================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-17136

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

DELAWARE 74-2126120
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

BMC SOFTWARE, INC.
2101 CITYWEST BOULEVARD
HOUSTON, TEXAS 77042-2827
(Address of principal executive offices) (Zip Code)

Registrant's telephone number including area code: (713) 918-8800

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

As of November 12, 2001, there were outstanding 244,221,630 shares of Common
Stock, par value $.01, of the registrant.

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BMC SOFTWARE, INC. AND SUBSIDIARIES

QUARTER ENDED SEPTEMBER 30, 2001

INDEX

<Table>
<Caption>
PAGE
----

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 2001 and
September 30, 2001 (Unaudited)...................................... 3
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three months and six months ended
September 30, 2000 and 2001 (Unaudited) ............................ 4
Condensed Consolidated Statements of Cash Flows for the six
months ended September 30, 2000 and 2001 (Unaudited)................ 5
Notes to Condensed Consolidated Financial Statements (Unaudited)...... 6

Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition................................................... 10

Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 20

PART II. OTHER INFORMATION

Item 1. Legal Proceedings........................................................ 21

Item 4. Submission of Matters to a Vote of Security Holders...................... 21

Item 6. Exhibits and Reports on Form 8-K......................................... 21

Signatures............................................................... 22
</Table>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BMC SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)

<Table>
<Caption>
MARCH 31, SEPTEMBER 30,
2001 2001
---------- -------------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 146.0 $ 144.4
Marketable securities ......................................... 144.7 194.6
Trade accounts receivable, net ................................ 292.6 207.3
Trade finance receivables, current ............................ 213.5 138.0
Other current assets .......................................... 105.9 169.1
---------- ----------
Total current assets ................................... 902.7 853.4
Property and equipment, net ..................................... 456.5 456.9
Software development costs and related assets, net .............. 242.7 249.0
Long-term marketable securities ................................. 713.3 649.9
Long-term finance receivables ................................... 236.3 149.5
Acquired technology, net ........................................ 95.3 74.2
Goodwill and other intangibles, net ............................. 317.6 245.2
Other long-term assets .......................................... 69.5 73.2
---------- ----------
$ 3,033.9 $ 2,751.3
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ........................................ $ 22.1 $ 20.2
Accrued liabilities ........................................... 182.3 174.6
Short-term borrowings ......................................... 150.0 --
Current portion of deferred revenue ........................... 474.6 490.5
---------- ----------
Total current liabilities .............................. 829.0 685.3
Long-term deferred revenue ...................................... 382.8 383.5
Other long-term liabilities ..................................... 6.8 11.1
---------- ----------
Total liabilities ...................................... 1,218.6 1,079.9
Commitments and contingencies
Stockholders' equity:
Preferred stock ............................................... -- --
Common stock .................................................. 2.5 2.5
Additional paid-in capital .................................... 530.9 536.3
Retained earnings ............................................. 1,336.2 1,232.9
Accumulated other comprehensive loss .......................... (9.8) (7.5)
---------- ----------
1,859.8 1,764.2
Less treasury stock, at cost ................................ (20.9) (78.0)
Less unearned portion of restricted stock compensation ...... (23.6) (14.8)
---------- ----------
Total stockholders' equity ............................. 1,815.3 1,671.4
---------- ----------
$ 3,033.9 $ 2,751.3
========== ==========
</Table>

The accompanying notes are an integral part of these condensed
consolidated financial statements.

BMC SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 2001 2000 2001
--------- --------- --------- ---------

Revenues:
License ............................................................... $ 173.9 $ 131.5 $ 403.6 $ 311.5
Maintenance ........................................................... 129.3 141.2 255.0 280.5
Professional services ................................................. 19.8 21.1 37.1 41.0
--------- --------- --------- ---------
Total revenues .................................................. 323.0 293.8 695.7 633.0
--------- --------- --------- ---------
Selling and marketing expenses .......................................... 132.8 132.9 285.0 285.7
Research and development expenses ....................................... 110.2 105.8 216.8 218.8
Cost of professional services ........................................... 23.5 23.8 44.1 48.9
General and administrative expenses ..................................... 38.2 40.2 76.5 82.1
Acquired research and development ....................................... 6.0 -- 17.7 --
Amortization of acquired technology, goodwill and intangibles ........... 44.8 48.5 84.4 96.7
Restructuring and severance costs ....................................... -- 32.7 -- 44.7
Merger-related costs and compensation charges ........................... 3.3 3.1 5.4 5.8
--------- --------- --------- ---------
Total operating expenses ........................................ 358.8 387.0 729.9 782.7
--------- --------- --------- ---------
Operating loss .................................................. (35.8) (93.2) (34.2) (149.7)
Interest and other income, net ............................................ 19.6 18.4 33.3 34.8
Interest expense .......................................................... (0.5) -- (1.8) (0.4)
Gain (loss) on marketable securities ...................................... 0.3 (0.2) 0.3 (7.6)
--------- --------- --------- ---------
Other income, net ............................................... 19.4 18.2 31.8 26.8
--------- --------- --------- ---------
Loss before income taxes ........................................ (16.4) (75.0) (2.4) (122.9)
Income taxes .............................................................. (3.9) (21.7) 0.1 (35.1)
--------- --------- --------- ---------
Net loss ........................................................ $ (12.5) $ (53.3) $ (2.5) $ (87.8)
========= ========= ========= =========
Basic loss per share ...................................................... $ (0.05) $ (0.22) $ (0.01) $ (0.36)
========= ========= ========= =========
Diluted loss per share .................................................... $ (0.05) $ (0.22) $ (0.01) $ (0.36)
========= ========= ========= =========
Shares used in computing basic loss per share ............................. 246.1 246.5 245.8 246.9
========= ========= ========= =========
Shares used in computing diluted loss per share ........................... 246.1 246.5 245.8 246.9
========= ========= ========= =========

Comprehensive Income (loss):
Net loss ................................................................ $ (12.5) $ (53.3) $ (2.5) $ (87.8)
Foreign currency translation adjustment ................................. 0.2 (2.3) (5.4) (2.1)
Unrealized gain on securities available for sale:
Unrealized gain (loss), net of taxes of $--, $1.1, $0.5 and $1.2 ..... -- 2.0 (1.0) 2.2
Realized (gain) loss included in net earnings, net of taxes of
$0.1, $0.1, $0.1 and $2.7 .......................................... (0.2) 0.1 (0.2) 4.9
--------- --------- --------- ---------
(0.2) 2.1 (1.2) 7.1
Unrealized gain on derivative instruments:

Unrealized gain (loss), net of taxes of $4.3, $2.2, $4.3 and $0.7..... 7.9 (4.1) 8.0 (1.3)
Realized (gain) included in net earnings, net of taxes of
$1.8, $-- $3.4 and $0.8 ............................................ (3.3) -- (6.3) (1.4)
--------- --------- --------- ---------
4.6 (4.1) 1.7 (2.7)
--------- --------- --------- ---------
Comprehensive loss .............................................. $ (7.9) $ (57.6) $ (7.4) $ (85.5)
========= ========= ========= =========
</Table>

The accompanying notes are an integral part of these condensed
consolidated financial statements.

