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

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 DECEMBER 31, 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 Identification No.)
incorporation or organization)

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 February 12, 2002, there were outstanding 242,790,706 shares of Common
Stock, par value $.01, of the registrant.

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BMC SOFTWARE, INC. AND SUBSIDIARIES

QUARTER ENDED DECEMBER 31, 2001

INDEX

<Table>
<Caption>
PAGE
----

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2001 (Unaudited)....................................... 3
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three months and nine months ended
December 31, 2000 and 2001 (Unaudited) ............................. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 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............... 23

PART II. OTHER INFORMATION

Item 1. Legal Proceedings........................................................ 23

Item 6. Exhibits and Reports on Form 8-K......................................... 23

Signatures............................................................... 24
</Table>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BMC SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)

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

ASSETS
Current assets:
Cash and cash equivalents.................................... $ 146.0 $ 281.7
Marketable securities........................................ 144.7 198.0
Trade accounts receivable, net............................... 292.6 191.7
Trade finance receivables, current........................... 213.5 129.2
Other current assets......................................... 105.9 82.3
---------- -----------
Total current assets.................................. 902.7 882.9
Property and equipment, net.................................... 456.5 451.8
Software development costs and related assets, net............. 242.7 225.4
Long-term marketable securities................................ 713.3 531.0
Long-term finance receivables.................................. 236.3 176.4
Acquired technology, net....................................... 95.3 49.2
Goodwill and other intangibles, net............................ 317.6 166.0
Other long-term assets......................................... 69.5 170.9
---------- -----------
$ 3,033.9 $ 2,653.6
========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Trade accounts payable....................................... $ 22.1 $ 56.4
Accrued liabilities.......................................... 182.3 186.5
Short-term borrowings........................................ 150.0 --
Current portion of deferred revenue.......................... 474.6 485.3
---------- -----------
Total current liabilities............................. 829.0 728.2
Long-term deferred revenue..................................... 382.8 366.4
Other long-term liabilities.................................... 6.8 7.6
---------- -----------
Total liabilities..................................... 1,218.6 1,102.2
Commitments and contingencies
Stockholders' equity:
Preferred stock.............................................. -- --
Common stock................................................. 2.5 2.5
Additional paid-in capital................................... 530.9 536.9
Retained earnings............................................ 1,336.2 1,134.5
Accumulated other comprehensive loss......................... (9.8) (8.6)
---------- -----------
1,859.8 1,665.3
Less treasury stock, at cost............................... (20.9) (104.9)
Less unearned portion of restricted stock compensation..... (23.6) (9.0)
---------- -----------
Total stockholders' equity............................ 1,815.3 1,551.4
---------- -----------
$ 3,033.9 $ 2,653.6
========== ===========
</Table>

See the accompanying notes to 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
2000 2001 2000 2001
--------- --------- --------- ---------

Revenues:
License ............................................................... $ 228.9 $ 152.3 $ 632.5 $ 463.8
Maintenance ........................................................... 133.6 146.3 388.6 426.8
Professional services ................................................. 23.0 21.6 60.1 62.6
--------- --------- --------- ---------
Total revenues ................................................ 385.5 320.2 1,081.2 953.2
--------- --------- --------- ---------
Selling and marketing expenses .......................................... 154.4 128.4 439.4 414.1
Research and development expenses ....................................... 111.2 137.2 328.0 356.0
Cost of professional services ........................................... 24.0 21.9 68.1 70.8
General and administrative expenses ..................................... 36.4 36.1 112.9 118.2
Acquired research and development ....................................... 0.4 -- 18.1 --
Amortization and impairment of acquired technology, goodwill
and intangibles ...................................................... 46.7 103.9 131.1 200.6
Restructuring and severance costs ....................................... -- 8.2 -- 52.9
Merger-related costs and compensation charges ........................... 2.4 5.8 7.8 11.6
--------- --------- --------- ---------
Total operating expenses ...................................... 375.5 441.5 1,105.4 1,224.2
--------- --------- --------- ---------
Operating income (loss) ....................................... 10.0 (121.3) (24.2) (271.0)
Interest and other income, net .......................................... 22.7 16.1 60.1 50.9
Interest expense ........................................................ (1.9) -- (7.8) (0.4)
Gain (loss) on marketable securities .................................... (0.2) (1.2) 0.1 (8.8)
--------- --------- --------- ---------
Other income, net ............................................. 20.6 14.9 52.4 41.7
--------- --------- --------- ---------
Earnings (loss) before income taxes ........................... 30.6 (106.4) 28.2 (229.3)
Income taxes ............................................................ 8.7 (11.9) 8.8 (47.0)
--------- --------- --------- ---------
Net earnings (loss) ........................................... $ 21.9 $ (94.5) $ 19.4 $ (182.3)
========= ========= ========= =========
Basic earnings (loss) per share ......................................... $ 0.09 $ (0.39) $ 0.08 $ (0.74)
========= ========= ========= =========
Diluted earnings (loss) per share ....................................... $ 0.09 $ (0.39) $ 0.08 $ (0.74)
========= ========= ========= =========
Shares used in computing basic earnings (loss) per share ................ 244.7 243.6 245.2 245.9
========= ========= ========= =========
Shares used in computing diluted earnings (loss) per share .............. 249.3 243.6 252.5 245.9
========= ========= ========= =========
Comprehensive Income (Loss):
Net earnings (loss) ................................................... $ 21.9 $ (94.5) $ 19.4 $ (182.3)
Foreign currency translation adjustment ............................... (0.5) 1.5 (5.9) (0.6)
Unrealized gain (loss) on securities available for sale:
Unrealized loss, net of taxes of $0.6, $1.6, $1.1 and $0.5 ......... (1.1) (3.1) (2.1) (0.9)
Realized (gain) loss included in net earnings, net of taxes of
$0.1, $0.4, $-- and $3.1 ........................................ 0.1 0.8 (0.1) 5.7
--------- --------- --------- ---------
(1.0) (2.3) (2.2) 4.8
Unrealized gain on derivative instruments:
Unrealized gain (loss), net of taxes of $1.5, $0.7, $2.8 and $--.... (2.8) 1.3 5.2 --
Realized (gain) included in net earnings, net of taxes of
$2.2, $0.8, $5.6 and $1.6 ....................................... (4.1) (1.6) (10.4) (3.0)
--------- --------- --------- ---------
(6.9) (0.3) (5.2) (3.0)
--------- --------- --------- ---------
Comprehensive income (loss) ................................... $ 13.5 $ (95.6) $ 6.1 $ (181.1)
========= ========= ========= =========
</Table>

See the accompanying notes to condensed consolidated financial statements.

