10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

OR

¨ 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 001-16393

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)
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 þ No ¨

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

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

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

As of October 27, 2008, there were outstanding 187,506,000 shares of Common Stock, par value $.01, of the registrant.

BMC SOFTWARE, INC.

QUARTER ENDED SEPTEMBER 30, 2008

INDEX

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and March 31, 2008	3
Condensed Consolidated Statements of Operations and Comprehensive Income for the quarter and six months ended September 30, 2008 and 2007 (Unaudited)	4
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2008 and 2007 (Unaudited)	5
Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures about Market Risk	25
Item 4. Controls and Procedures	25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	26
Item 2. Issuer Purchases of Equity Securities	26
Item 4. Submission of Matters to a Vote of Security Holders	26
Item 6. Exhibits	28
Signatures	29

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BMC SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except par value data)

	September 30, 2008			March 31, 2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	810.3		$	1,288.3
Short-term investments		115.3			62.2
Trade accounts receivable, net		180.7			208.0
Trade finance receivables, net		90.8			88.8
Deferred tax assets		58.9			61.7
Other current assets		86.7			93.6
Total current assets		1,342.7			1,802.6
Property and equipment, net		106.2			99.8
Software development costs, net		112.0			113.4
Long-term investments		83.6			124.7
Long-term trade finance receivables, net		71.6			56.4
Intangible assets, net		230.2			46.8
Goodwill		1,330.4			756.5
Other long-term assets		352.9			345.3
Total assets	$	3,629.6		$	3,345.5
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	47.3		$	43.8
Finance payables		15.8			4.3
Accrued liabilities		336.8			313.7
Deferred revenue		927.5			926.8
Total current liabilities		1,327.4			1,288.6
Long-term deferred revenue		834.8			852.6
Long-term debt		311.1			9.2
Other long-term liabilities		197.5			200.6
Total liabilities		2,670.8			2,351.0
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 1.0 shares authorized, none issued and outstanding		—			—
Common stock, $.01 par value, 600.0 shares authorized, 249.1 shares issued		2.5			2.5
Additional paid-in capital		839.9			786.7
Retained earnings		1,823.8			1,753.1
Accumulated other comprehensive income		1.8			19.7
		2,668.0			2,562.0
Treasury stock, at cost (61.7 and 58.5 shares)		(1,709.2	)		(1,567.5	)
Total stockholders’ equity		958.8			994.5
Total liabilities and stockholders’ equity	$	3,629.6		$	3,345.5

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

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BMC SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(In millions, except per share data)

(Unaudited)

	Quarter Ended September 30,						Six Months Ended September 30,
	2008			2007			2008			2007
Revenue:
License	$	175.5		$	150.9		$	324.9		$	276.8
Maintenance		255.5			241.2			509.8			476.7
Professional services		35.7			28.6			69.5			52.2
Total revenue		466.7			420.7			904.2			805.7
Operating expenses:
Cost of license revenue		29.5			24.7			57.1			47.9
Cost of maintenance revenue		46.6			39.7			87.1			81.6
Cost of professional services revenue		36.3			30.1			71.5			57.6
Selling and marketing expenses		136.7			129.1			277.1			257.0
Research and development expenses		53.7			49.6			115.5			95.2
General and administrative expenses		48.2			50.8			101.7			101.5
In-process research and development		—			—			50.3			2.2
Amortization of intangible assets		8.7			3.4			17.2			6.4
Severance, exit costs and related charges		1.5			1.9			7.9			3.7
Total operating expenses		361.2			329.3			785.4			653.1
Operating income		105.5			91.4			118.8			152.6
Other income, net:
Interest and other income, net		10.5			18.7			19.5			38.6
Interest expense		(5.8	)		(0.2	)		(7.9	)		(0.5	)
Gain (loss) on sale of investments		(1.5	)		1.2			(0.3	)		2.2
Total other income, net		3.2			19.7			11.3			40.3
Earnings before income taxes		108.7			111.1			130.1			192.9
Provision for income taxes		38.9			33.7			59.1			60.3
Net earnings	$	69.8		$	77.4		$	71.0		$	132.6
Basic earnings per share	$	0.37		$	0.39		$	0.38		$	0.67
Diluted earnings per share	$	0.36		$	0.38		$	0.37		$	0.65
Shares used in computing basic earnings per share		188.8			197.4			189.1			198.4
Shares used in computing diluted earnings per share		192.4			202.0			193.0			203.4
Comprehensive income:
Net earnings	$	69.8		$	77.4		$	71.0		$	132.6
Net changes in accumulated comprehensive income		(21.1	)		14.0			(17.9	)		15.3
Comprehensive income	$	48.7		$	91.4		$	53.1		$	147.9

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

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BMC SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Six Months Ended September 30,
	2008			2007
Cash flows from operating activities:
Net earnings	$	71.0		$	132.6
Adjustments to reconcile net earnings to net cash provided by operating activities:
In-process research and development		50.3			2.2
Depreciation and amortization		90.3			72.8
Share-based compensation expense		43.3			31.7
Other		0.3			(2.2	)
Changes in operating assets and liabilities, net of acquisitions:
Trade finance receivables		(11.2	)		138.1
Finance payables		5.2			(29.5	)
Deferred revenue		(24.7	)		(29.0	)
Other operating assets and liabilities		2.1			2.2
Net cash provided by operating activities		226.6			318.9
Cash flows from investing activities:
Proceeds from maturities / sales of investments		107.2			415.0
Purchases of investments		(122.2	)		(205.7	)
Cash paid for acquisitions, net of cash acquired, and other investments		(783.7	)		(92.4	)
Capitalization of software development costs		(26.8	)		(38.4	)
Purchases of property and equipment		(16.8	)		(19.0	)
Other investing activities		(0.2	)		2.3
Net cash provided by (used in) investing activities		(842.5	)		61.8
Cash flows from financing activities:
Treasury stock acquired		(200.0	)		(283.4	)
Repurchases of stock to satisfy employee tax withholding obligations		(16.1	)		—
Proceeds from issuance of long-term debt, net of debt issuance costs		295.6			—
Proceeds from stock options exercised and other		62.5			59.1
Excess tax benefit from share-based compensation		21.0			11.9
Payments on debt and capital leases		(6.0	)		(3.1	)
Net cash provided by (used in) financing activities		157.0			(215.5	)
Effect of exchange rate changes on cash and cash equivalents		(19.1	)		13.8
Net change in cash and cash equivalents		(478.0	)		179.0
Cash and cash equivalents, beginning of period		1,288.3			883.5
Cash and cash equivalents, end of period	$	810.3		$	1,062.5
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of amounts refunded	$	34.1		$	7.9
Liabilities assumed in acquisitions	$	116.6		$	19.7

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

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BMC SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of BMC Software, Inc. and its subsidiaries (collectively, we, us, our or BMC). All significant intercompany balances and transactions have been eliminated in consolidation. These 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 of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Certain reclassifications have been made to the prior period’s financial statements to conform to the current period’s presentation.

Interim results are not necessarily indicative of results for a full year. Our results generally tend to be stronger in the third and fourth quarters of our fiscal year, as compared to the first and second quarters of our fiscal year. These financial statements should be read in conjunction with our audited financial statements for the year ended March 31, 2008, as filed with the SEC on Form 10-K.