BMC SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)

<Table>
<Caption>
SIX MONTHS ENDED
SEPTEMBER 30,
------------------
2000 2001
------ ------

Cash flows from operating activities:
Net loss ............................................................................... $ (2.5) $(87.8)
Adjustments to reconcile net loss to net cash provided by operating activities:
Restructuring and severance costs ................................................... -- 28.9
Acquired research and development and merger-related costs and
compensation charges ........................................................... 23.1 5.6
Depreciation and amortization ....................................................... 141.1 184.3
(Gain) loss on marketable securities ................................................ (0.3) 7.6
Gain on sale of financial instrument ................................................ (2.9) --
Earned portion of restricted stock compensation ..................................... 3.6 1.5
Net change in receivables, payables, deferred revenue and other components of
working capital .................................................................... 130.0 83.7
------ ------
Net cash provided by operating activities ...................................... 292.1 223.8
------ ------
Cash flows from investing activities:

Cash paid for technology acquisitions and other investments, net of cash acquired ...... (100.5) (5.7)
Purchases of marketable securities ..................................................... (126.7) (54.4)
Maturities of/proceeds from sales of marketable securities ............................. 93.0 65.2
Purchases of property and equipment .................................................... (91.6) (31.7)
Proceeds from sales of property and equipment .......................................... -- 3.1
Capitalization of software development costs and related assets ........................ (49.0) (67.3)
Proceeds from sale of financial instrument ............................................. 9.4 --
Decrease in long-term finance receivables .............................................. 40.1 86.8
------ ------
Net cash used in investing activities .......................................... (225.3) (4.0)
------ ------
Cash flows from financing activities:
Proceeds from borrowings ............................................................... 35.0 --
Payments on borrowings ................................................................. (123.5) (150.0)
Stock options exercised and other ...................................................... 27.0 13.5
Treasury stock acquired ................................................................ (51.6) (82.8)
------ ------
Net cash used in financing activities .......................................... (113.1) (219.3)
------ ------
Effect of exchange rate changes on cash .................................................. (5.4) (2.1)
------ ------
Net change in cash and cash equivalents .................................................. (51.7) (1.6)
Cash and cash equivalents, beginning of period ........................................... 152.4 146.0
------ ------
Cash and cash equivalents, end of period ................................................. $100.7 $144.4
====== ======
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized ..................................... $ 2.0 $ 1.7
Cash paid for income taxes ............................................................. $ 11.4 $ 20.5
Common stock and options issued and liabilities assumed in acquisitions ................ $ 57.4 $ --
</Table>

The accompanying notes are an integral part of these condensed
consolidated financial statements.

BMC SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the
accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively,
the Company or BMC). All significant intercompany balances and transactions have
been eliminated in consolidation. Certain amounts previously reported have been
reclassified to ensure comparability among the periods presented.

The accompanying unaudited interim condensed consolidated financial
statements reflect all normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the periods
presented. These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.

These financial statements should be read in conjunction with the Company's
audited financial statements for the year ended March 31, 2001, as filed with
the Securities and Exchange Commission on Form 10-K.

(2) EARNINGS PER SHARE

Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share" requires dual presentation of basic and diluted earnings per share (EPS).
Basic EPS is computed by dividing net income (loss) by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. For purposes of this
calculation, outstanding stock options and unearned restricted stock are
considered potential common shares using the treasury stock method. For the
three-month periods ended September 30, 2000 and 2001, the treasury stock method
effect of 40.5 million and 36.8 million weighted options, respectively, and 1.1
million and 0.6 million weighted unearned restricted shares, respectively, has
been excluded from the calculation of EPS as it is anti-dilutive. For the
six-month periods ended September 30, 2000 and 2001, the treasury stock method
effect of 38.1 million and 37.4 million weighted options, respectively, and 0.9
million and 0.7 million weighted unearned restricted shares, respectively, has
been excluded from the calculation of EPS as it is anti-dilutive. The following
table summarizes the basic and diluted EPS computations for the three months and
six months ended September 30, 2000 and 2001:

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 2001 2000 2001
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)

Basic loss per share:
Net loss ................................................. $ (12.5) $ (53.3) $ (2.5) $ (87.8)
------- ------- ------- -------
Weighted average number of common shares ................. 246.1 246.5 245.8 246.9
------- ------- ------- -------
Basic loss per share ..................................... $ (0.05) $ (0.22) $ (0.01) $ (0.36)
======= ======= ======= =======

Diluted loss per share:
Net loss ................................................. $ (12.5) $ (53.3) $ (2.5) $ (87.8)
------- ------- ------- -------
Weighted average number of common shares ................. 246.1 246.5 245.8 246.9
Incremental shares from assumed conversions of
stock options and other .................................... -- -- -- --
------- ------- ------- -------
Adjusted weighted average number of common shares ........ 246.1 246.5 245.8 246.9
------- ------- ------- -------
Diluted loss per share ................................... $ (0.05) $ (0.22) $ (0.01) $ (0.36)
======= ======= ======= =======
</Table>

(3) SEGMENT REPORTING

BMC's management reviews the results of the Company's software business by
the following product categories: Enterprise Server Management, Business
Integrated Scheduling, Application & Database Performance Management, Recovery &
Storage Management and Other Software. In addition to these software segments,
the professional services business is also considered a separate segment.
Through June 30, 2001, the results of the business information integration
product group were included as part of the Other Software segment. Subsequent to
June 30, 2001, management began including a portion of this product group in the
Application & Database Performance Management segment and a portion in the
Recovery & Storage Management segment. Certain of the business information
integration products were discontinued at the time of this change. The amounts
reported below for the three months and six months ended September 30, 2000 and
2001 reflect this change in the composition of the segments. Management
continuously evaluates the product portfolio and additional changes to the
software segments could occur in future periods.

Segment performance is measured based on contribution margins, which reflect
only the direct controllable expenses of the segments and do not include
allocation of indirect research and development (R&D) expenses, the effect of
software development cost capitalization and amortization, selling and marketing
expenses, general and administrative expenses, amortization of acquired
technology, goodwill and intangibles, one-time charges, other income, net, and
income taxes. Assets and liabilities are not accounted for by segment.

<Table>
<Caption>
ENTERPRISE SYSTEMS MANAGEMENT SOFTWARE
--------------------------------------------------------------
APPLICATION
ENTERPRISE BUSINESS & DATABASE RECOVERY &
SERVER INTEGRATED PERFORMANCE STORAGE OTHER PROFESSIONAL INDIRECT AS
MANAGEMENT SCHEDULING MANAGEMENT MANAGEMENT SOFTWARE SERVICES R&D REPORTED
---------- ---------- ----------- ---------- -------- ------------ -------- --------

QUARTER ENDED SEPTEMBER 30, 2000 (IN MILLIONS)
- --------------------------------
Revenues:
License ...................... $ 53.5 $ 18.0 $ 56.3 $ 25.8 $ 20.3 $ -- $ -- $173.9
Maintenance .................. 63.5 8.6 27.4 24.3 5.5 -- -- 129.3
Professional services ........ -- -- -- -- -- 19.8 -- 19.8
------ ------ ------ ------ ------ ------ ------ ------
Total revenues .................. $117.0 $ 26.6 $ 83.7 $ 50.1 $ 25.8 $ 19.8 $ -- $323.0
R&D expenses .................... 23.9 5.5 38.3 16.4 8.0 -- 18.1 110.2
Cost of professional services ... -- -- -- -- -- 23.5 -- 23.5
------ ------ ------ ------ ------ ------ ------ ------
Contribution margin ........... $ 93.1 $ 21.1 $ 45.4 $ 33.7 $ 17.8 $ (3.7) $(18.1) 189.3
====== ====== ====== ====== ====== ====== ======
Selling and marketing expenses ....................................................................................... 132.8
General and administrative expenses................................................................................... 38.2
Acquired research and development..................................................................................... 6.0
Amortization of acquired technology, goodwill and intangibles......................................................... 44.8
Merger-related costs and compensation charges......................................................................... 3.3
Other income, net..................................................................................................... 19.4
------
Consolidated loss before taxes........................................................................................ $(16.4)
======
</Table>

