Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities was $52.6 million in the fiscal nine months ended October 31, 2008 as compared to net cash used in financing activities totaling $31.2 million in the same nine months a year ago. In the fiscal nine months ended October 31, 2008, net cash provided by financing activities related principally to borrowings under the revolving credit facility totaling

$65.0 million, all partially offset by principal payments made on the senior subordinated notes totaling $10.8 million, the repurchase of option rights under our employee stock option plan totaling $1.5 million, and the repurchase of common stock totaling $0.1 million. In the fiscal nine months ended October 31, 2007, net cash used in financing activities principally related to principal payments made on the term credit facility totaling $30.0 million, repurchases of option rights under our employee stock option plan totaling $1.0 million, and the repurchase of common stock totaling $0.2 million.

As a result of the Merger, we became highly leveraged. As of October 31, 2008, we had outstanding $573.6 million in aggregate indebtedness. Our liquidity requirements are significant, primarily due to debt service obligations. Our interest expense for the fiscal quarter and fiscal nine months ended October 31, 2008 was $10.1 million and $31.0 million, respectively, as compared to $12.1 million and $35.7 million in the same quarter and nine months, respectively, a year ago.

We believe that current cash and cash equivalents, and cash flows from operations will satisfy our working capital and capital expenditure requirements through the fiscal year ending January 31, 2009. As discussed under the section entitled Senior Secured Credit Agreement below, we have fully drawn down all of the available commitments under our Senior Secured Credit Agreement and currently have no other committed source of credit available to us. At some point in the future, we may require additional funds for either operating or strategic purposes and may seek to raise additional funds through public or private debt or equity financing. If we are required to seek additional financing in the future through public or private debt or equity financing, there is no assurance that this additional financing will be available or, if available, will be upon reasonable terms and not legally or structurally senior to or on parity with our existing debt obligations.

The following is a summary of our various contractual commitments, including non-cancelable operating lease agreements for office space that expire between calendar years 2008 and 2012. All periods start from November 1, 2008.

Accounts Receivable and Deferred Revenue. At October 31, 2008, we had accounts receivable, net of allowances, of $28.5 million and total deferred revenue of $70.7 million.

Off-Balance Sheet Arrangements. As part of our ongoing operations, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, or SPEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of October 31, 2008, we were not involved in any unconsolidated SPE transactions.

In connection with the consummation of the merger in March 2006, we entered into a senior secured credit agreement pursuant to a debt commitment that we obtained from affiliates of the initial purchasers of our senior subordinated notes.

General. The borrower under the senior secured credit agreement initially was Spyglass Merger Corp. and immediately following completion of the merger became Serena. The senior secured credit agreement provides for (1) a seven-year term loan in the amount of $400.0 million, which will amortize at a rate of 1.00% per year on a quarterly basis for the first six and three-quarter years after the closing date of the acquisition transactions, with the balance paid at maturity, and (2) a six-year committed revolving credit facility that provides for loans in an aggregate amount of up to $75.0 million, which includes a letter of credit facility and a swing line facility. In addition, subject to certain terms and conditions, the senior secured credit agreement provides for one or more uncommitted incremental term loans and/or revolving credit facilities in an aggregate amount not to exceed $150.0 million. During the fiscal quarter ended October 31, 2008, we provided a notice of borrowing to Lehman Commercial Paper, Inc. (“LCPI”), as the administrative agent under our senior secured credit agreement, seeking to borrow $75 million under commitments to fund the revolving credit facility. Based on our notice of borrowing, participating lenders funded $65 million and LCPI failed to fund $10 million of the revolving credit facility. In September 2008, Lehman Brothers Holdings Inc., of which LCPI is a subsidiary, filed a petition under Chapter 11 of the U.S. Bankruptcy Code. We do not expect LCPI to fund, or another lender to assume LCPI’s commitment to fund, its portion of the revolving credit facility and, as a result, consider the revolving credit facility as being fully drawn. Proceeds of the term loan on the initial borrowing date were used to partially finance the merger, to refinance certain indebtedness of Serena and to pay fees and expenses incurred in connection with the merger. Proceeds of the revolving credit facility and any incremental facilities will be used for working capital and general corporate purposes of the borrower and its restricted subsidiaries.