Recently Adopted Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (SFAS No. 159), which permits entities to choose to measure various financial instruments and certain other items at fair value. If an entity chooses to measure various financial instruments and certain other items at fair value, the standard requires that unrealized gains and losses be reported in earnings for those items measured using the fair value option. SFAS No. 159 was effective for us beginning in the first quarter of fiscal 2009. We have not elected to apply the fair value option to any of our assets or liabilities. Therefore, the adoption of SFAS No. 159 has not impacted our consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements, with certain exceptions. In February 2008, the FASB issued two FASB Staff Positions that remove leasing from the scope of SFAS No. 157 and delay the effective date of SFAS No. 157 to April 1, 2009 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). In October 2008, the FASB issued an additional FASB Staff Position that clarifies the application of SFAS No. 157 in a market that is not active. We have adopted the required provisions of SFAS No. 157 beginning in the first quarter of fiscal 2009. The adoption of the required provisions of SFAS No. 157 did not have a material impact on our financial position, results of operations or cash flows. We have not determined whether the adoption of the deferred provisions of SFAS No. 157 will have a material effect on our consolidated financial position, results of operations or cash flows.

Refer to Note 11 for information and related disclosures regarding our fair value measurements.

(2) Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net earnings 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, unearned nonvested stock and unearned nonvested stock units are considered potential common shares using the treasury stock method. For the quarter ended September 30, 2008 and 2007, 10.2 million and 7.3 million weighted potential common shares, respectively, have been excluded from the calculation of diluted EPS, as they were anti-dilutive. For the six months ended September 30, 2008 and 2007, 8.8 million and 5.4 million weighted potential common shares, respectively, have been excluded from the calculation of diluted EPS, as they were anti-dilutive. The following table summarizes the basic and diluted EPS computations for the quarter and six months ended

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September 30, 2008 and 2007:

	Quarter Ended September 30,				Six Months Ended September 30,
	2008		2007		2008		2007
	(In millions, except per share data)				(In millions, except per share data)
Basic earnings per share:
Net earnings	$	69.8	$	77.4	$	71.0	$	132.6
Weighted average number of common shares outstanding		188.8		197.4		189.1		198.4
Basic earnings per share	$	0.37	$	0.39	$	0.38	$	0.67
Diluted earnings per share:
Net earnings	$	69.8	$	77.4	$	71.0	$	132.6
Weighted average number of common shares outstanding		188.8		197.4		189.1		198.4
Incremental shares from assumed conversions of stock options and other		3.6		4.6		3.9		5.0
Adjusted weighted average number of common shares outstanding		192.4		202.0		193.0		203.4
Diluted earnings per share	$	0.36	$	0.38	$	0.37	$	0.65

(3) Business Combination

In April 2008, we completed the acquisition of all of the outstanding common shares of BladeLogic, Inc. (BladeLogic), a leading provider of data center automation software, for $28 per share. In addition, outstanding and unvested options to acquire the common stock of BladeLogic and other share-based awards were converted pursuant to the terms of the transaction into options to purchase our common stock and other share-based awards, respectively. BladeLogic’s operating results have been included in our consolidated financial statements since the acquisition date as part of our Enterprise Service Management segment. This acquisition expands our offerings for server provisioning, application release management, automation and compliance.

The acquisition of BladeLogic’s outstanding common stock and other equity instruments resulted in total purchase consideration of $854.0 million, including approximately $19.9 million of direct acquisition costs. The following table summarizes the preliminary estimated fair values of the acquired assets and assumed liabilities recorded as of the date of acquisition.

	April 18, 2008
	(In millions)
Cash and cash equivalents	$	73.3
Trade accounts receivable		27.1
Deferred tax assets		26.3
Other current assets		1.5
Property and equipment		1.4
Intangible assets		214.8
In-process research and development		50.3
Goodwill		570.5
Total assets acquired		965.2
Current liabilities		(17.4	)
Deferred tax liabilities		(86.8	)
Deferred revenue		(7.0	)
Total liabilities		(111.2	)
Net assets acquired	$	854.0

The allocation of the purchase price to specific acquired assets and assumed liabilities was based, in part, upon appraisals of the fair value of certain assets and liabilities of BladeLogic primarily using discounted cash flow analyses. This allocation is preliminary due to continuing analysis related to the determination of the fair value of the assets acquired and liabilities assumed. Any changes to the fair value of net assets acquired, based on information as of the acquisition date, would result in a corresponding adjustment to goodwill. Factors that contributed to a purchase price that resulted in goodwill include, but are not limited to, the retention of research and development personnel with the skills to develop future BladeLogic technology, support personnel to provide maintenance services related to BladeLogic products and a trained sales force capable of selling current and future BladeLogic products and the opportunity to cross-sell our products and BladeLogic products to existing customers. We believe that this acquisition will help us remain competitive in the Business Service Management market and improve our Enterprise Service Management segment results of

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operations. The goodwill resulting from the transaction was assigned to the Enterprise Service Management segment and is not deductible for tax purposes.

The acquired identifiable intangible assets included the following:

	Fair Value		Useful Life in Years
	(In millions)
Customer contracts and relationships	$	113.9	4
Developed product technology		100.7	4
Trademarks and tradenames		0.2	1
Total identifiable intangible assets	$	214.8

Future amortization expense related to the acquired identifiable intangible assets is expected to be $26.9 million, $53.7 million, $53.7 million, $53.6 million, and $2.5 million for the remainder of fiscal 2009 and for each of fiscal 2010, 2011, 2012 and 2013, respectively.

Approximately $50.3 million of the purchase price was allocated to purchased in-process research and development (IPR&D) and was written-off as of the acquisition date. The amounts allocated to IPR&D represent the estimated fair values, based on risk-adjusted cash flows and historical costs expended, related to core research and development projects that were incomplete and had neither reached technological feasibility nor been determined to have an alternative future use pending achievement of technological feasibility as of the date of acquisition. The IPR&D relates primarily to the development of a major new release to an existing core product that we plan to continue developing and expect to release in the second half of fiscal 2009.

The results of operations of BladeLogic are included in our consolidated statement of operations prospectively from April 18, 2008. The unaudited pro forma combined historical results of BMC and BladeLogic, giving effect to the acquisition assuming the transaction was consummated as of the beginning of each period presented, are as follows:

	Quarter Ended September 30, 2007		Six Months Ended September 30,
			2008		2007
	(In millions, except per share amounts)
Pro Forma Combined:
Revenue	$	437.6	$	905.8	$	836.2
Net earnings		61.6		111.2		100.5
Basic earnings per share		0.31		0.59		0.51
Diluted earnings per share		0.30		0.58		0.49

The pro forma combined historical results do not reflect any cost savings or other synergies that might result from the transaction and they are provided for informational purposes only and are not necessarily indicative of the combined results of operations for future periods or the results that actually would have been realized had the acquisition occurred as of the beginning of each specified period. Pro forma net earnings for the six months ended September 30, 2008 excludes the IPR&D charge of $50.3 million.