QUARTER ENDED SEPTEMBER 30, 2001 (IN MILLIONS)
- --------------------------------
Revenues:
License ...................... $ 40.4 $ 12.4 $ 43.4 $ 24.2 $ 11.1 $ -- $ -- $131.5
Maintenance .................. 66.3 10.1 31.7 26.2 6.9 -- -- 141.2
Professional services ........ -- -- -- -- -- 21.1 -- 21.1
------ ------ ------ ------ ------ ------ ------ ------
Total revenues .................. $106.7 $ 22.5 $ 75.1 $ 50.4 $ 18.0 $ 21.1 $ -- $293.8
R&D expenses .................... 23.4 5.5 38.9 18.3 13.6 -- 6.1 105.8
Cost of professional services ... -- -- -- -- -- 23.8 -- 23.8
------ ------ ------ ------ ------ ------ ------ ------
Contribution margin ........... $ 83.3 $ 17.0 $ 36.2 $ 32.1 $ 4.4 $ (2.7) $ (6.1) 164.2
====== ====== ====== ====== ====== ====== ======
Selling and marketing expenses ....................................................................................... 132.9
General and administrative expenses................................................................................... 40.2
Amortization of acquired technology, goodwill and intangibles......................................................... 48.5
Restructuring and severance costs..................................................................................... 32.7
Merger-related costs and compensation charges......................................................................... 3.1
Other income, net..................................................................................................... 18.2
------
Consolidated loss before taxes........................................................................................ $(75.0)
======
</Table>

SIX MONTHS ENDED SEPTEMBER 30, 2000 (IN MILLIONS)
- -----------------------------------
Revenues:
License ........................ $157.6 $ 28.9 $119.7 $ 69.4 $ 28.0 $ -- $ -- $403.6
Maintenance .................... 126.7 16.5 52.9 48.3 10.6 -- -- 255.0
Professional services .......... -- -- -- -- -- 37.1 -- 37.1
------ ------ ------ ------ ------ ------ ------ ------
Total revenues .................... $284.3 $ 45.4 $172.6 $117.7 $ 38.6 $ 37.1 $ -- $695.7
R&D expenses ...................... 45.2 10.4 76.8 33.2 18.2 -- 33.0 216.8
Cost of professional services ..... -- -- -- -- -- 44.1 -- 44.1
------ ------ ------ ------ ------ ------ ------ ------
Contribution margin ............. $239.1 $ 35.0 $ 95.8 $ 84.5 $ 20.4 $ (7.0) $(33.0) 434.8
====== ====== ====== ====== ====== ====== ======
Selling and marketing expenses ......................................................................................... 285.0
General and administrative expenses..................................................................................... 76.5
Acquired research and development....................................................................................... 17.7
Amortization of acquired technology, goodwill and intangibles........................................................... 84.4
Merger-related costs and compensation charges........................................................................... 5.4
Other income, net....................................................................................................... 31.8
------
Consolidated loss before taxes.......................................................................................... $ (2.4)
======
</Table>

SIX MONTHS ENDED SEPTEMBER 30, 2001 (IN MILLIONS)
- -----------------------------------
Revenues:
License ........................ $109.7 $ 26.1 $ 93.4 $ 57.8 $ 24.5 $ -- $ -- $311.5
Maintenance .................... 133.6 19.1 62.3 51.5 14.0 -- -- 280.5
Professional services .......... -- -- -- -- -- 41.0 -- 41.0
------ ------ ------ ------ ------ ------ ------ ------
Total revenues .................... $243.3 $ 45.2 $155.7 $109.3 $ 38.5 $ 41.0 $ -- $633.0
R&D expenses ...................... 50.3 11.1 80.7 38.6 28.1 -- 10.0 218.8
Cost of professional services ..... -- -- -- -- -- 48.9 -- 48.9
------ ------ ------ ------ ------ ------ ------ ------
Contribution margin ............. $193.0 $ 34.1 $ 75.0 $ 70.7 $ 10.4 $ (7.9) $(10.0) 365.3
====== ====== ====== ====== ====== ====== ======
Selling and marketing expenses ........................................................................................... 285.7
General and administrative expenses....................................................................................... 82.1
Amortization of acquired technology, goodwill and intangibles............................................................. 96.7
Restructuring and severance costs......................................................................................... 44.7
Merger-related costs and compensation charges............................................................................. 5.8
Other income, net......................................................................................................... 26.8
-------
Consolidated loss before taxes............................................................................................ $(122.9)
=======
</Table>

(4) RESTRUCTURING AND SEVERANCE COSTS

During the quarters ended June 30 and September 30, 2001, BMC implemented a
restructuring plan to better align the Company's cost structure with prevailing
market conditions. This plan included the involuntary termination of 447 and 427
employees during those quarters, respectively. These actions were across all
divisions and geographies and the affected employees received cash severance
packages. During the quarter ended September 30, 2001, the Company also
discontinued certain business information integration products and announced the
closure of certain locations throughout the world. A charge of $12.0 million was
recorded during the quarter ended June 30, 2001 for severance and related
expenses, $2.5 million of which remained accrued at June 30, 2001. A charge of
$32.7 million was recorded during the quarter ended September 30, 2001 for
employee severance, the write-off of software assets related to discontinued
products and office closures, and as of September 30, 2001, $13.5 million of
these costs remained accrued for payment in future periods, as follows:

<Table>
<Caption>
PAID OUT OR
BALANCE AT CHARGED AGAINST BALANCE
JUNE 30, CHARGED TO THE RELATED SEPT. 30, AT
2001 EXPENSE ASSETS 2001
---------- ---------- --------------- ------------
(IN MILLIONS)

Severance and related expenses .... $ 2.5 $15.3 $ (6.4) $11.4
Write-off of software assets ...... -- 14.9 (14.9) --
Facility costs .................... -- 2.5 (0.4) 2.1
----- ----- ------ -----
Total accrual ........... $ 2.5 $32.7 $(21.7) $13.5
===== ===== ====== =====
</Table>

Subsequent to September 30, 2001, the Company reduced its workforce by an
additional 7% worldwide. Consistent with the previous actions, these
terminations were across all divisions and geographies and the affected
employees received cash severance packages. As a result, the Company will incur
additional restructuring and severance charges of approximately $14 million to
$18 million in the quarter ending December 31, 2001.

(5) MERGER-RELATED COSTS

During the quarter ended September 30, 2001, the Company made no payments
under its plan of restructuring initiated in March 1999 in connection with the
merger with Boole & Babbage, Inc. (Boole). See the discussion of this plan in
the Company's Annual Report on Form 10-K for the year ended March 31, 2001. An
accrual of $1.1 million remains at September 30, 2001, for severance payments to
be made in future periods.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

This section of the Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
identified by the use of the words "believe," "expect," "anticipate," "will,"
"contemplate," "would" and similar expressions that contemplate future events.
Numerous important factors, risks and uncertainties affect our operating
results, including, without limitation, those contained in this report, and
could cause our actual results to differ materially from the results implied by
these or any other forward-looking statements made by us or on our behalf. There
can be no assurance that future results will meet expectations. You should pay
particular attention to the important risk factors and cautionary statements
described in the section of this Report entitled "Certain Risks and
Uncertainties That Could Affect Future Operating Results." It is important that
the historical discussion below be read together with the attached condensed
consolidated financial statements and notes thereto, with the discussion of such
risks and uncertainties and with the audited financial statements and notes
thereto, and Management's Discussion and Analysis of Results of Operations and
Financial Condition contained in our Form 10-K for fiscal 2001.

A. RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following table sets forth, for the periods indicated, the percentages
that selected items in the Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) bear to total revenues. These comparisons of
financial results are not necessarily indicative of future results.