BMC SOFTWARE, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
NINE MONTHS ENDED
DECEMBER 31,
---------------------
2000 2001
------- -------

Cash flows from operating activities:
Net earnings (loss) .................................................................... $ 19.4 $(182.3)
Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities:
Restructuring and severance costs ................................................... -- 21.5
Acquired research and development and merger-related costs and
compensation charges ............................................................ 25.9 10.9
Depreciation and amortization ....................................................... 228.2 283.4
Impairment of acquired technology, goodwill and intangibles ......................... -- 63.3
Write-off of technology assets ...................................................... -- 5.0
(Gain) loss on marketable securities ................................................ (0.1) 8.8
Equity in loss of unconsolidated affiliate .......................................... 0.2 0.5
Gain on sale of financial instrument ................................................ (2.9) --
Gain from real estate transaction ................................................... (6.3) --
Earned portion of restricted stock compensation and other compensatory
stock issuances .................................................................. 8.6 2.3
Net change in receivables, payables, deferred revenue and other components of
working capital .................................................................. 159.8 92.4
------- -------
Net cash provided by operating activities ...................................... 432.8 305.8
------- -------
Cash flows from investing activities:
Cash paid for technology acquisitions and other investments, net of cash acquired ...... (112.0) (10.0)
Purchases of marketable securities ..................................................... (128.4) (54.4)
Maturities of/proceeds from sales of marketable securities ............................. 166.5 173.3
Purchases of property and equipment .................................................... (135.3) (50.3)
Proceeds from sales of property and equipment .......................................... -- 3.1
Capitalization of software development costs and related assets ........................ (74.5) (85.4)
Proceeds from sale of financial instrument ............................................. 9.4 --
Proceeds from real estate transaction .................................................. 6.5 --
Decrease in long-term finance receivables .............................................. 19.0 59.9
Payable to financing institution related to finance receivables ........................ -- 44.0
------- -------
Net cash provided by (used in) investing activities ............................ (248.8) 80.2
------- -------
Cash flows from financing activities:
Proceeds from borrowings ............................................................... 35.0 --
Payments on borrowings ................................................................. (132.5) (150.0)
Stock options exercised and other ...................................................... 26.1 15.1
Treasury stock acquired ................................................................ (110.4) (115.3)
------- -------
Net cash used in financing activities .......................................... (181.8) (250.2)
------- -------
Effect of exchange rate changes on cash .................................................. (5.9) (0.1)
------- -------
Net change in cash and cash equivalents .................................................. (3.7) 135.7
Cash and cash equivalents, beginning of period ........................................... 152.4 146.0
------- -------
Cash and cash equivalents, end of period ................................................. $ 148.7 $ 281.7
======= =======

Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized ..................................... $ 7.8 $ 1.7
Cash paid for income taxes ............................................................. $ 16.4 $ 20.3
Common stock and options issued and liabilities assumed in acquisitions ................ $ 57.6 $ --
Common stock received as proceeds from technology sale ................................. $ -- $ 0.2
</Table>

See the accompanying notes to 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 earnings (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 December 31, 2000 and 2001, the treasury stock method
effect of 30.7 million and 37.0 million weighted options, respectively, and 1.0
million and 0.5 million weighted unearned restricted shares, respectively, has
been excluded from the calculation of EPS as it is anti-dilutive. For the
nine-month periods ended December 31, 2000 and 2001, the treasury stock method
effect of 19.4 million and 37.4 million weighted options, respectively, and 0.9
million and 0.6 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
nine months ended December 31, 2000 and 2001:

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- -----------------------
2000 2001 2000 2001
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)

Basic earnings (loss) per share:
Net earnings (loss) ...................................... $ 21.9 $ (94.5) $ 19.4 $ (182.3)
-------- -------- -------- --------
Weighted average number of common shares ................. 244.7 243.6 245.2 245.9
-------- -------- -------- --------
Basic earnings (loss) per share .......................... $ 0.09 $ (0.39) $ 0.08 $ (0.74)
======== ======== ======== ========
Diluted earnings (loss) per share:
Net earnings (loss) ...................................... $ 21.9 $ (94.5) $ 19.4 $ (182.3)
-------- -------- -------- --------
Weighted average number of common shares ................. 244.7 243.6 245.2 245.9
Incremental shares from assumed conversions of stock
options and other ..................................... 4.6 -- 7.3 --
-------- -------- -------- --------
Adjusted weighted average number of common shares ........ 249.3 243.6 252.5 245.9
-------- -------- -------- --------
Diluted earnings (loss) per share ........................ $ 0.09 $ (0.39) $ 0.08 $ (0.74)
======== ======== ======== ========
</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 the remainder 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 nine months ended December 31, 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 DECEMBER 31, 2000 (IN MILLIONS)

Revenues:
License...................... $ 89.2 $ 25.3 $ 64.9 $ 37.9 $ 11.6 $ -- $ -- $ 228.9
Maintenance.................. 66.3 8.2 26.5 26.7 5.9 -- -- 133.6
Professional services........ -- -- -- -- -- 23.0 -- 23.0
--------- --------- -------- -------- ------- --------- -------- --------
Total revenues.................. $ 155.5 $ 33.5 $ 91.4 $ 64.6 $ 17.5 $ 23.0 $ -- $ 385.5
R&D expenses.................... 22.8 5.2 37.0 16.5 9.8 -- 19.9 111.2
Cost of professional services... -- -- -- -- -- 24.0 -- 24.0
--------- --------- -------- -------- ------- --------- -------- --------
Contribution margin .......... $ 132.7 $ 28.3 $ 54.4 $ 48.1 $ 7.7 $ (1.0) $ (19.9) 250.3
========= ========= ======== ======== ======= ========= ========
Selling and marketing expenses.................................................................................... 154.4
General and administrative expenses............................................................................... 36.4
Acquired research and development................................................................................. 0.4
Amortization of acquired technology, goodwill and intangibles..................................................... 46.7
Merger-related costs and compensation charges..................................................................... 2.4
Other income, net................................................................................................. 20.6
--------
Consolidated earnings before taxes................................................................................ $ 30.6
========
</Table>