(4) Long-Term Debt

Long-term debt consists of the following:

	September 30, 2008		March 31, 2008
	(In millions)
Senior unsecured notes due 2018 (net of $1.7 million of unamortized discount at September 30, 2008)	$	298.3	$	—
Capital leases and other obligations		19.3		16.1
Total		317.6		16.1
Less current maturities of capital leases and other obligations (included in accrued liabilities)		6.5		6.9
Long-term debt	$	311.1	$	9.2

In June 2008, we issued $300.0 million of senior unsecured notes due in 2018 (the Notes). Net proceeds to us after original issuance discount and issuance costs amounted to $295.6 million, which were used for general corporate purposes. The Notes were issued at an original issuance discount to face value of $1.8 million. The Notes bear interest at a rate of 7.25% per annum payable

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semi-annually in June and December of each year. The Notes are redeemable at our option at any time in whole or, from time to time, in part at a redemption price equal to the greater of: (i) 100% of the principal amount of the Notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted at the applicable treasury rate plus 50 basis points, plus accrued and unpaid interest. The Notes are subject to the provisions of an indenture which includes covenants limiting, among other things, the creation of liens securing indebtedness and sale-leaseback transactions. As of September 30, 2008, we were in compliance with all such debt covenants.

(5) Segment Reporting

We are organized into two business segments, Enterprise Service Management (ESM) and Mainframe Service Management (MSM). The ESM segment derives its revenue from our service support, service assurance and service automation solutions, along with professional service revenue derived from consulting, implementation, integration and educational services related to our software products. The MSM segment derives its revenue from products for mainframe database management, monitoring and automation, enterprise scheduling and output management solutions. Beginning in the first quarter of fiscal 2009, we revised our operating segment reporting as follows: i) our professional services organization, which had previously been reported as a separate operating segment, was combined with our ESM segment, and ii) we revised and expanded our allocation of segment expenses to include direct controllable and indirect allocated operating expenses in order to derive segment operating income for each of our segments. These revisions were made in order to reflect fiscal 2009 changes in how our President and Chief Executive Officer, who is our chief operating decision maker, reviews the results of our business segments in order to assess corporate performance and make resource allocations.

Segment performance is measured based on segment operating income, reflecting segment revenue less direct and allocated indirect segment operating expenses. Direct segment operating expenses primarily include cost of revenue, selling and marketing, research and development and general and administrative expenses that can be specifically identified to a particular segment and are directly controllable by segment management, while allocated indirect segment operating expenses primarily include indirect costs within these operating expense categories that are not specifically identified to a particular segment or controllable by segment management. The indirect operating expenses are allocated to the segments based on budgeted bookings, revenue and other allocation methods that management believes to be reasonable. Our measure of segment operating income does not include the effect of share-based compensation expenses, amortization of acquired technology and other intangibles, the write-off of acquired in-process research and development or the costs associated with severance and exit activities described in Note 7, which are collectively included in unallocated operating expenses below. Assets and liabilities are reviewed by management at the consolidated level only.

The table below summarizes segment performance for the quarter and six months ended September 30, 2008 and 2007. The prior year information has been reclassified to conform to our revised segment reporting methodology.

Quarter Ended September 30, 2008	Enterprise Service Management		Mainframe Service Management		Consolidated
	(In millions)
Revenue:
License	$	104.8	$	70.7	$	175.5
Maintenance		138.1		117.4		255.5
Professional services		35.7		—		35.7
Total revenue		278.6		188.1		466.7
Direct and allocated indirect segment operating expenses		238.9		79.2		318.1
Segment operating income		39.7		108.9		148.6
Unallocated operating expenses						43.1
Other income, net						3.2
Earnings before income taxes					$	108.7

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Quarter Ended September 30, 2007	Enterprise Service Management		Mainframe Service Management		Consolidated
	(In millions)
Revenue:
License	$	85.5	$	65.4	$	150.9
Maintenance		129.2		112.0		241.2
Professional services		28.6		—		28.6
Total revenue		243.3		177.4		420.7
Direct and allocated indirect segment operating expenses		220.1		81.7		301.8
Segment operating income		23.2		95.7		118.9
Unallocated operating expenses						27.5
Other income, net						19.7
Earnings before income taxes					$	111.1

Six Months Ended September 30, 2008	Enterprise Service Management		Mainframe Service Management		Consolidated
	(In millions)
Revenue:
License	$	194.4	$	130.5	$	324.9
Maintenance		274.8		235.0		509.8
Professional services		69.5		—		69.5
Total revenue		538.7		365.5		904.2
Direct and allocated indirect segment operating expenses		481.1		163.6		644.7
Segment operating income		57.6		201.9		259.5
Unallocated operating expenses						140.7
Other income, net						11.3
Earnings before income taxes					$	130.1

Six Months Ended September 30, 2007	Enterprise Service Management		Mainframe Service Management		Consolidated
	(In millions)
Revenue:
License	$	152.1	$	124.7	$	276.8
Maintenance		254.6		222.1		476.7
Professional services		52.2		—		52.2
Total revenue		458.9		346.8		805.7
Direct and allocated indirect segment operating expenses		435.7		162.0		597.7
Segment operating income		23.2		184.8		208.0
Unallocated operating expenses						55.4
Other income, net						40.3
Earnings before income taxes					$	192.9

(6) Share-Based Compensation

During the six months ended September 30, 2008, our Board of Directors and Compensation Committee approved share-based award grants to our executive officers and non-executive employees. The awards consisted of stock options related to 3.9 million underlying shares, 1.1 million shares of time-based nonvested stock units, 0.2 million shares of market performance-based nonvested stock units and 0.2 million shares of performance-based nonvested stock units. The time-based nonvested stock units generally contain vesting provisions ranging from 3 to 4 years. The market performance-based nonvested stock units vest over three twelve-month performance periods based on our relative total shareholder return in comparison to a peer set of companies over each performance period. The vesting of the performance-based nonvested stock units are contingent upon meeting certain profitability targets in fiscal 2010 and 2011.

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In April 2008, in connection with the acquisition of BladeLogic, outstanding options to acquire the common stock of BladeLogic and other share-based awards were converted, pursuant to the terms of the transaction, into 1.2 million options to purchase our common stock and $13.7 million of other share-based awards.

The fair value of each option award granted is estimated as of the date of grant using a Black-Scholes option pricing model. We used the following weighted-average assumptions for awards during the quarter and six months ended September 30, 2008 and 2007:

	Quarter Ended September 30,				Six Months Ended September 30,
	2008		2007		2008		2007
Expected volatility	34	%	36	%	32	%	30	%
Risk-free interest rate %	3.4	%	4.7	%	3.0	%	5.0	%
Expected term (in years)	5		6		4		4
Dividend yield	—		—		—		—

As of September 30, 2008, we had $171.8 million of total unrecognized share-based compensation expense related to stock options and nonvested stock and nonvested stock units that is expected to be recognized as expense over a weighted-average period of 3 years.