Interest Rates and Fees. The $400.0 million term loan, of which $320.0 million was outstanding as of October 31, 2008, bears interest at a rate equal to prime plus 1.00%. That rate was 5.50% as of October 31, 2008. The $75.0 million revolving credit facility, of which $65.0 million was outstanding as of October 31, 2008 and the remaining $10.0 million no longer available as a result of LCPI’s failure to fund its loan commitment, bears interest at a rate equal to a base rate plus 1.25%. That rate was 5.75% as of October 31, 2008. Generally, the loans under the senior secured credit agreement bear interest, at the option of the borrower, at either:

The revolving credit facility bears an annual commitment fee of 0.50% on the undrawn portion of that facility commencing on the date of execution and delivery of the senior secured credit agreement. As a result of our borrowing $65.0 million under the revolving credit facility in the fiscal quarter ended October 31, 2008 and LCPI becoming a defaulting lender due to its failure to fund its loan commitment, the annual commitment fee of 0.50% will not be payable pursuant to the terms of the senior secured credit agreement until all or a portion of the loans under the revolving credit facility are repaid.

The applicable margin and commitment fee under the secured credit agreement are determined pursuant to a grid based on our most recent “total leverage ratio,” which is a computation of the maximum ratio of total debt (as defined in the senior secured credit agreement) to the trailing four quarters of EBITDA (as defined in the senior secured credit agreement).

We use an interest rate swap as part of our interest rate risk management strategy. In the second fiscal quarter ended July 31, 2006, we entered into an interest rate swap transaction to effectively convert the variable interest rate on a portion of the $400.0 million senior secured term loan to a fixed rate. The swap, which expires on April 10, 2010, is recorded on the consolidated balance sheet at fair value in accordance with SFAS 133. The swap has not been designated as a hedge and, accordingly, changes in the fair value of the derivative are recognized in the consolidated statement of operations. The notional amount of the swap was $250.0 million initially and reduces over time to $126.0 million at the time the swap transaction expires on April 10, 2010. Under the terms of the swap, we will make interest payments based on a fixed rate equal to 5.38% and will receive interest payments based on the LIBOR setting rate, set in arrears.

Prepayments. At our option, amounts outstanding under the term loan may be voluntarily prepaid and the unutilized portion of the commitments under the revolving credit facility may be permanently reduced and the loans under such facility may be voluntarily repaid, in each case subject to requirements as to minimum amounts and multiples, at any time in whole or in part without premium or penalty, except that any prepayment of LIBOR rate advances other than at the end of the applicable interest periods will be made with reimbursement for any funding losses or redeployment costs of the lenders resulting from the prepayment. Loans under the term loan and under any incremental term loan facility are subject to mandatory prepayment with (a) 50% of annual excess cash flow with certain step downs to be based on the most recent total leverage ratio and agreed upon by the issuer and the lenders, (b) 100% of net cash proceeds of asset sales and other asset dispositions by the borrower or any of its restricted subsidiaries, subject to our various reinvestment rights and other exceptions and (c) 100% of the net cash proceeds of the issuance or incurrence of debt by us or any of our restricted subsidiaries, subject to various baskets and exceptions.

We made principal payments totaling $25.0 million, $30.0 million and $25.0 million in the fiscal quarters ended July 31, 2006, April 30, 2007 and January 31, 2008, respectively, on the senior secured term loan.

Guarantors. All obligations under the senior secured credit agreement are to be guaranteed by each of our future direct and indirect restricted subsidiaries, other than foreign subsidiaries. We do not have any domestic subsidiaries and, accordingly, there are no guarantors.

Security. All of our obligations and the obligations of each guarantor (if any) under the senior secured credit agreement are secured by the following:

Covenants, Representations and Warranties. The senior secured credit agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, investments, capital expenditures, sales of assets, mergers and acquisitions, liens and dividends and other distributions. The financial covenants included in the senior secured credit agreement include a minimum interest coverage ratio and a maximum total leverage ratio as discussed below under “Covenant Compliance”.

Events of Default. Events of default under the senior secured credit agreement include, among others, nonpayment of principal or interest, covenant defaults, a material inaccuracy of representations or warranties, bankruptcy and insolvency events, cross defaults and a change of control.