Revenues:
License...................... $ 51.3 $ 15.0 $ 43.4 $ 29.2 $ 13.4 $ -- $ -- $ 152.3
Maintenance.................. 68.7 10.8 32.0 28.0 6.8 -- -- 146.3
Professional services........ -- -- -- -- -- 21.6 -- 21.6
--------- --------- -------- -------- ------- --------- -------- --------
Total revenues.................. 120.0 $ 25.8 $ 75.4 $ 57.2 $ 20.2 $ 21.6 $ -- $ 320.2
R&D expenses.................... 23.1 5.3 38.6 16.6 12.7 -- 40.9 137.2
Cost of professional services... -- -- -- -- -- 21.9 -- 21.9
--------- --------- -------- -------- ------- --------- -------- --------
Contribution margin .......... $ 96.9 $ 20.5 $ 36.8 $ 40.6 $ 7.5 $ (0.3) $ (40.9) 161.1
========= ========= ======== ======== ======= ========= ========
Selling and marketing expenses.................................................................................... 128.4
General and administrative expenses............................................................................... 36.1
Amortization and impairment of acquired technology, goodwill and intangibles...................................... 103.9
Restructuring and severance costs................................................................................. 8.2
Merger-related costs and compensation charges..................................................................... 5.8
Other income, net................................................................................................. 14.9
--------
Consolidated loss before taxes.................................................................................... $ (106.4)
========
</Table>

Revenues:
License...................... $ 247.2 $ 54.2 $ 184.3 $ 107.2 $ 39.6 $ -- $ -- $ 632.5
Maintenance.................. 193.5 24.7 78.8 75.1 16.5 -- -- 388.6
Professional services........ -- -- -- -- -- 60.1 -- 60.1
--------- --------- -------- -------- ------- --------- -------- --------
Total revenues.................. $ 440.7 $ 78.9 $ 263.1 $ 182.3 $ 56.1 $ 60.1 $ -- $1,081.2
R&D expenses.................... 68.0 15.6 114.0 49.7 27.8 -- 52.9 328.0
Cost of professional services... -- -- -- -- -- 68.1 -- 68.1
--------- --------- -------- -------- ------- --------- -------- --------
Contribution margin .......... $ 372.7 $ 63.3 $ 149.1 $ 132.6 $ 28.3 $ (8.0) $ (52.9) 685.1
========= ========= ======== ======== ======= ========= ========
Selling and marketing expenses.................................................................................... 439.4
General and administrative expenses............................................................................... 112.9
Acquired research and development................................................................................. 18.1
Amortization of acquired technology, goodwill and intangibles..................................................... 131.1
Merger-related costs and compensation charges..................................................................... 7.8
Other income, net................................................................................................. 52.4
--------
Consolidated earnings before taxes................................................................................ $ 28.2
========
</Table>

Revenues:
License...................... $ 161.0 $ 41.1 $ 136.9 $ 86.9 $ 37.9 $ -- $ -- $ 463.8
Maintenance.................. 202.6 29.8 94.0 79.5 20.9 -- -- 426.8
Professional services........ -- -- -- -- -- 62.6 -- 62.6
--------- --------- -------- -------- ------- --------- -------- --------
Total revenues.................. $ 363.6 $ 70.9 $ 230.9 $ 166.4 $ 58.8 $ 62.6 $ -- $ 953.2
R&D expenses.................... 73.4 16.3 119.8 55.2 40.4 -- 50.9 356.0
Cost of professional services... -- -- -- -- -- 70.8 -- 70.8
--------- --------- -------- -------- ------- --------- -------- --------
Contribution margin .......... $ 290.2 $ 54.6 $ 111.1 $ 111.2 $ 18.4 $ (8.2) $ (50.9) 526.4
========= ========= ======== ======== ======= ========= ========
Selling and marketing expenses.................................................................................... 414.1
General and administrative expenses............................................................................... 118.2
Amortization and impairment of acquired technology, goodwill and intangibles...................................... 200.6
Restructuring and severance costs................................................................................. 52.9
Merger-related costs and compensation charges..................................................................... 11.6
Other income, net................................................................................................. 41.7
--------
Consolidated loss before taxes.................................................................................... $ (229.3)
========
</Table>

(4) IMPAIRMENT OF ACQUIRED TECHNOLOGY AND GOODWILL

During the quarter ended December 31, 2001, BMC performed an assessment of
the carrying values of the Company's acquired technology, goodwill and
intangibles recorded in connection with various acquisitions. The assessment was
performed because sustained negative economic conditions have impacted BMC's
operations and expected future revenues. Current economic indicators suggest
that these conditions may continue for the foreseeable future. As a result, the
Company recorded impairment charges of $15.5 million related to acquired
technology to reflect these assets at their current estimated net realizable
values and $47.8 million related to goodwill to reflect these assets at their
current estimated fair values. These charges are reflected together with
amortization expense in the accompanying Consolidated Statements of Operations
and Comprehensive Income (Loss) for the three months and nine months ended
December 31, 2001, as amortization and impairment of acquired technology,
goodwill and intangibles.