<Table>
<Caption>
PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 2001 2000 2001
----- ----- ----- -----

Revenues:
License ............................................. 53.9% 44.7% 58.0% 49.2%
Maintenance ......................................... 40.0 48.1 36.7 44.3
Professional services ............................... 6.1 7.2 5.3 6.5
----- ----- ----- -----
Total revenues .................................. 100.0 100.0 100.0 100.0
Selling and marketing expenses ........................ 41.1 45.2 41.0 45.1
Research and development expenses ..................... 34.1 36.0 31.2 34.5
Cost of professional services ......................... 7.3 8.1 6.3 7.7
General and administrative expenses ................... 11.8 13.7 11.0 13.0
Acquired research and development ..................... 1.9 -- 2.5 --
Amortization of acquired technology, goodwill and
intangibles ......................................... 13.9 16.5 12.1 15.3
Restructuring and severance costs ..................... -- 11.1 -- 7.1
Merger-related costs and compensation charges ......... 1.0 1.1 0.8 0.9
----- ----- ----- -----
Total operating expenses ......................... 111.1 131.7 104.9 123.6
----- ----- ----- -----
Operating loss ................................... (11.1) (31.7) (4.9) (23.6)
Interest and other income, net ........................ 6.1 6.3 4.8 5.4
Interest expense ...................................... (0.2) -- (0.2) --
Gain (loss) on marketable securities .................. 0.1 (0.1) -- (1.2)
----- ----- ----- -----
Other income, net ................................ 6.0 6.2 4.6 4.2
Loss before income taxes ......................... (5.1) (25.5) (0.3) (19.4)
Income taxes .......................................... (1.2) (7.4) 0.0 (5.5)
----- ----- ----- -----
Net loss .................................... (3.9)% (18.1)% (0.3)% (13.9)%
===== ===== ===== =====
</Table>

REVENUES

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 2001 CHANGE 2000 2001 CHANGE
------ ------ ------ ------ ------ ------
(IN MILLIONS) (IN MILLIONS)

License:
North America ................................. $ 92.2 $ 72.4 (21.5)% $248.8 $185.4 (25.5)%
International ................................. 81.7 59.1 (27.7)% 154.8 126.1 (18.5)%
------ ------ ------ ------
Total license revenues .................. 173.9 131.5 (24.4)% 403.6 311.5 (22.8)%
Maintenance:
North America ................................. 83.8 87.8 4.8% 162.5 178.8 10.0%
International ................................. 45.5 53.4 17.4% 92.5 101.7 9.9%
------ ------ ------ ------
Total maintenance revenues ............... 129.3 141.2 9.2% 255.0 280.5 10.0%
Professional services:
North America ................................. 10.7 10.7 0.0% 20.8 21.4 2.9%
International ................................. 9.1 10.4 14.3% 16.3 19.6 20.2%
------ ------ ------ ------
Total professional services revenues ...... 19.8 21.1 6.6% 37.1 41.0 10.5%
------ ------ ------ ------
Total revenues .......................... $323.0 $293.8 (9.0)% $695.7 $633.0 (9.0)%
====== ====== ====== ======
</Table>

Product License Revenues

Our product license revenues consist of product license fees and license
upgrade fees. Product license fees are all fees associated with a customer's
licensing of a given software product for the first time. License upgrade fees
are all fees associated with a customer's purchase of the right to run a
previously licensed product on a larger computer or additional computers.
License upgrade fees are primarily generated by our mainframe products and
include fees associated with both current and future additional processing
capacity. For the three months and six months ended September 30, 2001, license
upgrade fees represented 14% and 15%, respectively, of total revenues, compared
to 14% and 21%, respectively, in the comparable prior year periods.

License revenues decreased 24% and 23%, respectively, for the three months
and six months ended September 30, 2001, as compared to the same periods in
fiscal 2001, primarily due to a decrease in large enterprise-wide license
transactions during the periods and a reduction in license upgrade fees as
discussed below. Difficult economic conditions in domestic and international
markets throughout fiscal 2002 have resulted in reduced IT spending by many of
our customers. Though we completed license transactions with more customers than
in the same periods in the prior year, tighter budgets and higher required
approval levels caused many customers to choose smaller transactions in terms of
dollar value. In addition, our license transaction closure rates at the end of
the quarter ended September 30, 2001, were negatively impacted by the effect of
the September 11, 2001 terrorist attacks and the resulting economic slowdown.

Our North American operations generated 53% and 55% of license revenues in
the three months ended September 30, 2000 and 2001, respectively, and 62% and
60% in the six months ended September 30, 2000 and 2001, respectively. A
decrease in Enterprise Server Management license revenues was the largest
contributor to the 22% and 26% declines in North American license revenues in
the three months and six months ended September 30, 2001, primarily due to a
decrease in product license fees in the second quarter of fiscal 2002. Decreased
capacity-based license upgrade fees were the primary contributor to the decline
for the first half of fiscal 2002. International license revenues represented
47% and 45% of total license revenues for the quarters ended September 30, 2000
and 2001, respectively, and 38% and 40% in the six months ended September 30,
2000 and 2001, respectively. International license revenues declined 28% and 19%
in the three months and six months ended September 30, 2001, respectively, from
the comparable periods in fiscal 2001, principally due to decreased product
license fees for Enterprise Server Management and Application & Database
Performance Management products in the second quarter of fiscal 2002, and
decreased license upgrade fees associated with Enterprise Server Management
products in the first quarter of fiscal 2002. International license revenues
decreased by 2% and 3% for the three months and six months ended September 30,
2001, respectively, due to foreign currency exchange rate changes from fiscal
2001 to fiscal 2002, after giving effect to our foreign currency hedging
program.

Maintenance and Support Revenues

Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in our software maintenance, enhancement and support
program. Maintenance and support enrollment entitles customers to product
enhancements, technical support services and ongoing compatibility with
third-party operating systems, database management systems and applications.
These fees are generally charged annually and equal 15% to 20% of the discounted
price of the product. In addition, customers may be entitled to reduced
maintenance percentages for prepayment of annual maintenance fees. Maintenance
revenues

also include the ratable recognition of the bundled fees for any initial
maintenance services covered by the related perpetual license agreement.

Maintenance revenues have increased for the three-month and six-month
periods ended September 30, 2001 over the comparable prior year periods as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase in proportion
to the aggregate processing capacity on which the products are installed;
consequently, we receive higher absolute maintenance fees as customers install
our products on additional processing capacity. Due to the increased discounting
for higher levels of additional processing capacity, the maintenance fees on a
per unit of capacity basis are typically reduced in enterprise license
agreements for mainframe products. Historically, we have experienced high
maintenance renewal rates for our products.

Product Line Revenues

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 2001 CHANGE 2000 2001 CHANGE
------ ------ ------ ------ ------ ------
(IN MILLIONS) (IN MILLIONS)

Enterprise Server Management ..................... $117.0 $106.7 (8.8)% $284.3 $243.3 (14.4)%
Business Integrated Scheduling ................... 26.6 22.5 (15.4)% 45.4 45.2 (0.4)%
Application & Database Performance Management .... 83.7 75.1 (10.3)% 172.6 155.7 (9.8)%
Recovery & Storage Management .................... 50.1 50.4 0.6% 117.7 109.3 (7.1)%
Other Software ................................... 25.8 18.0 (30.2)% 38.6 38.5 (0.3)%
------ ------ ------ ------
Total license & maintenance revenues .... $303.2 $272.7 (10.1)% $658.6 $592.0 (10.1)%
====== ====== ====== ======
</Table>

We market software solutions designed to improve the availability,
performance and recoverability of enterprise applications, databases and other
IT systems components operating in mainframe, distributed computing and Internet
environments. These solutions fall into the five broad categories above. In
managing our investment in these product categories we consider each to be
included in one of three strategic groups. The first group includes our
Enterprise Server Management and Business Integrated Scheduling solutions. Our
objective for this group is to extend our core strengths in these markets. The
second strategic group includes our Application & Database Performance
Management and Recovery & Storage Management solutions. Our objective for this
group is to build our business in fast-growing markets. The last group includes
our other software products, such as our security, enterprise resource planning
(ERP), network management, output management and service provider solutions. The
primary objective for this group is to make strategic investments in what we
anticipate will be sources of future growth.

Our Enterprise Server Management and Business Integrated Scheduling
solutions combined represented 47% of total software revenues for each of the
quarters ended September 30, 2000 and 2001, and 50% and 49% for the six months
ended September 30, 2000 and 2001, respectively. Total software revenues for
this group declined 10% and 12% in the three months and six months ended
September 30, 2001, from the same periods in fiscal 2001. Decreased license
revenues in both product groups due to the economic conditions discussed above
more than offset increased maintenance revenues during the periods.

Our Application & Database Performance Management and Recovery & Storage
Management solutions combined contributed 44% and 46% of total software revenues
for the quarters ended September 30, 2000 and 2001, respectively, and 44% and
45% for the six months ended September 30, 2000 and 2001, respectively. Total
software revenues for this group declined 6% and 9% in the three months and six
months ended September 30, 2001, from the same periods in fiscal 2001 primarily
due to the economic conditions discussed above. Decreased license revenues in
both product groups more than offset increased maintenance revenues during the
period.