Share-based compensation expense as recorded in our condensed consolidated statements of operations is summarized as follows:

	Quarter Ended September 30,				Six Months Ended September 30,
	2008		2007		2008		2007
	(In millions)
Cost of license revenue	$	0.4	$	0.1	$	0.7	$	0.3
Cost of maintenance revenue		2.6		1.8		5.1		3.6
Cost of professional services revenue		0.8		0.3		1.5		0.5
Selling and marketing expenses		7.4		5.3		15.3		10.3
Research and development expenses		3.0		3.0		6.8		5.5
General and administrative expenses		6.7		6.0		13.9		11.5
Total share-based compensation expense	$	20.9	$	16.5	$	43.3	$	31.7

(7) Severance, Exit Costs and Related Charges

We have undertaken various restructuring and process improvement initiatives in recent years with the goal of reducing costs through the realignment of resources to focus on growth areas and the simplification, standardization and automation of key business processes. These initiatives include workforce reductions across all functions and geographies, and the affected employees were, or will be, provided cash separation packages. Additionally, as part of these initiatives, we have exited certain leases, reduced the square footage required to operate certain locations and relocated some operations to lower cost facilities. During the six months ended September 30, 2008, we identified approximately 140 employees for termination under these process improvement initiatives.

As of September 30, 2008, $11.2 million of severance and facilities costs related to actions completed under these initiatives remain accrued as follows:

	Balance at March 31, 2008		Charged to Expense		Adjustments to Estimates			Foreign Exchange Adjustments			Accretion		Cash Payments, Net of Sublease Income			Balance at September 30, 2008
	(In millions)
Severance and related costs	$	8.6	$	9.9	$	(2.5	)	$	(0.5	)	$	—	$	(9.4	)	$	6.1
Facilities costs		7.6		0.5		—			—			0.2		(3.2	)		5.1
Total accrued	$	16.2	$	10.4	$	(2.5	)	$	(0.5	)	$	0.2	$	(12.6	)	$	11.2

The accruals for severance and related costs at September 30, 2008, represent the estimated amounts to be paid to employees that have been terminated or identified for termination as a result of these initiatives. These amounts are expected to be paid within twelve

11

months from September 30, 2008. We continue to review the impact of these actions and will determine if, based on future results of operations, additional actions to reduce operating expenses are necessary. The amount of any potential future charges for such actions will depend upon the nature, timing, and extent of those actions.

The accruals for facilities costs at September 30, 2008, represent the remaining fair values of lease obligations for exited locations as determined at the cease-use dates of those facilities, net of estimated sublease income that could be reasonably obtained in the future, and will be paid out over the remaining lease terms, the last of which ends in fiscal 2011. We may incur additional facilities charges subsequent to September 30, 2008, as a result of our on-going initiatives. Accretion (the increase in the present value of facilities accruals over time) is included in operating expenses.

(8) Income Taxes

Income tax expense was $38.9 million and $33.7 million for the quarter ended September 30, 2008 and 2007, respectively, resulting in effective tax rates of 35.8% and 30.3%, respectively. Income tax expense was $59.1 million and $60.3 million for the six months ended September 30, 2008 and 2007, respectively, resulting in effective tax rates of 45.4% and 31.3%, respectively. The effective tax rate is impacted primarily by the worldwide mix of estimated consolidated earnings before taxes and our policy of indefinitely re-investing earnings from certain low tax jurisdictions, changes in estimates related to our uncertain tax positions, changes in the valuation allowance recorded against our deferred tax assets, benefits associated with income attributable to both domestic production activities and the extraterritorial income exclusion and the non-deductible write-off of IPR&D expense associated with certain acquisitions.

We file a federal income tax return in the United States as well as income tax returns in various state, local and foreign jurisdictions. Our tax years are closed with the United States Internal Revenue Service (IRS) through the tax year ended March 31, 2003. During the quarter, we received a Notice of Deficiency from the IRS for the tax years ended March 31, 2004 and 2005. We are in the process of preparing a protest on the only two disputed issues from those years. The IRS is currently examining our tax returns for the years ended March 31, 2006 and 2007. In addition, certain tax years related to state, local and foreign jurisdictions remain subject to examination.

(9) Guarantees and Contingencies

Guarantees

Under our standard software license agreements, we agree to indemnify, defend and hold harmless our licensees from and against certain losses, damages and costs arising from claims alleging the licensees’ use of our software infringes the intellectual property rights of a third party. Also, under these standard license agreements, we represent and warrant to licensees that our software products operate substantially in accordance with published specifications.

Other guarantees include promises to indemnify, defend and hold harmless each of our executive officers, non-employee directors and certain key employees from and against losses, damages and costs incurred by each such individual in administrative, legal or investigative proceedings arising from alleged wrongdoing by the individual while acting in good faith within the scope of his or her job duties on our behalf.

Historically, we have not incurred significant costs related to such indemnifications, warranties and guarantees. As such, and based on other factors, no provision or accrual for these items has been made.

Contingencies

We have received claims from a third party alleging that we infringed on one or more of the third party’s patents. We believe that we have meritorious defenses to the claims and intend to vigorously contest them. Additionally, we have asserted counter-claims against the third party alleging infringement on certain of our patents. No formal proceedings have been initiated by either party and the ultimate outcome of this matter cannot be estimated at this time.

We are party to various labor claims brought by certain former international employees alleging that amounts are due such employees for unpaid commissions and other compensation. The claims are in various stages and are not expected to be fully resolved

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in the near future. We intend to vigorously contest all of the claims. However, the ultimate outcome of all of the claims cannot be estimated at this time.

In June 2006, in response to a filing by BMC seeking clarification as to whether a tax applies to the remittance of software payments from its Brazilian operations, a lower level Brazilian court denied our request for a preliminary injunction and published an unfavorable decision. We are in the process of appealing this initial decision. In February 2007, a law was enacted that clarified that this particular tax did not apply to the remittance of software payments, retroactive to January 1, 2006. We continue to pursue a favorable resolution on this matter for years prior to January 1, 2006, and believe we will ultimately prevail based on the merits of our position. However, we cannot predict the timing and ultimate outcome of this matter.

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

(10) Treasury Stock

Our Board of Directors previously authorized a total of $3.0 billion to repurchase common stock. During the quarter and six months ended September 30, 2008, we repurchased 3.1 million and 5.7 million shares, respectively, for $100.0 million and $200.0 million, respectively, under this stock repurchase program. As of September 30, 2008, there was approximately $474.9 million remaining in this stock repurchase program, which does not have an expiration date. In addition, during the quarter and six months ended September 30, 2008, we repurchased less than 0.1 million and 0.4 million shares, respectively, for $0.3 million and $16.1 million, respectively, to satisfy employee tax withholding obligations upon the lapse of restrictions on nonvested stock grants.

(11) Financial Instruments

We measure certain financial instruments at fair value on a recurring basis. These financial instruments consist of money-market funds, US Treasury securities, auction rate securities, certificates of deposit, and mutual funds and other securities that have readily determinable fair values. All of our investments are classified as available-for-sale. In addition, we utilize certain derivative financial instruments to manage our foreign currency exchange risk. The fair values associated with these derivative financial instruments are included in other current assets and accounts payable in our consolidated balance sheets. The fair values of these financial instruments were determined using the following inputs at September 30, 2008:

	Fair Value Measurements at Reporting Date Using
September 30, 2008	Total		Quoted Prices in Active Markets for Identical Assets(1) (Level 1)		Significant Other Observable Inputs(2) (Level 2)		Significant Unobservable Inputs(3) (Level 3)
	(In millions)
Assets
Cash equivalents
Money market funds	$	344.1	$	344.1
US treasury securities		207.9		207.9
Certificate of deposit		30.8		30.8
Short-term and long-term investments
US treasury securities		73.0		73.0
Auction rate securities		67.9						67.9
Certificate of deposit		42.3		42.3
Mutual funds and other		15.7		15.7
Foreign currency exchange derivatives		6.4		—		6.4		—
Total	$	788.1	$	713.8	$	6.4	$	67.9
Liabilities
Foreign currency exchange derivatives	$	2.8	$	—	$	2.8	$	—
Total	$	2.8	$	—	$	2.8	$	—

(1) Level 1 classification is applied to any asset that has a readily available quoted market price from an active market where there is significant transparency in the executed/quoted price.