The Company evaluated its acquired technology under the provisions of SFAS
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," its other intangibles under the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and of Long-lived Assets to
be Disposed Of," and its enterprise-level goodwill under the provisions of
Accounting Principles Board (APB) Opinion No. 17, "Intangible Assets." The
impairment charges for acquired technology reflect the amounts by which the
carrying values exceeded the estimated net realizable values of the products.
The net realizable values for acquired technology were estimated as the future
gross revenues from the products reduced by the estimated future costs of
completing and disposing of the products, including the costs of performing
maintenance and customer support required to satisfy the Company's
responsibilities set forth at the time of sale. The impairment charges for
goodwill reflect the amounts by which the carrying values exceeded the estimated
fair values of these assets. Fair value was determined by discounting

estimated future net cash flows related to these assets. No impairment was
identified for the Company's other intangible assets. Impairment charges by
asset category were as follows:

<Table>
<Caption>
TOTAL
ACQUIRED IMPAIRMENT
TECHNOLOGY GOODWILL CHARGE
---------- -------- ----------
(IN MILLIONS)

Acquisition:
New Dimension Software Ltd.................... $ 8.4 $ -- $ 8.4
Evity, Inc.................................... 0.8 21.6 22.4
OptiSystems Solutions, Ltd.................... 2.0 20.2 22.2
Perform SA.................................... 4.3 6.0 10.3
------ ------ --------
Total..................................... $ 15.5 $ 47.8 $ 63.3
====== ====== ========
</Table>

As of December 31, 2001, acquired technology of $49.2 million and goodwill
and intangibles of $166.0 million remained, which will be amortized through
March 31, 2002. As of April 1, 2002, the Company will adopt SFAS No. 142,
"Goodwill and Other Intangible Assets." Under this pronouncement, goodwill and
those intangible assets with indefinite lives will no longer be amortized, but
rather will be tested for impairment annually and when events or circumstances
indicate that their fair value has been reduced below carrying value. Acquired
technology will continue to be amortized under SFAS No. 86. For acquisitions
completed through December 31, 2001, the Company estimates that a balance of
approximately $126 million of goodwill and intangibles will remain at April 1,
2002, that will no longer be amortized, assuming amortization continues at
current rates through that date.

We review the realizability of acquired technology, goodwill and intangibles
on an ongoing basis, and when there is an indication of impairment, we perform
the procedures under the applicable accounting pronouncements to quantify any
impairment that exists. Determining the amount of impairment of these assets, if
any, requires us to estimate future cash flows and to make judgments regarding
discount rates and other variables that impact the net realizable value or fair
value of those assets, as applicable. Actual future cash flows and other assumed
variables could differ from our estimates. Future impairment charges under
existing pronouncements and under SFAS No. 142 to be adopted April 1, 2002,
could be material.

(5) RESTRUCTURING AND SEVERANCE COSTS

During the nine months ended December 31, 2001, BMC implemented a
restructuring plan to better align the Company's cost structure with current
market conditions. This plan included the involuntary termination of 1,260
employees during the nine months ended December 31, 2001. 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 as a result
of the dissolution of that business unit, and announced the closure of certain
locations throughout the world. A charge of $52.9 million was recorded during
the nine months ended December 31, 2001 for employee severance, the write-off of
software assets related to discontinued products, net of proceeds from the sale
of a portion of the related technology, and office closures.

During the quarter ended December 31, 2001, a charge of $8.4 million was
recorded for employee severance and office closures. Also, on December 31, 2001,
the Company sold its enterprise data propagation (EDP) technology for a minority
equity investment in the purchaser and future cash payments to be made based on
the purchaser's quarterly sales to BMC's former EDP customers over the next four
years. As these products were part of the business information integration
products discontinued in the quarter ended September 30, 2001, the proceeds will
be recorded as a reduction of restructuring and severance costs, as a recovery
of the amount previously written off for these products. For the quarter ended
December 31, 2001, proceeds of $0.2 million were recorded, reflecting the
estimated fair value of the equity investment received. As the future cash
payments, if any, cannot be currently estimated, they will be recorded in the
periods received as a reduction of restructuring and severance costs up to the
amount previously written off. Any receipts in excess of the related asset
write-off will be reflected as other income.

As of December 31, 2001, $5.7 million of severance and facilities costs
remained accrued for payment in future periods, as follows:

<Table>
<Caption>
BALANCE AT PAID OUT OR BALANCE AT
MARCH 31, CHARGED TO CHARGED AGAINST DEC. 31,
2001 EXPENSE RELATED ASSETS 2001
---------- ---------- --------------- ----------
(IN MILLIONS)

Severance and related expenses................... $ -- $ 35.1 $ (31.3) $ 3.8
Write-off of software assets, net of proceeds
received....................................... -- 14.7 (14.7) --
Facilities costs................................. -- 3.1 (1.2) 1.9
---- ------ -------- ------
Total accrual.......................... $ -- $ 52.9 $ (47.2) $ 5.7
==== ====== ======== ======
</Table>

Subsequent to December 31, 2001, the Company has had various organizational
changes. The related severance expense will be recorded in the quarter ending
March 31, 2002.

(6) MERGER-RELATED COSTS

During the quarter ended December 31, 2001, the Company made payments of
$0.5 million 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 $0.6 million remains at December 31, 2001,
for severance and facilities payments to be made in future periods.

(7) STOCK INCENTIVE PLANS

On December 17, 2001, the Company granted 9.8 million common stock options
to employees. The exercise price of these options was equal to the fair market
value of the Company's common stock on that date.

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 the Company's 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 the line items in the 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 REVENUE
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2000 2001 2000 2001
------ ------ ------ ------

Revenues:
License .............................................. 59.4% 47.6% 58.5% 48.6%
Maintenance .......................................... 34.6 45.7 35.9 44.8
Professional services ................................ 6.0 6.7 5.6 6.6
------ ------ ------ ------
Total revenues ................................... 100.0 100.0 100.0 100.0
Selling and marketing expenses ......................... 40.0 40.1 40.7 43.5
Research and development expenses ...................... 28.9 42.8 30.3 37.3
Cost of professional services .......................... 6.2 6.8 6.3 7.4
General and administrative expenses .................... 9.4 11.3 10.4 12.4
Acquired research and development ...................... 0.1 -- 1.7 --
Amortization and impairment of acquired technology,
goodwill and intangibles ............................ 12.1 32.4 12.1 21.0
Restructuring and severance costs ...................... -- 2.6 -- 5.6
Merger-related costs and compensation charges .......... 0.6 1.8 0.7 1.2
------ ------ ------ ------
Operating income (loss) ........................... 2.7 (37.8) (2.2) (28.4)
Interest and other income, net ......................... 5.8 5.0 5.5 5.3
Interest expense ....................................... (0.5) -- (0.7) --
Gain (loss) on marketable securities ................... -- (0.4) -- (0.9)
------ ------ ------ ------
Other income, net ................................. 5.3 4.6 4.8 4.4
Earnings (loss) before income taxes ............... 8.0 (33.2) 2.6 (24.0)
Income taxes ........................................... 2.3 (3.7) 0.8 (4.9)
------ ------ ------ ------
Net earnings (loss) .......................... 5.7% (29.5)% 1.8% (19.1)%
====== ====== ====== ======
</Table>