Our other software solutions contributed 9% and 7% of total software
revenues for the quarters ended September 30, 2000 and 2001, respectively, and
6% for each of the six month periods ended September 30, 2000 and 2001. Total
software revenues for this group declined 30% in the second quarter of fiscal
2002 from the same period in fiscal 2001 and were flat for the six months ended
September 30, 2001. Increases in revenues from our service provider solutions,
network management and ERP products were more than offset by decreases in the
other products included in this group.

Professional Services Revenues

Professional services revenues, representing fees from implementation,
integration and education services performed during the period, increased 7% and
11%, respectively, during the three-month and six-month periods ended September
30, 2001, over the comparable prior year periods.

OPERATING EXPENSES

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 2001 CHANGE 2000 2001 CHANGE
------ ------ ------ ------ ------ ------
(IN MILLIONS) (IN MILLIONS)

Selling and marketing ................................. $132.8 $132.9 0.0% $285.0 $285.7 0.2%
Research and development .............................. 110.2 105.8 (4.0)% 216.8 218.8 0.9%
Cost of professional services ......................... 23.5 23.8 1.3% 44.1 48.9 10.9%
General and administrative ............................ 38.2 40.2 5.2% 76.5 82.1 7.3%
Acquired research and development ..................... 6.0 -- (100.0)% 17.7 -- (100.0)%
Amortization of acquired technology, goodwill and
intangibles ........................................... 44.8 48.5 8.3% 84.4 96.7 14.6%
Restructuring and severance costs ..................... -- 32.7 nm -- 44.7 nm
Merger-related costs and compensation charges ......... 3.3 3.1 (6.1)% 5.4 5.8 7.4%
------ ------ ------ ------
Total operating expenses .................... $358.8 $387.0 7.9% $729.9 $782.7 7.2%
====== ====== ====== ======
</Table>

Selling and Marketing

Our selling and marketing expenses primarily include personnel and related
costs, sales commissions, and costs associated with advertising, industry trade
shows and sales seminars. Selling and marketing expenses were flat for the three
months and six months ended September 30, 2001 compared to the same periods in
fiscal 2001. Decreased sales commissions and marketing costs in the second
quarter were offset by increases in rent expense and bad debt expense related to
license billings. For the six month period, decreased sales commissions and
marketing costs were also offset by higher personnel costs in the first quarter
of fiscal 2002, due in part to increased headcount during that quarter. Selling
and marketing headcount decreased during the second quarter of fiscal 2002,
returning to the same quarter end level as in fiscal 2001.

Research and Development

Research and development expenses mainly comprise personnel costs related to
software developers and development support personnel, including software
programmers, testing and quality assurance personnel and writers of technical
documentation such as product manuals and installation guides. These expenses
also include costs associated with the maintenance, enhancement and support of
our products, computer hardware/software costs and telecommunications expenses
necessary to maintain our data processing center, royalties and the effect of
software development cost capitalization and amortization. Research and
development costs are reduced by amounts capitalized in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed." We capitalize our software development costs when the
projects under development reach technological feasibility as defined by SFAS
No. 86, and amortize these costs over the products' estimated useful lives.
During the second quarters of fiscal 2001 and 2002, we capitalized $30.0 million
and $32.0 million, respectively, of software development and purchased software
costs. Capitalized software costs for the six month periods ended September 30,
2000 and 2001, were $49.0 million and $67.3 million, respectively. The growth in
capitalized costs is primarily due to increases in distributed systems product
development and platform compatibility efforts. We amortized $8.9 million and
$22.6 million in the second quarters of fiscal 2001 and 2002, respectively, of
capitalized software development and purchased software costs pursuant to SFAS
No. 86, including $0.5 million and $7.6 million, respectively, to accelerate the
amortization of certain software products. We amortized $16.9 million and $45.0
million, respectively, of capitalized costs for the six months ended September
30, 2000 and 2001, including $0.5 million and $16.1 million, respectively, to
accelerate the amortization of certain software products. We accelerated the
amortization of these software products as they were not expected to generate
sufficient future revenues to realize the carrying value of the assets. During
the quarter ended September 30, 2001, we also wrote off software assets totaling
$14.9 million associated with certain business information integration products
that were discontinued during the quarter. This charge is included in
restructuring and severance costs in the accompanying Statement of Operations
and Comprehensive Income (Loss) for the three months ended September 30, 2001.

Research and development expenses decreased 4% during the second quarter of
fiscal 2002 compared to the same period in fiscal 2001, primarily due to reduced
headcount, travel costs and consulting fees which more than offset an increase
due to the net effect of software cost capitalization and amortization. For the
six months ended September 30, 2001, research and development costs were
slightly increased, primarily due to higher personnel costs in the first quarter
of fiscal 2001 resulting from annual base pay increases and the net effect of
software cost capitalization and amortization for the period.

Cost of Professional Services

Cost of professional services consists primarily of personnel costs
associated with implementation, integration and education services that we
perform for our customers, and the related infrastructure to support this
business. The increase in these costs for the three months and six months ended
September 30, 2001, over the comparable prior year periods resulted from
increased headcount to support the 7% and 11% growth in professional services
revenues, respectively, during these periods.

General and Administrative

General and administrative expenses are comprised primarily of compensation
and personnel costs within executive management, finance and accounting,
facilities management and human resources. Other costs included in general and
administrative expenses are fees paid for legal and accounting services,
consulting projects, insurance, costs of managing our foreign currency exposure
and bad debt expense related to maintenance billings. The increase in general
and administrative expenses for each of the three months and six months ended
September 30, 2001 over the same periods in the prior year was primarily
attributable to increased legal and other professional fees.

Acquired Research and Development

Acquired research and development costs for the six months ended September
30, 2000, were $17.7 million. These technology charges relate to the
acquisitions of Evity in the first quarter of fiscal 2001 and OptiSystems in the
second quarter of fiscal 2001 and the write-off of assets totaling $4.7 million,
related to a technology agreement with Envive Corporation that was terminated
during the first quarter of fiscal 2001. See the discussion of these
acquisitions in the fiscal 2001 Annual Report on Form 10-K. There was no charge
for acquired research and development during the six months ended September 30,
2001.

Amortization of Acquired Technology, Goodwill and Intangibles

Under the purchase accounting method for certain of our acquisitions,
portions of the purchase prices were allocated to goodwill, workforce, customer
base, software and other intangible assets. We are amortizing these intangibles
over three to five-year periods, which reflect the estimated useful lives of the
respective assets. The increase in amortization expense is primarily related to
the OptiSystems and other acquisitions completed during the last three quarters
of fiscal 2001.

Restructuring and Severance Costs

During the quarters ended June 30 and September 30, 2001, we implemented a
restructuring plan to better align our cost structure with prevailing market
conditions. The plan included the involuntary termination of 447 and 427
employees during those quarters, respectively. These actions were across all
divisions and geographies and the affected employees received cash severance
packages. During the quarter ended September 30, 2001, the Company also
discontinued certain business information integration products and announced the
closure of certain locations throughout the world. A charge of $12.0 million was
recorded during the quarter ended June 30, 2001 for severance and related
expenses, $2.5 million of which remained accrued at June 30, 2001. A charge of
$32.7 million was recorded during the quarter ended September 30, 2001 for
employee severance, the write-off of software assets related to discontinued
products and office closures, and as of September 30, 2001, $13.5 million of
these costs remained accrued for payment in future periods, as follows:

<Table>
<Caption>
PAID OUT OR
BALANCE AT CHARGED AGAINST BALANCE
JUNE 30, CHARGED TO THE RELATED SEPT. 30, AT
2001 EXPENSE ASSETS 2001
---------- ---------- --------------- ------------
(IN MILLIONS)

Subsequent to September 30, 2001, we reduced our workforce by an additional
7% worldwide. Consistent with the previous actions, these terminations were
across all divisions and geographies and the affected employees received cash
severance packages. As a result, we will incur additional restructuring and
severance charges of approximately $14 million to $18 million in the quarter
ending December 31, 2001.