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(2) Level 2 classification is applied to assets that have evaluated prices where the data inputs to these valuations are observable either directly or indirectly, but do not represent quoted market prices from an active market.

(3) Level 3 classification is applied to assets when prices are not derived from existing market data.

As of September 30, 2008, we held auction rate securities with a par value of $72.2 million and an estimated fair value of $67.9 million. Our auction rate securities consist entirely of bonds issued by public agencies that are backed by student loans with at least a 97% guarantee by the federal government under the United States Department of Education’s Federal Family Education Loan Program. Substantially all of these bonds are currently rated AAA or equivalent by Moody’s and Standard and Poor’s. We do not believe that any of the underlying issuers of these auction rate securities are presently at risk or that the underlying credit quality of the assets backing the auction rate security investments has been impacted by the reduced liquidity of these investments. Due to the illiquidity in the auction rate securities market caused by failed auctions, we estimated the fair value of these securities using internally developed probability-weighted cash flow models based on assumptions regarding probabilities of various scenarios including redemption of the securities at par, recovery of the auction rate market, the securities remaining illiquid until maturity, a liquidity-driven forced sale of the securities and an outright default of the securities. During the six months ended September 30, 2008, we recorded an unrealized loss of $1.0 million that is included in other comprehensive income, as we believe the decline in fair value of the auction rate securities is temporary. In making this determination, we primarily considered the financial condition and near-term prospects of the issuers, the magnitude of the losses compared to the investments’ cost, the length of time the investments have been in an unrealized loss position and our ability to hold the investments for a period of time sufficient to allow for any anticipated recovery in market value. Because of the uncertainty related to the timing of liquidity associated with these auction rate securities, we classified these securities as long-term investments at September 30, 2008. The following table presents changes to our determination of the fair value of the auction rate securities during the six months ended September 30, 2008:

	Auction Rate Securities
	(In millions)
Balance at April 1, 2008	$	68.9
Unrealized loss included in other comprehensive income		(1.0	)
Balance at September 30, 2008	$	67.9

(12) Recently Issued Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS No. 161), which requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS No. 161 is effective for us beginning in the fourth quarter of fiscal 2009. Because SFAS No. 161 applies only to financial statement disclosures, it will not have any impact on our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)), which changes the accounting for business combinations including: (i) the measurement of acquirer shares issued in consideration for a business combination, (ii) the recognition of contingent consideration, (iii) the accounting for preacquisition gain and loss contingencies, (iv) the recognition of capitalized in-process research and development, (v) the accounting for acquisition-related restructuring costs, (vi) the treatment of acquisition related transaction costs, and (vii) the recognition of changes in the acquirer’s income tax valuation allowance. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of fiscal 2010. The impact of adoption of SFAS No. 141(R) on our financial position or results of operations is dependent upon the nature and terms of business combinations, if any, that we may consummate in fiscal 2010 and thereafter.

In April 2008, the FASB issued Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Based on our current operations, we do not expect that the adoption of FSP FAS 142-3 will have a material impact on our financial position or results of operations.

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

This report on Form 10-Q for the quarter ended September 30, 2008 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,” “estimate,” “will,” “contemplate,” “would” and similar expressions that contemplate future events. Numerous important factors, risks and uncertainties affect our operating results, 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. 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 included in our Annual Report on Form 10-K for fiscal 2008, with the audited financial statements and notes thereto, and with Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

During the first half of fiscal 2009, we continued to focus on our leadership in Business Service Management (BSM) by responding to IT executive needs, improving IT service quality and supporting business priorities. Our two segments, Enterprise Service Management (ESM) and Mainframe Service Management (MSM), continue to provide the focus to align our resources and product development efforts to meet the demands of the dynamic markets we serve. Our financial performance in terms of revenue, expense management, operating income and operating cash flows for the second quarter and full first half of fiscal 2009 was strong, despite the continuing uncertainty in the global markets. We believe that our performance reflects the tangible value that our solutions offer customers in both good and difficult economic environments, along with our strong ability to control and manage our expenses.

In April 2008, we acquired BladeLogic, Inc. (BladeLogic), a leading provider of data center automation software, for total purchase consideration of $854.0 million. This acquisition expands our service automation offerings for server provisioning, application release management, and configuration automation and compliance.

In June 2008, we completed the issuance of $300.0 million in senior unsecured notes due 2018 (the Notes). Net proceeds from this offering amounted to $295.6 million, which were used for general corporate purposes.

A significant portion of our operating expenses are fixed in the short-term and that we plan a portion of our expense run-rate based on our expectations of future revenue. In addition, a significant amount of our license transactions are completed during the final weeks and days of each quarter and, therefore, we generally do not know whether revenue has met our expectations until after the end of the quarter. If a shortfall in revenue were to occur in any given quarter, there would be an immediate, and possibly significant, impact to our overall earnings and, most likely, our stock price.

Because our software solutions are designed for and marketed to companies to manage their IT infrastructure from a business perspective, demand for our products, and therefore our financial results, are dependent upon corporations continuing to value such solutions and invest in such technology. There are a number of trends that have historically influenced demand for systems management software, including, among others, business demands placed on IT, computing capacity within IT departments, complexity of IT systems, and IT operational costs. Our financial results are also influenced by many economic and industry conditions, including, but not limited to, general economic and market conditions in the United States and other economies in which we market products, corporate spending generally, IT budgets, the competitiveness of the systems management software industry, the adoption rate for BSM and the stability of the mainframe market. As a result of recent changes in global economic conditions, including changes in foreign currency exchange rates and forecasts of contracting IT spending, we have recently reduced our bookings, revenue growth and operating cash flow expectations for the remainder of the fiscal year. In view of this, our operating plans include continued discipline in controlling expenses and ongoing efforts to simplify processes and increase efficiencies.

Critical Accounting Policies

The preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances; the results of which form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. We have discussed the development and selection of the critical accounting policies with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our related disclosures. The critical accounting policies related to the estimates and judgments are discussed in our Annual Report on Form 10-K for fiscal 2008 under Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical accounting policies during the six months ended September 30, 2008.