REVENUES

We recognize revenue in accordance with the American Institute of Certified
Public Accountants (AICPA) 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." 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 AICPA and
its Software Revenue Recognition Task Force continue to issue interpretations
and guidance for applying the relevant standards to a wide range of sales
contract terms and business arrangements that are prevalent in the software
industry. Also, the Securities and Exchange Commission (SEC) has issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. Future interpretations of existing accounting
standards or changes in our business practices could result in future changes in
our revenue accounting policies that could have a material adverse effect on our
business, financial condition and results of operations. For a more detailed
discussion of our revenue recognition policies, see the footnotes to the
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended March 31, 2001.

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2000 2001 CHANGE 2000 2001 CHANGE
-------- -------- ------ -------- -------- ------
(IN MILLIONS) (IN MILLIONS)

License:
North America ................................. $ 110.2 $ 79.6 (27.8)% $ 358.9 $ 265.0 (26.2)%
International ................................. 118.7 72.7 (38.8)% 273.6 198.8 (27.3)%
-------- -------- -------- --------
Total license revenues .................. 228.9 152.3 (33.4)% 632.5 463.8 (26.7)%
Maintenance:
North America ................................. 80.0 86.3 7.9% 242.5 265.2 9.4%
International ................................. 53.6 60.0 11.9% 146.1 161.6 10.6%
-------- -------- -------- --------
Total maintenance revenues ............... 133.6 146.3 9.5% 388.6 426.8 9.8%
Professional services:
North America ................................. 12.3 9.8 (20.3)% 33.1 31.2 (5.7)%
International ................................. 10.7 11.8 10.3% 27.0 31.4 16.3%
-------- -------- -------- --------
Total professional services revenues ..... 23.0 21.6 (6.1)% 60.1 62.6 4.2%
-------- -------- -------- --------
Total revenues .......................... $ 385.5 $ 320.2 (16.9)% $1,081.2 $ 953.2 (11.8)%
======== ======== ======== ========
</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 may
include fees associated with both current and future additional processing
capacity. For the three months and nine months ended December 31, 2001, license
upgrade fees represented 19% and 16%, respectively, of total revenues, compared
to 24% and 22%, respectively, in the comparable prior year periods.

License revenues decreased 33% and 27%, respectively, for the three months
and nine months ended December 31, 2001, as compared to the same periods in
fiscal 2001, primarily due to a decrease in large enterprise-wide license
transactions during the periods. Difficult economic conditions in domestic and
international markets throughout fiscal 2002 have resulted in reduced
information technology spending by many of our customers. Though we completed
approximately the same number of license transactions in the nine months ended
December 31, 2001, as in the same prior year period, tighter budgets and higher
required approval levels caused many customers to enter into smaller
transactions in terms of dollar value.

Our North American operations generated 48% and 52% of license revenues in
the three months ended December 31, 2000 and 2001, respectively, and 57% in each
of the nine months ended December 31, 2000 and 2001. A decrease in Enterprise
Server Management license revenues was the largest contributor to the 28% and
26% declines in North American license revenues in the three months and nine
months ended December 31, 2001, primarily due to a decrease in product license
fees during those periods. Decreased license upgrade fees were not a major
contributor to the decline for the quarter, but had a more significant negative
impact for the nine months ended December 31, 2001. International license
revenues represented 52% and 48% of license revenues for the quarters ended
December 31, 2000 and 2001, respectively, and 43% in each of the nine months
ended December 31, 2000 and 2001. International license revenues declined 39%
and 27% in the three months and nine months ended December 31, 2001,
respectively, from the comparable periods in fiscal 2001, principally due to
decreased license upgrade fees for Enterprise Server Management

products during those periods. The international license revenue decline
included decreases of 1% and 2% for the three months and nine months ended
December 31, 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.
Generally, these fees are 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 entering into long-term maintenance
contracts and prepaying 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 nine-month
periods ended December 31, 2001 over the comparable prior year periods primarily
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. Also, during the quarter ended December 31,
2001, the recognition of $2.6 million of deferred maintenance revenue was
accelerated due to the sale of our enterprise data propagation technology and
the resulting assignment of certain maintenance contracts for those products to
the purchaser. As additional maintenance contracts for these products are
assigned, recognition of additional maintenance revenue will be accelerated in
future periods.

Product Line Revenues

Enterprise Server Management ...................... $ 155.5 $ 120.0 (22.8)% $ 440.7 $ 363.6 (17.5)%
Business Integrated Scheduling .................... 33.5 25.8 (23.0)% 78.9 70.9 (10.1)%
Application & Database Performance Management ..... 91.4 75.4 (17.5)% 263.1 230.9 (12.2)%
Recovery & Storage Management ..................... 64.6 57.2 (11.5)% 182.3 166.4 (8.7)%
Other Software .................................... 17.5 20.2 15.4% 56.1 58.8 4.8%
-------- -------- -------- --------
Total license & maintenance revenues ..... $ 362.5 $ 298.6 (17.6)% $1,021.1 $ 890.6 (12.8)%
======== ======== ======== ========
</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 52% and 49% of total software revenues for the
quarters ended December 31, 2000 and 2001, respectively, and 51% and 49% for the
nine months ended December 31, 2000 and 2001, respectively. Total software
revenues for this group declined 23% and 16% in the three months and nine months
ended December 31, 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 43% and 44% of total software revenues
for the quarters ended December 31, 2000 and 2001, respectively, and 44% and 45%
for the nine months ended December 31, 2000 and 2001, respectively. Total
software revenues for this group declined 15% and 11% in the three months and
nine months ended December 31, 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 5% and 7% of total software
revenues for the quarters ended December 31, 2000 and 2001, respectively, and 5%
and 6% for the nine month periods ended December 31, 2000 and 2001. Total
software revenues for this group increased 15% and 5% for the three months and
nine months ended December 31, 2001, respectively. For the third quarter,
revenue growth for our security, network management and service provider
solutions was the primary contributor to the increase. For the nine months ended
December 31, 2001, the revenue increase was primarily related to our service
provider solutions, network management and ERP products.