As of October 31, 2008, we have outstanding $188.6 million principal amount of senior subordinated notes, which bear interest at a rate of 10.375%, payable semi-annually on March 15 and September 15, and which mature on March 15, 2016. Each of our domestic subsidiaries that guarantees the obligations under our senior secured credit agreement will jointly, severally and unconditionally guarantee the notes on an unsecured senior subordinated basis. As of the date of this report, we do not have any domestic subsidiaries and, accordingly, there are no guarantors on such date. The notes are our unsecured, senior subordinated obligations, and the guarantees, if any, will be unsecured, senior subordinated obligations of the guarantors. The notes are subject to redemption at our option under terms and conditions specified in the indenture related to the notes, and may be redeemed at the option of the holders at 101% of their face amount, plus accrued and unpaid interest, upon certain change of control events.

In May 2008 and July 2008, we repurchased, in privately negotiated transactions, $9.4 million and $2.0 million, respectively, of principal amount of our original outstanding $200.0 million senior subordinated notes. The repurchases resulted in a gain of $0.6 million from the extinguishment of debt in the fiscal nine months ended October 31, 2008.

In November 2008 and December 2008, subsequent to the most recent fiscal quarter ended October 31, 2008, we repurchased, in four separate privately negotiated transactions, an aggregate of $14.2 million of principal amount of senior subordinated notes. The repurchases will result in a gain of $5.1 million from the extinguishment of debt in the fiscal quarter ending January 31, 2009 which will be included in interest expense in the condensed consolidated statement of operations in the fiscal quarter ending January 31, 2009.

Our senior secured credit agreement and the indenture governing the senior subordinated notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ ability to, among other things:

In addition, under our senior secured credit agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests, including a minimum interest coverage ratio and a maximum total leverage ratio. We were in compliance with all of the covenants under the secured credit agreement and indenture as of October 31, 2008, and we expect to be in compliance with all of these covenants as of January 31,

2009. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests in the future. A breach of any of these covenants would result in a default (which, if not cured, could mature into an event of default) and in certain cases an immediate event of default under our senior secured credit agreement. Upon the occurrence of an event of default under our senior secured credit agreement, all amounts outstanding under our senior secured credit agreement could be declared to be (or could automatically become) immediately due and payable.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is a non-GAAP measure used to determine our compliance with certain covenants contained in the indenture governing the senior subordinated notes and in our senior secured credit agreement. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indenture governing the senior subordinated notes and our senior secured credit agreement. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financing covenants.

The breach of financial covenants in our senior secured credit agreement (i.e., those that require the maintenance of ratios based on Adjusted EBITDA) would result in an event of default under that agreement, in which case the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under the indenture governing the senior subordinated notes. Additionally, under our debt agreements, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Adjusted EBITDA.

Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs.

While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA eliminates the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, the definition of Adjusted EBITDA in the indentures allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net income (loss). However, these are expenses that may recur, vary greatly and are difficult to predict. Further, our debt agreements require that Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

The following is a reconciliation of net loss, which is a GAAP measure of our operating results, to Adjusted EBITDA as defined in our debt agreements (in thousands).

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable, term loan, secured indebtedness and our interest rate swap contract. We consider investments in highly liquid instruments purchased with an original maturity of 90 days or less to be cash equivalents. All of our cash equivalents principally consist of money market funds, and are classified as available-for-sale as of October 31, 2008. We are subject to interest rate risk on the variable interest rate of the unhedged portion of the secured term loan. We do not believe that a hypothetical 25% fluctuation in the variable interest rate would have a material impact on our consolidated financial position or results of operations. In addition, we are subject to the risk of default by the originator of the interest rate swap.

Sales to customers located in foreign countries accounted for approximately 28% and 35% of total sales in the fiscal quarter and fiscal nine months ended October 31, 2008, respectively. Because we invoice certain foreign sales in currencies other than the United States dollar, predominantly the British pound sterling and euro, and do not hedge these transactions, fluctuations in exchange rates could adversely affect the translated results of operations of our foreign subsidiaries. Therefore, foreign exchange fluctuations could create a risk of significant balance sheet gains or losses on our consolidated financial statements. In addition, over the past several quarters we have benefited from the weakness of the U.S. dollar against other currencies, which increased our net revenues derived from international operations. During the quarter ended October 31, 2008, the United States dollar appreciated more than 20% against these foreign currencies, which negatively affected our net revenues for the current fiscal quarter. If the U.S. dollar continues to strengthen against foreign currencies, our future net revenues could be adversely affected. However, given our foreign subsidiaries’ net book values as of October 31, 2008 and net cash flows for the most recent fiscal nine months ended October 31, 2008, we do not believe that a hypothetical 25% fluctuation in foreign currency exchange rates would have a material impact on our consolidated financial position or results of operations.