Recently Adopted Accounting Pronouncements

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In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (SFAS No. 159), which permits entities to choose to measure various financial instruments and certain other items at fair value. If an entity chooses to measure various financial instruments and certain other items at fair value, the standard requires that unrealized gains and losses be reported in earnings for those items measured using the fair value option. SFAS No. 159 was effective for us beginning in the first quarter of fiscal 2009. We have not elected to apply the fair value option to any of our assets or liabilities. Therefore, the adoption of SFAS No. 159 has not impacted our consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements, with certain exceptions. In February 2008, the FASB issued two FASB Staff Positions that remove leasing from the scope of SFAS No. 157 and delay the effective date of SFAS No. 157 to April 1, 2009 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is at least annually). In October 2008, the FASB issued an additional FASB Staff Position that clarifies the application of SFAS No. 157 in a market that is not active. We have adopted the required provisions of SFAS No. 157 beginning in the first quarter of fiscal 2009. The adoption of the required provisions of SFAS No. 157 did not have a material impact on our financial position, results of operations or cash flows. We have not determined whether the adoption of the deferred provisions of SFAS No. 157 will have a material effect on our consolidated financial position, results of operations or cash flows.

Results of Operations and Financial Condition

The following table sets forth, for the periods indicated, the percentages that selected items in the Condensed Consolidated Statements of Operations and Comprehensive Income represent of total revenue. These financial results are not necessarily indicative of future results.

	Percentage of Total Revenue
	Quarter Ended September 30,				Six Months Ended September 30,
	2008		2007		2008		2007
Revenue:
License	37.6	%	35.9	%	35.9	%	34.4	%
Maintenance	54.7	%	57.3	%	56.4	%	59.2	%
Professional services	7.6	%	6.8	%	7.7	%	6.5	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Operating expenses:
Cost of license revenue	6.3	%	5.9	%	6.3	%	5.9	%
Cost of maintenance revenue	10.0	%	9.4	%	9.6	%	10.1	%
Cost of professional services revenue	7.8	%	7.2	%	7.9	%	7.1	%
Selling and marketing expenses	29.3	%	30.7	%	30.6	%	31.9	%
Research and development expenses	11.5	%	11.8	%	12.8	%	11.8	%
General and administrative expenses	10.3	%	12.1	%	11.2	%	12.6	%
In-process research and development	—		—		5.6	%	0.3	%
Amortization of intangible assets	1.9	%	0.8	%	1.9	%	0.8	%
Severance, exit costs and related charges	0.3	%	0.5	%	0.9	%	0.5	%
Total operating expenses	77.4	%	78.3	%	86.9	%	81.1	%
Operating income	22.6	%	21.7	%	13.1	%	18.9	%
Other income, net	0.7	%	4.7	%	1.2	%	5.0	%
Earnings before income taxes	23.3	%	26.4	%	14.4	%	23.9	%
Provision for income taxes	8.3	%	8.0	%	6.5	%	7.5	%
Net earnings	15.0	%	18.4	%	7.9	%	16.5	%

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Revenue

The following table provides information regarding license and maintenance revenue for the quarter and six months ended September 30, 2008 and 2007:

Software License Revenue	Quarter Ended September 30,						Six Months Ended September 30,
	2008		2007		% Change		2008		2007		% Change
	(In millions)						(In millions)
Enterprise Service Management	$	104.8	$	85.5	22.6	%	$	194.4	$	152.1	27.8	%
Mainframe Service Management		70.7		65.4	8.1	%		130.5		124.7	4.7	%
Total software license revenue	$	175.5	$	150.9	16.3	%	$	324.9	$	276.8	17.4	%
Software Maintenance Revenue	Quarter Ended September 30,						Six Months Ended September 30,
	2008		2007		% Change		2008		2007		% Change
	(In millions)						(In millions)
Enterprise Service Management	$	138.1	$	129.2	6.9	%	$	274.8	$	254.6	7.9	%
Mainframe Service Management		117.4		112.0	4.8	%		235.0		222.1	5.8	%
Total software maintenance revenue	$	255.5	$	241.2	5.9	%	$	509.8	$	476.7	6.9	%
Total Software Revenue	Quarter Ended September 30,						Six Months Ended September 30,
	2008		2007		% Change		2008		2007		% Change
	(In millions)						(In millions)
Enterprise Service Management	$	242.9	$	214.7	13.1	%	$	469.2	$	406.7	15.4	%
Mainframe Service Management		188.1		177.4	6.0	%		365.5		346.8	5.4	%
Total software revenue	$	431.0	$	392.1	9.9	%	$	834.7	$	753.5	10.8	%

Software License Revenue

Total software license revenue was $175.5 million for the quarter ended September 30, 2008, an increase of 16.3%, or $24.6 million, from the prior year period. This increase was attributable to license revenue increases in both the ESM and MSM segments, as further discussed below. Recognition of license revenue that was deferred in prior periods increased $5.5 million for the quarter ended September 30, 2008, as compared to the prior year period. Of the license transactions recorded, the percentage of license revenue recognized upfront decreased from 55% during the quarter ended September 30, 2007 to 51% during the quarter ended September 30, 2008. During the quarter ended September 30, 2008, we recorded 35 transactions with license values over $1 million, with a total license value of $104.6 million, compared with 19 transactions with license values over $1 million, with a total license value of $52.5 million, in the prior year quarter.

Total software license revenue was $324.9 million for the six months ended September 30, 2008, an increase of 17.4%, or $48.1 million, from the prior year period. This increase was attributable to license revenue increases in both the ESM and MSM segments, as further discussed below. Recognition of license revenue that was deferred in prior periods increased $13.2 million for the six months ended September 30, 2008, as compared to the prior year period. Of the license transactions recorded, the percentage of license revenue recognized upfront increased from 48% during the six months ended September 30, 2007 to 51% during the six months ended September 30, 2008. During the six months ended September 30, 2008, we recorded 50 transactions with license values over $1 million, with a total license value of $155.4 million, compared with 36 transactions with license values over $1 million, with a total license value of $128.1 million, in the prior year period.

ESM license revenue represented 59.7%, or $104.8 million, and 59.8%, or $194.4 million, of our total license revenue for the quarter and six months ended September 30, 2008, respectively, and 56.7%, or $85.5 million, and 54.9%, or $152.1 million, of our total license revenue for the quarter and six months ended September 30, 2007, respectively. ESM license revenue for the quarter ended September 30, 2008 increased 22.6%, or $19.3 million, from the prior year period. ESM license revenue for the six months ended September 30, 2008 increased 27.8%, or $42.3 million, from the prior year period. These period over period increases were attributable primarily to increased demand for our BSM solutions, inclusive of incremental service automation revenues resulting from our acquisition of BladeLogic in April 2008 and our fiscal 2008 acquisitions, as well as an increase in the recognition of previously deferred license revenue quarter over quarter, partially offset by an increase in the level of new license transactions with revenue being deferred into future periods. Service Automation license revenue contributed by BladeLogic amounted to $16.8 million and $32.1 million during the quarter and six months ended September 30, 2008, respectively.

MSM license revenue represented 40.3%, or $70.7 million, and 40.2%, or $130.5 million, of our total license revenue for the quarter and six months ended September 30, 2008, respectively, and 43.3%, or $65.4 million, and 45.1%, or $124.7 million, of our total license revenue for the quarter and six months ended September 30, 2007, respectively. MSM license revenue for the quarter ended September 30, 2008 increased 8.1%, or $5.3 million, from the prior year period. MSM license revenue for the six months ended September 30, 2008 increased 4.7%, or $5.8 million, from the prior year period. These period over period increases were attributable primarily to an increase in the recognition of previously deferred license revenue period over period, partially offset by a decrease in the volume of license transactions recorded.