Professional Services Revenues

Professional services revenues, representing fees from implementation,
integration and education services performed during the period, decreased 6% for
the third quarter and increased 4% for the nine-month period ended December 31,
2001, over the comparable prior year periods. The decline in professional
services revenues is related to decreased license revenues, as this results in
less demand for our implementation and integration services.

OPERATING EXPENSES

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- ------------------
2000 2001 CHANGE 2000 2001 CHANGE
-------- -------- ------ -------- -------- ------
(IN MILLIONS) (IN MILLIONS)

Selling and marketing ...................................... $ 154.4 $ 128.4 (16.8)% $ 439.4 $ 414.1 (5.8)%
Research and development ................................... 111.2 137.2 23.4% 328.0 356.0 8.5%
Cost of professional services .............................. 24.0 21.9 (8.8)% 68.1 70.8 4.0%
General and administrative ................................. 36.4 36.1 (0.8)% 112.9 118.2 4.7%
Acquired research and development .......................... 0.4 -- (100.0)% 18.1 -- (100.0)%
Amortization and impairment of acquired technology,
goodwill and intangibles ................................ 46.7 103.9 122.5% 131.1 200.6 53.0%
Restructuring and severance costs .......................... -- 8.2 N/A -- 52.9 N/A
Merger-related costs and compensation charges .............. 2.4 5.8 141.7% 7.8 11.6 48.7%
-------- -------- -------- --------
Total operating expenses ......................... $ 375.5 $ 441.5 17.6% $1,105.4 $1,224.2 10.7%
======== ======== ======== ========
</Table>

Selling and Marketing

Our selling and marketing expenses include personnel and related costs,
sales commissions and costs associated with advertising, industry trade shows
and sales seminars. Selling and marketing expenses decreased 17% and 6% for the
three months and nine months ended December 31, 2001, respectively. Lower sales
commissions, personnel costs and travel costs due to the revenue decline and
reduced headcount were the primary contributors to the expense decrease in both
periods. Selling and marketing expenses were flat for the six months ended
September 30, 2001, and declined in the quarter ended December 31, 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 third quarters of fiscal 2001 and 2002, we capitalized $25.5 million
and $18.1 million, respectively, of software development and purchased software
costs. Capitalized software costs for the nine-month periods ended December 31,
2000 and 2001, were $74.5 million and $85.4 million, respectively. We amortized
$24.0 million and $38.7 million in the third quarters of fiscal 2001 and 2002,
respectively, of

capitalized software development and purchased software costs pursuant to SFAS
No. 86, including $9.0 million and $24.2 million, respectively, to accelerate
the amortization of certain software products. We amortized $40.9 million and
$83.7 million, respectively, of capitalized costs for the nine months ended
December 31, 2000 and 2001, including $9.5 million and $40.3 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, as discussed further below.

Research and development expenses increased 23% and 9% during the three
months and nine months ended December 31, 2001, respectively, compared to the
same periods in fiscal 2001, primarily due to the net effect of software cost
capitalization and amortization and a $5.0 million third quarter write-off of
prepaid royalties and other assets related to technology we no longer plan to
utilize. These additional costs more than offset reduced headcount costs, travel
costs and consulting fees during the periods. As a result of the changes in
market conditions and the research and development headcount reductions, we have
begun focusing more on our core and high-potential growth businesses. As part of
this effort, we reviewed our product portfolio during the quarter ended December
31, 2001, and discontinued certain products throughout the portfolio. To the
extent that there were any capitalized software development costs remaining on
the balance sheet related to these products, we accelerated the amortization to
write these balances off. The result of accelerating amortization in the third
quarter of fiscal 2002 was a net expense for the quarter of $18.7 million
related to internal software capitalization and amortization, which was in
addition to approximately $1.9 million of amortization expense for purchased
software, for a total net effect of $20.6 million for the quarter.

Total capitalized software development costs net of amortization at December
31, 2001, were $225.4 million. Under SFAS No. 86, we evaluate our capitalized
software costs at each balance sheet date to determine if the unamortized
balance related to any given product exceeds the estimated net realizable value
of that product. Any such excess is written off through accelerated amortization
in the quarter it is identified. Determining net realizable value as defined by
SFAS No. 86 requires that we estimate future cash flows to be generated by the
products and to use judgment in quantifying the appropriate amount to write off,
if any. Actual cash flows and amounts realized from the software products could
differ from our estimates. Also, any future changes to our product portfolio
could result in significant research and development expenses related to
software asset write-offs.

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 as a result of
the dissolution of that business unit as part of our restructuring plan. This
charge is included in restructuring and severance costs in the accompanying
Consolidated Statement of Operations and Comprehensive Income (Loss) for the
nine months ended December 31, 2001.

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. These costs decreased 9% for the quarter ended December 31, 2001, and
increased 4% for the nine months ended December 31, 2001, compared to the
comparable prior year periods. These changes are consistent with the revenue
decrease of 6% and increase of 4% for the same 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 expenses 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 decline in general and
administrative expenses for the quarter ended December 31, 2001, was primarily
related to decreased personnel and travel costs. The increase in general and
administrative expenses for the nine months ended December 31, 2001 over the
same period 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 nine months ended December
31, 2000, were $18.1 million. These technology charges primarily 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 nine months ended December 31,
2001.

Amortization and Impairment of Acquired Technology, Goodwill and Intangibles

Under the purchase accounting method for certain of our acquisitions,
portions of the purchase price 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.