We account for derivative instruments in accordance with the provisions of SFAS 133, as amended by SFAS 138 and SFAS 149. We utilize certain derivative instruments to enhance our ability to manage risk relating to interest rate exposure. Derivative instruments are entered into for periods consistent with the related underlying exposures and are not entered into for speculative purposes. We document all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions.

Interest Rate Risk. We use an interest rate swap as part of our interest rate risk management strategy. In the second fiscal quarter ended July 31, 2006, we entered into an interest rate swap transaction to effectively convert the variable interest rate on a portion of our $400.0 million senior secured term loan to a fixed rate. The swap, which expires on April 10, 2010, is accounted for at fair value under SFAS 133, and accordingly, the

change in the fair value of the derivative is recognized in the consolidated statement of operations. The notional amount of the swap was $250.0 million initially and reduces over time to $126.0 million at the time the swap transaction expires on April 10, 2010. Under the terms of the swap, we will make interest payments based on a fixed rate equal to 5.38% and will receive interest payments based on the LIBOR setting rate, set in arrears.

Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer, with the assistance of senior management personnel, have conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of October 31, 2008. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our annual and quarterly reports filed under the Exchange Act. Based on this evaluation, and subject to the limitations described below, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of October 31, 2008.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended October 31, 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls. Our management, including our Chief Executive Officer and the Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurances that the objectives of the control system are met. The design of a control system reflects resource constraints, and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, have been or will be detected.

Information with respect to this Item may be found in Note 10 of notes to our unaudited condensed consolidated financial statements in Part I, Item I of this quarterly report, which information is incorporated into this Item 1 by reference.

There have been no material changes from the risk factors associated with our business, financial condition and results of operations as set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2008, except as set forth below.

The recent global financial crisis and the continuing decline and uncertainty in global economic conditions has negatively affected, and could continue to negatively affect, our business, results of operations and financial condition.

Economic conditions, both domestically and abroad, directly affect our operating results. Current and future economic conditions, including such factors as consumer demand, unemployment and inflation levels, the availability of credit, and our customers’ financial condition, operating results and growth prospects may adversely affect our business and the results of our operations. The recent global financial crisis and uncertainty in global economic conditions present a variety of risks and uncertainties that could negatively affect our business, results of operations and financial condition, including the following:

In addition, although we do not anticipate needing additional capital in the near term due to our current financial position, financial market disruption may make it difficult for us to raise additional capital upon acceptable terms or at all. During the fiscal quarter ended October 31, 2008, we provided a notice of borrowing to Lehman Commercial Paper, Inc. (“LCPI”), as the administrative agent under our senior secured credit agreement, seeking to borrow $75 million under commitments to fund the revolving credit facility, which was the

entire amount of our revolving credit facility. Based on our notice of borrowing, participating lenders funded $65 million and LCPI failed to fund $10 million of the revolving credit facility. Lehman Brothers Holdings Inc., of which LCPI is a subsidiary, has filed a petition under Chapter 11 of the U.S. Bankruptcy Code. We do not expect LCPI to fund, or another lender to assume LCPI’s commitment to fund, its portion of the revolving credit facility and, as a result, consider the revolving credit facility as being fully drawn. We have fully drawn all of the available commitments under our senior secured credit agreement, and currently have no other committed source of credit available to us.

If adverse global economic conditions persist, the foregoing risks could result in our failure to meet the financial covenants under our senior secured credit agreement. A breach of any of these financial covenants would result in a default under our senior secured credit agreement, in which event all outstanding amounts could be declared immediately due and payable. Any such acceleration would also result in a default under the indenture governing our senior subordinated notes. If repayment under our senior secured credit agreement is accelerated, we cannot assure you that we would have sufficient assets or access to credit to repay our indebtedness or, if credit were available, that it would be upon acceptable terms.

On October 29, 2008, one of our employees exercised a stock option to acquire 29,000 shares of our common stock for an aggregate exercise price of $36,250. The exercise of the stock option was effected through the net exercise of the stock option, with 6,272 shares applied to the payment of the aggregate exercise price, 7,466 shares applied to the payment of applicable taxes and withholdings and 15,262 shares issued to the employee. The shares were issued under an exemption from registration requirements pursuant to Rule 701 of the Securities Act of 1933, which provides an exemption for offers and sales of securities pursuant to certain compensatory benefit plans.