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Deferred License Revenue

Changes to deferred license revenue for the quarter and six months ended September 30, 2008 and 2007 are summarized as follows:

	Quarter Ended September 30,						Six Months Ended September 30,
	2008			2007			2008			2007
	(In millions)
Deferred license revenue balance at beginning of period	$	554.0		$	520.2		$	555.4		$	504.4
Deferrals of license revenue		92.3			63.9			165.1			146.7
Recognition from deferred license revenue		(78.6	)		(73.1	)		(153.4	)		(140.2	)
Impact of foreign currency exchange rate changes		(2.0	)		0.8			(1.4	)		0.9
Deferred license revenue balance at end of period	$	565.7		$	511.8		$	565.7		$	511.8

The primary reasons for license revenue deferrals include, but are not limited to, customer transactions that include products for which the maintenance pricing is based on both discounted and undiscounted license list prices, certain arrangements that include unlimited licensing rights, time-based licenses that are recognized over the term of the arrangement, customer transactions that include products with differing maintenance periods and other transactions for which we do not have or are not able to determine vendor-specific objective evidence of the fair value of the maintenance and/or professional services. The contract terms and conditions that result in deferral of revenue recognition for a given transaction result from arm’s length negotiations between us and our customers. We anticipate our transactions will continue to include such contract terms that result in deferral of the related license revenue as we expand our offerings to meet customers’ product, pricing and licensing needs.

Once it is determined that license revenue for a particular contract must be deferred, based on the contractual terms and application of revenue recognition policies to those terms, we recognize such license revenue either ratably over the term of the contract or when the revenue recognition criteria are met. Because of this, we generally know the timing of the subsequent recognition of license revenue at the time of deferral. Therefore, the amount of license revenue to be recognized out of the deferred revenue balance in each future quarter is generally predictable, and our total license revenue to be recognized each quarter becomes more predictable as a larger percentage of that revenue comes from the deferred license revenue balance. As of September 30, 2008, the deferred license revenue balance was $565.7 million. As additional license revenue is deferred in future periods, the amounts to be recognized in future periods will increase. A summary of the estimated deferred license revenue we expect to recognize in future periods as of September 30, 2008 follows (in millions):

Remainder fiscal 2009	$	159.3
Fiscal 2010	$	207.9
Fiscal 2011 and thereafter	$	198.5

Software Maintenance Revenue

Total software maintenance revenue was $255.5 million for the quarter ended September 30, 2008, an increase of 5.9%, or $14.3 million, from the prior year period. Total software maintenance revenue was $509.8 million for the six months ended September 30, 2008, an increase of 6.9%, or $33.1 million, from the prior year period. These period over period increases were attributable to increases in both ESM and MSM maintenance revenue as discussed below.

ESM maintenance revenue represented 54.1%, or $138.1 million, and 53.9%, or $274.8 million, of our total maintenance revenue for the quarter and six months ended September 30, 2008, respectively, and 53.6%, or $129.2 million, and 53.4%, or $254.6 million, of our total maintenance revenue for the quarter and six months ended September 30, 2007, respectively. ESM maintenance revenue for the quarter ended September 30, 2008 increased 6.9%, or $8.9 million, over the prior year period. ESM maintenance revenue for the six months ended September 30, 2008 increased 7.9%, or $20.2 million, over the prior year period. These period over period increases were attributable primarily to the expansion of our installed ESM customer license base, including incremental maintenance revenue resulting from of our acquisition of BladeLogic in April 2008 and our fiscal 2008 acquisitions. Maintenance revenue contributed by BladeLogic amounted to $3.7 million and $5.6 million during the quarter and six months ended September 30, 2008, respectively.

MSM maintenance revenue represented 45.9%, or $117.4 million, and 46.1%, or $235.0 million, of our total maintenance revenue for the quarter and six months ended September 30, 2008, respectively, and 46.4%, or $112.0 million, and 46.6%, or $222.1 million,

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of our total maintenance revenue for the quarter and six months ended September 30, 2007, respectively. MSM maintenance revenue for the quarter ended September 30, 2008 increased 4.8%, or $5.4 million, over the prior year period. MSM maintenance revenue for the six months ended September 30, 2008 increased 5.8%, or $12.9 million, over the prior year period. These period over period increases were attributable primarily to the expansion of our installed MSM customer license base and increasing capacities of the current installed base.

As of September 30, 2008, the deferred maintenance revenue balance was $1,175.9 million. A summary of the estimated deferred maintenance revenue we expect to recognize in future periods as of September 30, 2008, follows (in millions):

Remainder of fiscal 2009	$	385.6
Fiscal 2010	$	435.3
Fiscal 2011 and thereafter	$	355.0

Domestic vs. International Revenue

	Quarter Ended September 30,						Six Months Ended September 30,
	2008		2007		% Change		2008		2007		% Change
	(In millions)						(In millions)
License:
Domestic	$	98.5	$	76.3	29.1	%	$	171.0	$	142.4	20.1	%
International		77.0		74.6	3.2	%		153.9		134.4	14.5	%
Total license revenue		175.5		150.9	16.3	%		324.9		276.8	17.4	%
Maintenance:
Domestic		138.0		131.3	5.1	%		275.9		260.7	5.8	%
International		117.5		109.9	6.9	%		233.9		216.0	8.3	%
Total maintenance revenue		255.5		241.2	5.9	%		509.8		476.7	6.9	%
Professional services:
Domestic		15.9		11.9	33.6	%		29.8		22.0	35.5	%
International		19.8		16.7	18.6	%		39.7		30.2	31.5	%
Total professional services revenue		35.7		28.6	24.8	%		69.5		52.2	33.1	%
Total domestic revenue		252.4		219.5	15.0	%		476.7		425.1	12.1	%
Total international revenue		214.3		201.2	6.5	%		427.5		380.6	12.3	%
Total revenue	$	466.7	$	420.7	10.9	%	$	904.2	$	805.7	12.2	%

License Revenue

Our domestic license revenue represented 56.1%, or $98.5 million, and 50.6%, or $76.3 million, of our total license revenue for the quarter ended September 30, 2008 and 2007, respectively. Our domestic license revenue for the quarter ended September 30, 2008 increased 29.1%, or $22.2 million, over the prior year period. This period over period increase was attributable primarily to an increase in ESM license revenue, including incremental revenue resulting from our acquisition of BladeLogic in April 2008 and our fiscal 2008 acquisitions, and an increase in MSM license revenue. Our domestic license revenue represented 52.6%, or $171.0 million, and 51.4%, or $142.4 million, of our total license revenue for the six months ended September 30, 2008 and 2007, respectively. Our domestic license revenue for the six months ended September 30, 2008 increased 20.1%, or $28.6 million, compared to the same period in the prior year. This period over period increase was attributable primarily to an increase in ESM license revenue, including incremental revenue resulting from our acquisition of BladeLogic in April 2008 and our fiscal 2008 acquisitions, as MSM domestic license revenue was relatively flat period over period.