During the quarter ended December 31, 2001, we performed an assessment of
the carrying values of our acquired technology, goodwill and intangibles
recorded in connection with various acquisitions. The assessment was performed
because sustained negative economic conditions impacted our operations and
expected future revenues. Current economic indicators suggest that these
conditions may continue for the foreseeable future. As a result, we recorded
impairment charges of $15.5 million related to acquired technology to reflect
these assets at their current estimated net realizable values and $47.8 million
related to goodwill to reflect these assets at their current estimated fair
values. These charges are reflected together with amortization expense in the
accompanying Consolidated Statements of Operations and Comprehensive Income
(Loss) for the three months and nine months ended December 31, 2001, as
amortization and impairment of acquired technology, goodwill and intangibles.

We evaluated our acquired technology under the provisions of SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," our other intangibles under the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and of Long-lived Assets to
be Disposed Of," and our enterprise-level goodwill under the provisions of
Accounting Principles Board (APB) Opinion No. 17, "Intangible Assets." The
impairment charges for acquired technology reflect the amounts by which the
carrying values exceeded the estimated net realizable values of the products.
The net realizable values for acquired technology were estimated as the future
gross revenues from the products reduced by the estimated future costs of
completing and disposing of the products, including the costs of performing
maintenance and customer support required to satisfy our responsibilities set
forth at the time of sale. The impairment charges for goodwill reflect the
amounts by which the carrying values exceeded the estimated fair values of these
assets. Fair value was determined by discounting estimated future net cash flows
related to these assets. No impairment was identified for our other intangible
assets. Impairment charges by asset category were as follows:

<Table>
<Caption>
TOTAL
ACQUIRED IMPAIRMENT
TECHNOLOGY GOODWILL CHARGE
---------- -------- ----------
(IN MILLIONS)

We review the realizability of acquired technology, goodwill and intangibles
on an ongoing basis, and when there is an indication of impairment, we perform
the procedures under the applicable accounting pronouncements to quantify any
impairment that exists. Determining the amount of impairment of these assets, if
any, requires that we estimate future cash flows and make judgments regarding
discount rates and other variables that impact the net realizable value or fair
value of those assets, as applicable. Actual future cash flows and other assumed
variables could differ from our estimates. Future impairment charges under
existing pronouncements and under SFAS No. 142 to be adopted April 1, 2002,
could be material.

Restructuring and Severance Costs

During the nine months ended December 31, 2001, we implemented a
restructuring plan to better align our cost structure with current market
conditions. This plan included the involuntary termination of 1,260 employees
during the nine months ended December 31, 2001. These actions were across all
divisions and geographies and the affected employees received cash severance
packages. During the quarter ended September 30, 2001, we also discontinued
certain business information integration products as a

result of the dissolution of that business unit, and announced the closure of
certain locations throughout the world. A charge of $52.9 million was recorded
during the nine months ended December 31, 2001 for employee severance, the
write-off of software assets related to discontinued products, net of proceeds
from the sale of a portion of the related technology, and office closures.

During the quarter ended December 31, 2001, a charge of $8.4 million was
recorded for employee severance and office closures. Also, on December 31, 2001,
we sold our enterprise data propagation (EDP) technology for a minority equity
investment in the purchaser and future cash payments to be made based on the
purchaser's quarterly sales to our former EDP customers over the next four
years. As these products were part of the business information integration
products discontinued in the quarter ended September 30, 2001, the proceeds will
be recorded as a reduction of restructuring and severance costs, as a recovery
of the amount previously written off for these products. For the quarter ended
December 31, 2001, proceeds of $0.2 million were recorded, reflecting the
estimated fair value of the equity investment received. As the future cash
payments, if any, cannot be currently estimated, they will be recorded in the
periods received as a reduction of restructuring and severance costs up to the
amount previously written off. Any receipts in excess of the related asset
write-off will be reflected as other income.

As of December 31, 2001, $5.7 million of severance and facilities costs
remained accrued for payment in future periods, as follows:

BALANCE AT PAID OUT OR BALANCE AT
MARCH 31, CHARGED TO CHARGED AGAINST DEC. 31,
2001 EXPENSE RELATED ASSETS 2001
---------- ---------- --------------- ----------
(IN MILLIONS)

Severance and related expenses ................... $ -- $35.1 $(31.3) $ 3.8
Write-off of software assets, net of proceeds
received ....................................... -- 14.7 (14.7) --
Facilities costs ................................. -- 3.1 (1.2) 1.9
----- ----- ------ -----
Total accrual .......................... $ -- $52.9 $(47.2) $ 5.7
===== ===== ====== =====
</Table>

Subsequent to December 31, 2001, we have had various organizational changes.
The related severance expense will be recorded in the quarter ending March 31,
2002.

Merger-Related Costs and Compensation Charges

In conjunction with our merger with Boole in March 1999, management approved
a formal plan of restructuring 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. During
the third quarter of fiscal 2001, $1.0 million of previously accrued merger
costs were reversed, as certain lease and severance obligations were satisfied
at amounts below the amounts originally estimated. This reversal is reflected as
a reduction of merger-related costs and compensation charges in the accompanying
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
three months and nine months ended December 31, 2000. No charges related to this
restructuring plan were recorded during the three-month or nine-month periods
ended December 31, 2001, and as of December 31, 2001, we have remaining accrued
termination benefits and facilities costs of approximately $0.6 million.

During the third quarters of fiscal 2001 and 2002, we recorded
merger-related compensation charges of $3.4 million and $5.8 million,
respectively, and during the nine months ended December 31, 2000 and 2001, we
recorded merger-related compensation charges of $8.8 million and $11.6 million,
respectively. These 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 nine months ended December 31, 2001, other income,
net was $14.9 million and $41.7 million, reflecting a decrease of 28% and 20%
from the same periods of fiscal 2001. Other income, net consists primarily of
interest earned on cash, cash equivalents and marketable securities, realized
gains and losses on marketable and other investment securities, and interest
expense on short-term borrowings. The decrease in other income, net for the
third quarter is primarily due to a one-time gain of $6.3 million related to a
real estate transaction in the third quarter of fiscal 2001. The decrease for
the nine months ended December 31, 2001 is primarily due to the one-time real
estate gain in fiscal 2001, a $2.9 million one-time gain in the second quarter
of fiscal 2001 related to the sale of a financial instrument and 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 nine months ended December 31, 2001, the income tax
benefit was $11.9 million and $47.0 million, respectively, compared to expense
of $8.7 million and $8.8 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.