Pursuant to a written consent effective as of August 29, 2008, our stockholders elected Tim Davenport as a director to our board of directors. This matter is described in our Current Report on Form 8-K (File No. 000-25285) filed with the Securities and Exchange Commission on September 5, 2008 (Item 5.02 of which is incorporated herein by reference). The written consent was executed by stockholders representing 97,925,780 shares, or 99.4%, of our outstanding common stock.

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


SERENA SOFTWARE, INC.

By:		/s/ ROBERT I. PENDER, JR.
		Robert I. Pender, Jr.
		Senior Vice President, Finance And Administration, Chief Financial Officer (Principal Financial And Accounting Officer)


Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x	(Do not check if a smaller reporting company)	Smaller reporting company ¨


		Page
PART I FINANCIAL INFORMATION

Item 1	Financial Statements:

	Condensed Consolidated Balance Sheets as of October 31, 2008 and January 31, 2008	3

	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended October 31, 2008 and 2007	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2008 and 2007	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4	Controls and Procedures	37

PART II OTHER INFORMATION

Item 1	Legal Proceedings	38

Item 1A	Risk Factors	38

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3	Defaults Upon Senior Securities	39

Item 4	Submission of Matters to a Vote of Security Holders	39

Item 5	Other Information	39

Item 6	Exhibits	40

SIGNATURES		41


	October 31, 2008			January 31, 2008
ASSETS
Current assets
Cash and cash equivalents	$	99,121		$	48,304
Accounts receivable, net of allowance of $520 and $1,027 at October 31, 2008 and January 31, 2008, respectively		28,488			39,532
Deferred taxes, net		11,721			9,116
Prepaid expenses and other current assets		5,847			4,943

Total current assets		145,177			101,895
Property and equipment, net		5,654			3,947
Goodwill		785,511			793,344
Other intangible assets, net		287,724			334,149
Other assets		8,856			10,210

TOTAL ASSETS	$	1,232,922		$	1,243,545

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt	$	20,000		$	—
Accounts payable		3,643			1,990
Income taxes payable		10,635			9,650
Accrued expenses		21,236			23,808
Accrued interest on term loan and subordinated notes		4,860			10,429
Deferred revenue		62,881			73,056

Total current liabilities		123,255			118,933
Deferred revenue, net of current portion		7,846			10,942
Long-term liabilities		6,307			9,196
Deferred taxes		93,440			120,964
Term loan		300,000			320,000
Revolving term credit facility		65,000			—
Senior subordinated notes		188,590			200,000

Total liabilities		784,438			780,035

Commitments and contingencies:
Stockholders’ equity:
Preferred stock, $0.01 par value; 10,000,000 shares authorized and no shares issued and outstanding at October 31, 2008 and January 31, 2008		—			—
Series A Preferred stock, $0.01 par value; 1 share authorized, issued and outstanding at October 31, 2008 and January 31, 2008		—			—
Common stock, $0.01 par value; 200,000,000 shares authorized; 98,545,777 and 98,549,945 shares issued and outstanding at October 31, 2008 and January 31, 2008, respectively		985			985
Additional paid-in capital		514,691			513,062
Accumulated other comprehensive loss		742			(931	)
Accumulated deficit		(67,934	)		(49,606	)

Total stockholders’ equity		448,484			463,510

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,232,922		$	1,243,545


	Three Months Ended October 31,						Nine Months Ended October 31,
	2008			2007			2008			2007
Revenue:
Software licenses	$	13,019		$	19,907		$	47,433		$	52,119
Maintenance		40,555			39,602			122,245			114,688
Professional services		8,266			8,948			25,207			27,347

Total revenue		61,840			68,457			194,885			194,154

Cost of revenue:
Software licenses		340			92			1,296			1,215
Maintenance		4,051			3,850			12,321			11,299
Professional services		7,918			8,333			24,338			25,059
Amortization of acquired technology		8,859			8,804			26,355			26,413

Total cost of revenue		21,168			21,079			64,310			63,986

Gross profit		40,672			47,378			130,575			130,168

Operating expenses:
Sales and marketing		19,094			19,830			61,676			56,210
Research and development		9,300			10,302			27,079			30,046
General and administrative		4,208			4,311			15,013			15,713
Amortization of intangible assets		9,203			9,203			27,609			27,610
Restructuring, acquisition and other charges		2,942			428			5,210			1,677