Merger-Related Costs and Compensation Charges

In conjunction with our merger with Boole in March 1999, management approved
a formal plan of restructuring (the "Plan") which included steps to be taken to
integrate the operations of the two companies, consolidate duplicate facilities
and streamline operations to achieve reductions in overhead expenses in future
periods. No charges related to this restructuring plan were recorded during the
six-month periods ended September 30, 2000 and 2001, and as of September 30,
2001, we have remaining accrued termination benefits of approximately $1.1
million.

During the second quarters of fiscal 2001 and 2002, we recorded compensation
charges of $3.3 million and $3.1 million, respectively, and during the six
months ended September 30, 2000 and 2001, we recorded compensation charges of
$5.4 million and $5.8 million, respectively. These merger-related compensation
charges are primarily related to the vesting of common stock issued as part of
the Evity acquisition to certain Evity employee shareholders who we employed
after the acquisition.

OTHER INCOME, NET

For the three months and six months ended September 30, 2001, other income,
net was $18.2 million and $26.8 million, reflecting a decrease of 6% and 16%
from the same periods of fiscal 2001. Other income, net consists primarily of
interest earned on cash, cash equivalents and investment securities and interest
expense on short-term borrowings. The decrease in other income, net for the
second quarter is primarily due to a one-time gain of $2.9 million related to
the sale of a financial instrument in the second quarter of fiscal 2001. For the
six months ended September 30, 2001, other income, net was also decreased due to
a $7.4 million loss on a marketable security in the first quarter of fiscal
2002. These decreases in other income were partially offset by lower interest
expense as a result of our payment of all short-term borrowings in the first
quarter of fiscal 2002.

INCOME TAXES

For the three months and six months ended September 30, 2001, the income tax
benefit was $21.7 million and $35.1 million, respectively, compared to a benefit
of $3.9 million and expense of $0.1 million for the same periods in fiscal 2001.
The increase in the income tax benefit is directly attributable to the decline
in pre-tax earnings discussed above.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for business
combinations and requires that all business combinations be accounted for using
one method, the purchase method. The Statement applies to all business
combinations initiated after June 30, 2001. SFAS No. 142 addresses financial
accounting and reporting at the point of acquisition for intangible assets
acquired individually or with a group of other assets, other than those acquired
in a business combination, and the financial accounting and reporting for
goodwill and other intangible assets subsequent to their acquisition. Under this
Statement, all goodwill and those intangible assets with indefinite useful lives
will no longer be amortized, but rather will be tested at least annually for
impairment. Intangible assets with finite useful lives will continue to be
amortized over those useful lives. The provisions of SFAS No. 142 are required
to be applied for fiscal years beginning after December 15, 2001, except that
goodwill and intangibles that arise from business combinations after June 30,
2001 will not be amortized. As such, we will adopt the Statement in its entirety
on April 1, 2002, and will apply the appropriate provisions to any business
combinations we may complete between June 30, 2001 and that date. Adoption of
these Statements will eliminate a portion of the amortization expense from our
Statement of Operations and Comprehensive Income (Loss), which for the quarter
ended September 30, 2001, totaled $35.9 million. For acquisitions completed
through September 30, 2001, we estimate that a balance of approximately $160
million of goodwill and intangibles will remain at April 1, 2002, assuming
amortization of goodwill and intangibles continues at current rates. We will
continue to evaluate the realizability of goodwill and intangibles prior to
adoption, particularly considering current economic conditions. Prior to
adoption, impairment charges may be recorded if events or circumstances indicate
that goodwill or intangibles could not be realized under existing accounting
pronouncements.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143
requires the recognition of a liability for the fair value of an asset
retirement obligation in the period in which the obligation is incurred, if a
reasonable estimate of fair value can be made. If a reasonable estimate of fair
value cannot be made in the period the obligation is incurred, the liability
must be recognized when a reasonable estimate of fair value can be made. Upon
initial recognition of such a liability, an equal amount

must be capitalized into the carrying amount of the related long-lived asset and
subsequently expensed over its useful life. The provisions of SFAS No. 143 are
required to be applied for fiscal years beginning after June 15, 2002. SFAS No.
144 supercedes FASB No. 121 and the accounting and reporting provisions of APB
Opinion No. 30 for the disposal of a segment of a business. This statement
establishes a single accounting model, based on the framework in SFAS No. 121,
for long-lived assets to be disposed of by sale and resolves significant
implementation issues related to Statement 121. The provisions of SFAS No. 144
are required to be applied for fiscal years beginning after December 15, 2001.
We believe that adoption of SFAS No. 143 and SFAS No. 144 will not have a
material effect on our financial position or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2001, our cash, cash equivalents and marketable securities
were $988.9 million, a decrease of $15.1 million from the March 31, 2001
balance. Our working capital as of September 30, 2001, was $168.1 million,
reflecting an increase from the March 31, 2001 balance of $73.7 million due
primarily to positive operating cash flow and the decrease of $150.0 million in
short-term borrowings. We continue to invest a portion of our cash in securities
with maturities beyond one year. While typically yielding greater returns, this
reduces reported working capital. Our marketable securities are primarily
investment grade and are highly liquid. Stockholders' equity as of September 30,
2001, was $1.7 billion.

We continue to primarily finance our operations through funds generated from
operations. For the six months ended September 30, 2001, net cash provided by
operating activities was $223.8 million. Our primary source of cash is the sale
of our software licenses, software maintenance and professional services. We
provide financing on a portion of these sales transactions, to customers that
meet our specified standards of creditworthiness. We participate in established
programs with third-party financing institutions that allow us to transfer a
significant portion of our finance receivables on a non-recourse basis for cash.
During the six months ended September 30, 2001, we transferred $167.2 million of
such receivables through these programs. The high credit quality of our finance
receivables and the existence of these third-party facilities extend our ability
to offer financing to qualifying customers on an ongoing basis without a
negative cash flow impact.

Net cash used in investing activities in the six months ended September 30,
2001 was $4.0 million, primarily related to disbursements for the purchase of
marketable securities and the construction of an expansion to our corporate
headquarters, which were offset by cash receipts from the maturities of
marketable securities and sales of finance receivables. Net cash used in
financing activities in the six months ended September 30, 2001 was $219.3
million, which derived primarily from the repayment of all short-term borrowings
and treasury stock purchases. On April 24, 2000, the board of directors
authorized the purchase of up to $500.0 million in common stock. During the six
months ended September 30, 2001 we purchased 4.6 million shares for $82.8
million. Since the inception of the repurchase plan, we have purchased 11.8
million shares for $237.9 million. We plan to continue to buy stock on the open
market from time to time, depending on market conditions, cash flows and other
possible uses of our cash.

In April 2001, the term loan outstanding at March 31, 2001 matured and we
paid the balance outstanding. We entered a new 364-day $100.0 million revolving
credit facility, which is secured by certain of our financial assets, the market
value of which must equal or exceed 115% of the commitment under the facility.
Interest on the borrowings under this facility is payable monthly and is accrued
at a margin above LIBOR. There were no short-term borrowings outstanding as of
September 30, 2001.

We believe that our existing cash balances and funds generated from
operations will be sufficient to meet our liquidity requirements for the
foreseeable future.

B. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS.

Our Stock Price is Volatile.

Our stock price has been and is highly volatile. Our stock price is highly
influenced by current expectations of future revenue and earnings growth rates.
Any failure to meet anticipated revenue and earnings levels in a period or any
negative change in our perceived long-term growth prospects would likely have a
significant adverse effect on our stock price. Our historical financial results
should not be seen as indicative of future results.

The Timing and Size of License Contracts Could Cause Our Quarterly Revenues and
Earnings to Fluctuate.