Recording such tax benefits results in the recognition of a tax asset
representing the future benefit of utilizing the net operating loss carryforward
to reduce future tax obligations. We evaluate this tax asset at each balance
sheet date to determine its realizability, considering currently enacted tax
laws. If we determine that it is not fully realizable, a valuation allowance
will be recorded to reduce the asset balance to its realizable value through a
charge to income tax expense. Determining whether we will be able to utilize the
net operating loss carryforward requires that we estimate future taxable income
and make judgments regarding the timing of future tax obligations. Actual
taxable income could differ from our estimates. As of December 31, 2001, we
believe it is more likely than not that we will be able to realize the tax asset
through net operating loss carryforwards and therefore no valuation allowance is
recorded related to this asset, which is reflected in other long-term assets in
the accompanying Condensed Consolidated Balance Sheet as of December 31, 2001.
If we conclude that this tax asset requires a valuation allowance in the future,
the effect on income tax expense could be material.

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 for impairment annually
and when events or circumstances indicate that their fair value has been reduced
below carrying value. 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 Consolidated Statement of Operations and Comprehensive Income
(Loss), which for the quarter ended December 31, 2001, totaled $29.2 million.
For acquisitions completed through December 31, 2001, we estimate that a balance
of approximately $126 million of goodwill and intangibles will remain at April
1, 2002, that will no longer be amortized, assuming amortization 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
SFAS 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 December 31, 2001, our cash and cash equivalents were $281.7 million and
our marketable securities were $729.0 million, for a total of $1,010.7 million,
an increase of $6.7 million from the March 31, 2001 total. Our working capital
as of December 31, 2001, was $154.7 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. Stockholders'
equity as of December 31, 2001, was $1.6 billion.

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. The majority of our marketable securities are classified as
held-to-maturity under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." As such, they are recorded at amortized cost and changes
in their fair values during the holding period are not reflected in the
financial statements. If the creditworthiness of an issuer of these securities
deteriorates, losses would be recorded when we sell the securities or upon
default by the issuer. The remainder of our marketable securities are classified
as available-for-sale under SFAS No. 115. Changes in the fair values of these
securities are reflected as unrealized gains and losses in stockholders' equity
and as a component of comprehensive income. Gains and losses on these securities
are reflected in earnings either when realized through our sale of securities or
when a decline in fair value is determined to be other than temporary.
Determining whether a value decline is other than temporary requires that we
make judgments about expected future events. Actual future fair values could
differ from our expectations.

We continue to finance our operations primarily through funds generated from
operations. For the nine months ended December 31, 2001, net cash provided by
operating activities was $305.8 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 to securitize or syndicate a
significant portion of our finance receivables. We securitize finance
receivables from customers with investment-grade credit ratings through two
special-purpose entities sponsored by third-party financial institutions. Such
special-purpose entities issue investment grade commercial paper backed by
beneficial interests in the financed receivables, and we have no risk of credit
loss on the beneficial interests transferred to the special-purpose entities. We
do retain a beneficial interest of approximately 7% of the finance receivables,
and we bear the risk of credit loss on this retained interest. However, we have
not experienced a credit loss during the three years this program has operated.
Other finance receivables are syndicated to third-party financial institutions
on a non-recourse basis. We record such transfers of beneficial interests in
finance receivables to third-party financing institutions as sales when we have
surrendered control of such receivables, including determining that such assets
have been isolated beyond our reach and the reach of our creditors. We have
not guaranteed the transferred receivables and have no obligation upon default.
During the nine months ended December 31, 2001, we transferred $215.2 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 provided by investing activities in the nine months ended December
31, 2001 was $80.2 million, primarily related to cash receipts from the
maturities of marketable securities and sales of finance receivables, which were
partially offset by disbursements for the purchase of marketable securities and
the construction of an expansion to our corporate headquarters. Net cash used in
financing activities in the nine months ended December 31, 2001 was $250.2
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 nine
months ended December 31, 2001, we purchased 6.6 million shares for $115.3
million. From the inception of the repurchase plan through December 31, 2001, we
have purchased 13.8 million shares for $270.4 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.

We have no long-term debt outstanding, and we have not engaged in any
transactions involving off-balance sheet debt. 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 December 31, 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. These revenues depend on our customers
planning to grow their computer processing capacity and continuing to perceive
an increasing need to use our existing software products on substantially
greater 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. During the past several years, we also entered into many enterprise
license agreements with our larger customers to operate our distributed systems
products on significant levels of processing capacity in excess of their then
current distributed processing capacity. In a weak economy, these customers may
elect not to license our 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 slow or even
decline. In addition, the uncertain economic environment has reduced customers'
expectations of future capacity 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 processing capacity beyond the levels previously
licensed from us or license additional processing capacity in anticipation of
future growth, then our 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 led 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 nine months 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. 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. Also, 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 several 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. During the fourth quarter of
fiscal 2002, we revised our maintenance program to a single maintenance offering
of 24x7 support at a standard rate of 20% of the discounted price of the
associated product. In connection with this revision, we have extended our
standard warranty and initial support period to one year for all our products,
whereas prior to this revision such periods were 90 days for distributed systems
products and one year for mainframe products. Because our maintenance revenues
include the ratable recognition of the bundled fees for any initial maintenance
services covered by the related perpetual license agreement, in certain new
license transactions the extension of the initial support period for
distributed systems products will cause us to recognize more maintenance
revenues over time and less license revenues when the transactions occur. While
the accounting impact of this change in our maintenance program will not have a
material effect on our total revenues over time, there will be a negative
short-term revenue impact, which we have considered in determining our estimates
of future revenues. In addition, there is a risk that our revenues could decline
if customers do not accept these changes to the maintenance program and choose
to license competing products instead.

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 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 may receive more patent
infringement claims as companies increasingly seek to patent their software and
business methods and enforce such patents, especially given the increase in
software and business method patents issued during the past several years.
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. 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 conflict in the region and hostilities within Israel 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
investment 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

We are subject to various 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 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

February 13, 2002

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

February 13, 2002