Total operating expenses		44,747			44,074			136,587			131,256

Operating (loss) income		(4,075	)		3,304			(6,012	)		(1,088	)
Interest income		314			516			1,088			1,358
Interest expense		(10,133	)		(12,114	)		(31,000	)		(35,744	)
Change in the fair value of derivative instrument		(4	)		(1,757	)		2,862			(2,210	)
Amortization and write-off of debt issuance costs		(410	)		(361	)		(1,250	)		(742	)

Loss before income taxes		(14,308	)		(10,412	)		(34,312	)		(38,426	)
Income tax benefit		(7,505	)		(3,983	)		(15,984	)		(16,981	)

Net loss	$	(6,803	)	$	(6,429	)	$	(18,328	)	$	(21,445	)


	Nine Months Ended October 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(18,328	)	$	(21,445	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of acquired technology and other intangible assets		56,916			56,391
Deferred income taxes		(23,781	)		(21,418	)
Interest expense on term credit facility and subordinated notes, net of interest paid		(6,197	)		(4,781	)
Fair market value adjustment on the interest rate swap		(2,862	)		2,210
Amortization and write-off of debt issuance costs		1,250			742
Stock-based compensation		3,242			5,765
Acquisition, restructure and other charges		(484	)		(1,581	)
Changes in operating assets and liabilities:
Accounts receivable		11,044			13,156
Prepaid expenses and other assets		(799	)		(587	)
Accounts payable		1,653			553
Income taxes payable		985			3,753
Accrued expenses		(2,374	)		(8,367	)
Deferred revenue		(13,270	)		(9,122	)

Net cash provided by operating activities		6,995			15,269

Cash flows used in investing activities:
Capital expenditures		(3,857	)		(2,837	)
Capital expenditures for internal use software		(4,652	)		—
Cash paid in acquisitions, including direct transaction costs and net of cash received		(1,948	)		(377	)
Sales of short-term and long-term investments		—			12

Net cash used in investing activities		(10,457	)		(3,202	)

Cash flows provided by (used in) financing activities:
Repurchase of option rights under employee stock option plan		(1,519	)		(1,042	)
Exercise of stock options under employee stock option plan		19			90
Repurchase of common stock		(112	)		(211	)
Principal borrowings under the term credit facility		65,000			—
Principal payments under the term credit facility and senior subordinated notes, net of gains on early extinguishment of debt		(10,782	)		(30,000	)

Net cash provided by (used in) financing activities		52,606			(31,163	)

Effect of exchange rate changes on cash		1,673			(1,023	)

Net increase (decrease) in cash and cash equivalents		50,817			(20,119	)
Cash and cash equivalents at beginning of period		48,304			68,455

Cash and cash equivalents at end of period	$	99,121		$	48,336

Supplemental disclosures of cash flow information:
Income taxes paid, net of refunds	$	4,094		$	1,007

Interest paid	$	37,074		$	40,510

Non-cash investing and financing activity:
Consideration payable to shareholders in acquisitions	$	132		$	263


	Options Available for Grant		Number of Options Outstanding		Weighted Average Exercise Price
Balances as of January 31, 2008	947,949		14,447,394		$	4.53
Granted	(657,500	)	657,500		$	5.45
Exercised	—		(378,040	)	$	2.48
Cancelled	1,503,710		(1,503,710	)	$	5.08

Balances as of October 31, 2008	1,794,159		13,223,144		$	4.58


Range of Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$1.25	1,764,580	4.57 years	$	1.25	1,764,580	$	1.25
$5.00	5,984,091	7.14 years	$	5.00	2,090,065	$	5.00
$5.09	316,956	4.92 years	$	5.09	176,531	$	5.09
$5.15	4,504,062	8.45 years	$	5.15	513,432	$	5.15
$5.20	362,500	9.39 years	$	5.20	885	$	5.20
$5.78	285,000	9.82 years	$	5.78	—		—
$8.40	5,955	0.50 years	$	8.40	5,955	$	8.40

	13,223,144	7.31 years	$	4.58	4,551,448	$	3.57


	Legal and other miscellaneous			Relocation costs		Facilities closures			Total acquisition- related charges and accruals
Balances as of January 31, 2008	$	—		$	—	$	271		$	271
Accrued		158			5		—			163
Adjustments(1)		—			—		39			39
Paid		(102	)		—		(310	)		(412	)