Our revenues and results of operations are difficult to predict and may
fluctuate substantially quarter to quarter. The timing and amount of our license
revenues are subject to a number of factors that make estimation of operating
results prior to the end of a quarter extremely uncertain. We generally operate
with little or no sales backlog and, as a result, license revenues in any
quarter are dependent upon contracts entered into or orders booked and shipped
in that quarter. A significant amount of our license transactions are completed
during the final weeks and days of the quarter, and therefore we generally do
not know whether revenues and earnings will meet expectations until the final
days or day of a quarter.

We have a High Degree of Operating Leverage.

Our business model is characterized by a very high degree of operating
leverage. A substantial portion of our operating costs and expenses consists of
employee and facility related costs, which are relatively fixed over the short
term. In addition, our expense levels and hiring plans are based substantially
on our projections of future revenues. If near term demand weakens in a given
quarter, there would likely be a material adverse effect on operating results
and a resultant drop in our stock price.

We May Have Difficulty Achieving our EPS Goal.

There is a risk that we may not be able to achieve our earnings per share
goal in the near-term. If current weak global economic conditions continue or if
there is continued global economic uncertainty due to terrorism or wartime
conditions, we may find it difficult to sustain our revenues or achieve revenue
growth. Although we have taken steps to reduce our expenses in light of current
conditions, our ability to achieve our earnings per share goal in the near-term
is dependent upon increasing revenues over the most recent quarter. If we are
unable to achieve our earnings per share goal, our stock price may be adversely
affected.

Decreasing Demand for Enterprise License Transactions Could Adversely Affect
Revenues.

Fees from enterprise license transactions have historically been a
fundamental component of our revenues and the primary source of mainframe
license revenues. These revenues depend on our customers planning to grow their
mainframe capacity and continuing to perceive an increasing need to use our
existing software products on substantially greater mainframe processing
capacity in future periods. Prior to 2000, we licensed many of our larger
customers to operate our mainframe products on significant levels of processing
capacity in excess of their then current mainframe processing capacity. In a
weak economy, these customers may elect not to license our mainframe products
for additional processing capacity until their actual processing capacity or
expected future processing capacity exceeds the capacity they have already
licensed from us. If economic conditions weaken further, demand for data
processing capacity could continue to be slow or even decline. In addition, the
uncertain economic environment has reduced customers' expectations of future
MIPS growth, thus lessening demand for licensing excess processing capacity in
anticipation of future growth. If our customers who have entered into multi-year
capacity-based licenses for excess processing capacity do not increase their
mainframe processing capacity beyond the levels previously licensed from us or
license additional processing capacity in anticipation of future growth, then
our mainframe license revenues may not grow and our earnings could be adversely
affected.

Increased Competition and Pricing Pressures Could Adversely Affect Our Earnings.

The market for systems management software has been increasingly competitive
for the past number of years. We compete with a variety of software vendors
including IBM and CA. We derived over half of our total revenues in fiscal 2001
from software products for IBM and IBM-compatible mainframe computers. IBM
continues, directly and through third parties, to enhance and market its
utilities for IMS and DB2 as lower cost alternatives to the solutions provided
by us and other independent software vendors. Although such utilities are
currently less functional than our solutions, IBM has begun to invest more
heavily in the IMS and DB2 utility market and appears to be committed to
competing in these markets. If IBM is successful with its efforts to achieve
performance and functional equivalence with our IMS, DB2 and other products at a
lower cost, our business may be materially adversely affected. CA is also
competing with us in these markets. Competition has lead to increased pricing
pressures within the mainframe systems software markets. We continue to reduce
the cost to our customers of our mainframe tools and utilities in response to
such competitive pressures. Microsoft entered the distributed systems monitoring
and management market through its relationship with NetIQ and is now competing
with us in the market for management tools for the Windows operating system.

In connection with the introduction of its Z-series server, IBM has
announced changes to its mainframe software pricing, including a new
workload-based pricing model. We have also announced that we will support the
new workload-based pricing structure for the Z-series, but the software used to
measure workloads is not yet available. As such, the effect of this change on
our future mainframe license revenues cannot be determined.

Maintenance Revenue Growth Could Slow.

Maintenance revenues have increased in each of the last three fiscal years
and the first half of fiscal 2002 as a result of the continuing growth in the
base of installed products and the processing capacity on which they run.
Maintenance fees increase as the processing capacity on which the products are
installed increases; consequently, we receive higher absolute maintenance fees
as customers install our products on additional processing capacity. Due to
increased discounting for higher levels of additional processing capacity, the
maintenance fees on a per unit of capacity basis are typically reduced in
enterprise license agreements for our mainframe products. Historically, we have
enjoyed high maintenance renewal rates for our mainframe products. Should
customers migrate from their mainframe applications or find alternatives to our
products, increased cancellations could adversely impact the sustainability and
growth of our maintenance revenues. To date, we have been successful in
extending our traditional maintenance and support pricing model to the
distributed systems market. Renewal rates for maintenance on our distributed
systems products are lower than on our mainframe products.

Failure to Adapt to Technological Change Could Adversely Affect Our Earnings.

If we fail to keep pace with technological change in our industry, such
failure would have an adverse effect on our revenues and earnings. We operate in
a highly competitive industry characterized by rapid technological change,
evolving industry standards, changes in customer requirements and frequent new
product introductions and enhancements. During the past two years, many new
technological advancements and competing products entered the marketplace. The
distributed systems and application management markets in which we operate are
far more crowded and competitive than our traditional mainframe systems
management markets. Our ability to compete effectively and our growth prospects
depend upon many factors, including the success of our existing distributed
systems products, the timely introduction and success of future software
products, and the ability of our products to interoperate and perform well with
existing and future leading databases and other platforms supported by our
products. We have experienced long development cycles and product delays in the
past, particularly with some of our distributed systems products, and expect to
have delays in the future. Delays in new mainframe or distributed systems
product introductions or less-than-anticipated market acceptance of these new
products are possible and would have an adverse effect on our revenues and
earnings. New products or new versions of existing products may, despite
testing, contain undetected errors or bugs that could delay the introduction or
adversely affect commercial acceptance of such products.

Changes in Pricing Practices Could Adversely Affect Revenues and Earnings.

We may choose in fiscal 2002 or a future fiscal year to make changes to our
product packaging, pricing or licensing programs. If made, such changes may have
a material adverse impact on revenues or earnings.

Our Customers May Not Accept our Product Strategies.

Historically, we have focused on selling software products to address
specific customer problems associated with their applications. We are now
integrating multiple software products and offering packaged solutions for
customers' systems. There can be no assurance that customers will perceive a
need for such solutions. In addition, there may be technical difficulties in
integrating individual products into a combined solution that may delay the
introduction of such solutions to the market or adversely affect the demand for
such solutions.

Risks Related to Business Combinations.

As part of our overall strategy, we have acquired or invested in, and plan
to continue to acquire or invest in, complementary companies, products, and
technologies and to enter into joint ventures and strategic alliances with other
companies. Risks commonly encountered in such transactions include: the
difficulty of assimilating the operations and personnel of the combined
companies; the risk that we may not be able to integrate the acquired
technologies or products with our current products and technologies; the
potential disruption of our ongoing business; the inability to retain key
technical and managerial personnel; the inability of management to maximize our
financial and strategic position through the successful integration of acquired
businesses; and decreases in reported earnings as a result of charges for
in-process research and development and amortization of goodwill and acquired
intangible assets.

In order for us to maximize the return on our investments in acquired
companies, the products of these entities must be integrated with our existing
products. These integrations can be difficult and unpredictable, especially
given the complexity of software and that acquired technology is typically
developed independently and designed with no regard to integration. The
difficulties are compounded when the products involved are well established
because compatibility with the existing base of installed products must be
preserved. Successful integration also requires coordination of different
development and engineering teams. This too can be difficult and unpredictable
because of possible cultural conflicts and different opinions on technical
decisions and product roadmaps. There can be no assurance that we will be
successful in our product integration efforts or that we will realize the
expected benefits.

With each of our acquisitions, we have initiated efforts to integrate the
disparate cultures, employees, systems and products of these companies.
Retention of key employees is critical to ensure the continued advancement,
development, support, sales and marketing efforts pertaining to the acquired
products. We have implemented retention programs to keep many of the key
technical, sales and marketing employees; nonetheless, we have lost some key
employees and may lose others in the future.

Enforcement of Our Intellectual Property Rights.

We rely on a combination of copyright, patent, trademark, trade secrets,
confidentiality procedures and contractual procedures to protect our
intellectual property rights. Despite our efforts to protect our intellectual
property rights, it may be possible for unauthorized third parties to copy
certain portions of our products or to reverse engineer or obtain and use
technology or other information that we regard as proprietary. There can also be
no assurance that our intellectual property rights would survive a legal
challenge to their validity or provide significant protection for us. In
addition, the laws of certain countries do not protect our proprietary rights to
the same extent as do the laws of the United States. Accordingly, there can be
no assurance that we will be able to protect our proprietary technology against
unauthorized third party copying or use, which could adversely affect our
competitive position.

Possibility of Infringement Claims.

From time to time, we receive notices from third parties claiming
infringement by our products of third party patent and other intellectual
property rights. We expect that software products will increasingly be subject
to such claims as the number of products and competitors in our industry
segments grow and the functionality of products overlap. In addition, we expect
to receive more patent infringement claims as companies increasingly seek to
patent their software and business methods, especially in light of recent
developments in the law that extend the ability to patent software and business
methods. Regardless of its merit, responding to any such claim could be
time-consuming, result in costly litigation and require us to enter into royalty
and licensing agreements which may not be offered or available on terms
acceptable to us. If a successful claim is made against us and we fail to
develop or license a substitute technology, our business, results of operations
or financial position could be materially adversely affected.

Risks Related to International Operations and the Euro Currency.

We have committed, and expect to continue to commit, substantial resources
and funding to build our international service and support infrastructure.
Operating costs in many countries, including many of those in which we operate,
are higher than in the United States. In order to increase international sales
in fiscal 2002 and subsequent periods, we must continue to globalize our
software product lines; expand existing and establish additional foreign
operations; hire additional personnel; identify suitable locations for sales,
marketing, customer service and development; and recruit international
distributors and resellers in selected territories. Future operating results are
dependent on sustained performance improvement by our international offices,
particularly our European operations. Our operations and financial results
internationally could be significantly adversely affected by several risks such
as changes in foreign currency exchange rates, sluggish regional economic
conditions and difficulties in staffing and managing

international operations. Generally, our foreign sales are denominated in our
foreign subsidiaries' local currencies. If these foreign currency exchange rates
change unexpectedly, we could have significant gains or losses. Many systems and
applications software vendors are experiencing difficulties internationally.

The European Union's adoption of the Euro single currency raises a variety
of issues associated with our European operations. Although the transition will
be phased in over several years, the Euro became Europe's single currency on
January 1, 1999. Our foreign exchange exposures to legacy sovereign currencies
of the participating countries in the Euro became foreign exchange exposures to
the Euro upon its introduction. Although we are not aware of any material
adverse financial risk consequences of the change from legacy sovereign
currencies to the Euro, conversion may result in problems, which may have an
adverse impact on our business since we may be required to incur unanticipated
expenses to remedy these problems.

Conditions in Israel.

Our INCONTROL and ERP development operations are conducted primarily in
Israel and, accordingly, we are directly affected by economic, political and
military conditions in Israel. Any major hostilities involving Israel or the
interruption or curtailment of trade between Israel and its present trading
partners could materially adversely affect our business, operating results and
financial condition. Since the establishment of the State of Israel in 1948, a
state of hostility has existed, varying in degree and intensity, between Israel
and the Palestinian people and the Arab countries. In addition, Israel and
companies doing business with Israel have been the subject of an economic
boycott by the Arab countries since Israel's establishment. Although Israel has
entered into various agreements with certain Arab countries and the Palestinian
Authority, and various declarations have been signed in connection with efforts
to resolve some of the economic and political problems in the Middle East, we
cannot predict whether or in what manner these problems will be resolved. To
date, the current unrest in the region and hostilities within Israel associated
with the ongoing peace process have not caused disruption of our operations
located in Israel.

In addition, certain of our INCONTROL and ERP employees are currently
obligated to perform annual reserve duty in the Israel Defense Forces and are
subject to being called for active military duty at any time. Although our
businesses located in Israel have historically operated effectively under these
requirements, we cannot predict the effect of these obligations on our
operations in the future.

Possible Adverse Impact Of Interpretations of Existing Accounting
Pronouncements.

On April 1, 1998 and 1999 we adopted American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition,"
and SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions," respectively. The adoption of these standards
did not have a material impact on our financial position or results of
operations. Based on our reading and interpretation of these SOPs, we believe
that our current sales contract terms and business arrangements have been
properly reported. However, the American Institute of Certified Public
Accountants and its Software Revenue Recognition Task Force continue to issue
interpretations and guidance for applying the relevant standards to a wide range
of sales contract terms and business arrangements that are prevalent in the
software industry. Also, the Securities and Exchange Commission ("SEC") has
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. Future interpretations of
existing accounting standards or changes in our business practices could result
in future changes in our revenue accounting policies that could have a material
adverse effect on our business, financial condition and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of risks, including foreign currency exchange
rate fluctuations and changes in the market value of our investments. In the
normal course of business, we employ established policies and procedures to
manage these risks including the use of derivative instruments. There have been
no material changes in our foreign exchange risk management strategy or our
marketable securities subsequent to March 31, 2001, therefore our foreign
currency exchange rate risk and interest rate risk related to investments remain
substantially unchanged from the description in our Form 10-K for the year ended
March 31, 2001.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On October 1, 2001, the United States District Court for the Southern
District of Texas dismissed with prejudice the consolidated federal securities
action styled Dov Klein v. BMC Software, Inc., Richard P. Gardner, Stephen B.
Solcher, Roy J. Wilson, Kevin M. Weiss, Kevin M. Klausmeyer, Max P. Watson, Jr.,
William M. Austin, Wayne S. Morris, M. Brinkley Morse, Robert E. Beauchamp, and
Theodore W. Van Duyn, No. 00-CV-359. As discussed in the Company's prior
filings, this action was filed on February 4, 2000. The plaintiffs alleged that
the Company and eleven current and former senior executives violated Sections
10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5. Plaintiffs have
elected not to appeal the dismissal and the parties have filed a joint
stipulation of dismissal with prejudice, which the Company anticipates will be
entered in due course.

We are subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.
Management does not believe that the outcome of any of these legal matters will
have a material adverse effect on our financial position or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At BMC Software's Annual Meeting of Stockholders held on August 27, 2001
the following proposals were adopted by the margins indicated.

NUMBER OF SHARES
VOTED FOR WITHHELD
---------------------------

1. To elect eight directors
of the Company, each to serve
until the next annual meeting
or until his respective
successor has been duly
elected and qualified.

Jon E. Barfield 211,983,342 2,989,120
John W. Barter 212,058,180 2,914,282
Robert E. Beauchamp 212,047,059 2,925,403
B. Garland Cupp 212,048,367 2,924,095
Meldon K. Gafner 212,044,323 2,928,139
L. W. Gray 212,043,303 2,929,159
George F. Raymond 212,047,612 2,924,850
Tom C. Tinsley 212,035,003 2,937,459

NUMBER OF SHARES
VOTED FOR VOTED AGAINST ABSTAIN
------------------------------------------

2. To ratify the Board of
Directors' appointment of
Arthur Andersen LLP as the
Company's independent
accountants. 201,740,004 12,395,898 836,560

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

None

(b) Reports on Form 8-K.

None

SIGNATURES

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.

BMC SOFTWARE, INC.

By: /s/ ROBERT E. BEAUCHAMP
-------------------------------------------
Robert E. Beauchamp
President and Chief Executive Officer

November 13, 2001

By: /s/ JOHN W. COX
-------------------------------------------
John W. Cox
Vice President, Chief Financial Officer and
Chief Accounting Officer

November 13, 2001