Balances as of October 31, 2008	$	56		$	5	$	—		$	61


	Severance, payroll taxes and other employee benefits			Legal and other miscellaneous			Total restructuring charges and accruals
Balances as of January 31, 2008	$	—		$	—		$	—
Accrued in the fiscal quarter ended October 31, 2008		1,613			57			1,670
Paid in the fiscal quarter ended October 31, 2008		(180	)		(37	)		(217	)

Balances as of October 31, 2008	$	1,433		$	20		$	1,453


Balance as of January 31, 2008	$	793,344
Activity during the nine months ended October 31, 2008:
Purchase accounting adjustments to goodwill recorded in the Merger		(194	)
Purchase accounting adjustments to goodwill for deferred balances that existed prior to the Merger		1,307
Purchase accounting adjustments to goodwill recorded in the Pacific Edge acquisition related to the release of tax reserves associated with utilization of net operating losses		(8,627	)
Purchase accounting adjustments to goodwill related to reserve releases against acquisition transaction costs, net of valuation allowance adjustments		(319	)

Balance as of October 31, 2008	$	785,511


	As of October 31, 2008
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizing intangible assets:
Acquired technology	$	181,910	$	(97,730	)	$	84,180
Customer relationships		278,900		(92,228	)		186,672
Trademark/Trade name portfolio		14,300		(4,736	)		9,564
Capitalized software		11,716		(4,408	)		7,308

Total	$	486,826	$	(199,102	)	$	287,724


	As of January 31, 2008
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizing intangible assets:
Acquired technology	$	178,186	$	(71,375	)	$	106,811
Customer relationships		278,900		(65,966	)		212,934
Trademark/Trade name portfolio		14,300		(3,388	)		10,912
Capitalized software		7,104		(3,612	)		3,492

Total	$	478,490	$	(144,341	)	$	334,149

Estimated amortization expense:
For remaining three months of year ending January 31, 2009						$	18,827
For year ending January 31, 2010							75,308
For year ending January 31, 2011							74,014
For year ending January 31, 2012							42,964
For year ending January 31, 2013							36,408
Thereafter							40,203

Total						$	287,724


	October 31, 2008			January 31, 2008
Credit Facility:
Senior secured term loan, due March 10, 2013, Prime plus 1.00%	$	320,000		$	320,000
Revolving term credit facility, due March 10, 2012, 5.75%		65,000			—
Senior subordinated notes, due March 15, 2016, 10.375%		188,590			200,000

Total long-term debt		573,590			520,000
Less current portion		(20,000	)		—

Total long-term debt, less current portion	$	553,590		$	520,000


Description	Estimated Fair Value at October 31, 2008		Fair Value Measurement at Reporting Date Using
Description	Estimated Fair Value at October 31, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	83,251	$	83,251	$	—	$	—

Total Assets	$	83,251	$	83,251	$	—	$	—

Liabilities:
Derivative instrument(1)	$	5,670	$	—	$	5,670	$	—

Total Liabilities	$	5,670	$	—	$	5,670	$	—


	Three Months Ended October 31,									Nine Months Ended October 31,
					Increase (Decrease)									Increase (Decrease)
	2008		2007		In Dollars			In %		2008		2007		In Dollars			In %
Revenue:
Software licenses	$	13,019	$	19,907	$	(6,888	)	(35	)%	$	47,433	$	52,119	$	(4,686	)	(9	)%
Maintenance		40,555		39,602		953		2	%		122,245		114,688		7,557		7	%
Professional services		8,266		8,948		(682	)	(8	)%		25,207		27,347		(2,140	)	(8	)%

Total revenue	$	61,840	$	68,457	$	(6,617	)	(10	)%	$	194,885	$	194,154	$	731		—


	Payments Due by Period(2)
	Total		Less than 1 year		1-3 years		3-5 years		Thereafter
	(in thousands)
Operating lease obligations	$	11,085	$	4,853	$	5,814	$	418	$	—
Credit Facility:
Senior secured term loan due March 10, 2013		320,000		—		—		320,000		—
Revolving term credit facility due March 10, 2012		65,000		—		—		65,000		—
Senior subordinated notes due March 15, 2016		188,590		—		—		—		188,590
Scheduled interest on debt(1)		233,915		40,904		81,807		64,734		46,470

	$	818,590	$	45,757	$	87,621	$	450,152	$	235,060


Exhibit No.		Exhibit Description
10.01*†		Form of Notice of Exercise (Net) under Amended and Restated 1997 Stock Option Plan

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

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

32.01‡		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.02‡		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002