Our international license revenue represented 43.9%, or $77.0 million, and 49.4%, or $74.6 million, of our total license revenue for the quarter ended September 30, 2008 and 2007, respectively. Our international license revenue for the quarter ended September 30, 2008 increased 3.2%, or $2.4 million, over the prior year period. This period over period increase was attributable to an increase in MSM license revenue in our European market, partially offset by a decrease in MSM license revenue in our Latin American markets. Our international license revenue represented 47.4%, or $153.9 million, and 48.6%, or $134.4 million, of our total license revenue for the six months ended September 30, 2008 and 2007, respectively. Our international license revenue for the six months ended September 30, 2008 increased 14.5%, or $19.5 million, over the prior year period. This period over period increase was attributable to ESM and MSM license revenue increases in most of our international regions. The ESM license revenue increase was attributable primarily to increases in our European market, principally due to incremental revenue resulting from our acquisition of BladeLogic in

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April 2008, and to a lesser degree increases in our Latin America and Asia Pacific markets. The MSM license revenue increase was attributable primarily to increases in our European and Asia Pacific markets. Both the quarter and year-to-date period over period increases discussed above were impacted favorably by changes in foreign exchange rates.

Maintenance Revenue

Our domestic maintenance revenue represented 54.0%, or $138.0 million, and 54.4%, or $131.3 million, of our total maintenance revenue for the quarter ended September 30, 2008 and 2007, respectively. For the quarter ended September 30, 2008, domestic maintenance revenue increased 5.1%, or $6.7 million, over the prior year period. This period over period increase was attributable to increases in both ESM and MSM maintenance revenue, including incremental ESM maintenance revenue resulting from our acquisition of BladeLogic in April 2008 and our fiscal 2008 acquisitions. Our domestic maintenance revenue represented 54.1%, or $275.9 million, and 54.7%, or $260.7 million, of our total maintenance revenue for the six months ended September 30, 2008 and 2007, respectively. For the six months ended September 30, 2008, domestic maintenance revenue increased 5.8%, or $15.2 million, over the prior year period. This period over period increase was attributable to increases in both ESM and MSM maintenance revenue, including incremental ESM maintenance revenue resulting from our acquisition of BladeLogic in April 2008 and our fiscal 2008 acquisitions.

Our international maintenance revenue represented 46.0%, or $117.5 million, and 45.6%, or $109.9 million, of our total maintenance revenue for the quarter ended September 30, 2008 and 2007, respectively. For the quarter ended September 30, 2008, international maintenance revenue increased 6.9%, or $7.6 million, over the prior year period. Our international maintenance revenue represented 45.9%, or $233.9 million, and 45.3%, or $216.0 million, of our total maintenance revenue for the six months ended September 30, 2008 and 2007, respectively. For the six months ended September 30, 2008, international maintenance revenue increased 8.3%, or $17.9 million, over the prior year period. These period over period increases were attributable to ESM and MSM maintenance revenue increases in each of our core international regions, resulting from the growth in our installed customer base. Both the quarter and year-to-date period over period increases discussed above were impacted favorably by changes in foreign exchange rates.

Professional Services Revenue

Professional services revenue increased 24.8%, or $7.1 million, and 33.1%, or $17.3 million, for the quarter and six months ended September 30, 2008, respectively, as compared to the prior year periods. Domestic professional services revenue for the quarter and six months ended September 30, 2008 increased 33.6%, or $4.0 million, and 35.5%, or $7.8 million, as compared to the prior year periods. International professional services revenue for the quarter and six months ended September 30, 2008 increased 18.6%, or $3.1 million, and 31.5%, or $9.5 million, as compared to the prior year periods. These period over period increases were attributable primarily to increases in implementation and consulting services, principally related to growth in BSM solution sales and inclusive of incremental revenue resulting from our acquisition of BladeLogic in April 2008.

Operating Expenses

	Quarter Ended September 30,						Six Months Ended September 30,
	2008		2007		% Change		2008		2007		% Change
	(In millions)						(In millions)
Cost of license revenue	$	29.5	$	24.7	19.4	%	$	57.1	$	47.9	19.2	%
Cost of maintenance revenue		46.6		39.7	17.4	%		87.1		81.6	6.7	%
Cost of professional services revenue		36.3		30.1	20.6	%		71.5		57.6	24.1	%
Selling and marketing expenses		136.7		129.1	5.9	%		277.1		257.0	7.8	%
Research and development expenses		53.7		49.6	8.3	%		115.5		95.2	21.3	%
General and administrative expenses		48.2		50.8	(5.1	)%		101.7		101.5	0.2	%
In-process research and development		—		—	—			50.3		2.2	*
Amortization of intangible assets		8.7		3.4	155.9	%		17.2		6.4	168.8	%
Severance, exit costs and related charges		1.5		1.9	(21.1	)%		7.9		3.7	113.5	%
Total operating expenses	$	361.2	$	329.3	9.7	%	$	785.4	$	653.1	20.3	%

* — not meaningful.

Cost of License Revenue

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Cost of license revenue consists primarily of (i) the amortization of capitalized software costs for internally developed products, (ii) amortization of acquired technology for products acquired through business combinations, (iii) license-based royalties to third parties and (iv) production and distribution costs for initial product licenses. For the quarters ended September 30, 2008 and 2007, cost of license revenue represented 6.3%, or $29.5 million, and 5.9%, or $24.7 million, of total revenue, respectively, and 16.8% and 16.4% of license revenue, respectively. For the six months ended September 30, 2008 and 2007, cost of license revenue represented 6.3%, or $57.1 million, and 5.9%, or $47.9 million, of total revenue, respectively, and 17.6% and 17.3% of license revenue, respectively. Cost of license revenue increased 19.4%, or $4.8 million, and 19.2%, or $9.2 million, during the quarter and six months ended September 30, 2008, respectively, as compared to the prior year periods. These period over period increases were attributable primarily to an increase in the amortization of acquired technology related to fiscal 2008 and 2009 acquisitions, partially offset by the conclusion of the amortization of certain acquired technology from earlier acquisitions.

Cost of Maintenance Revenue

Cost of maintenance revenue consists primarily of the costs associated with customer support and research and development personnel that provide maintenance, enhancement and support services to our customers. For the quarters ended September 30, 2008 and 2007, cost of maintenance revenue represented 10.0%, or $46.6 million, and 9.4%, or $39.7 million, of total revenue, respectively, and 18.2% and 16.5% of maintenance revenue, respectively. For the six months ended September 30, 2008 and 2007, cost of maintenance revenue represented 9.6%, or $87.1 million, and 10.1%, or $81.6 million, of total revenue, respectively, and 17.1% of maintenance revenue in each period. Cost of maintenance revenue increased 17.4%, or $6.9 million, and 6.7%, or $5.5 million, during the quarter and six months ended September 30, 2008, respectively, as compared to the prior year periods. These period over period increases were attributable primarily to an increase in resources dedicated to maintenance projects and an increase in share-based compensation expense, partially offset by a decrease in third-party outsourcing costs.

Cost of Professional Services Revenue

Cost of professional services revenue consists primarily of salaries, related personnel costs and third-party fees associated with implementation, integration and education services that we provide to our customers, and the related infrastructure to support these activities. For the quarters ended September 30, 2008 and 2007, cost of professional services revenue represented 7.8%, or $36.3 million, and 7.2%, or $30.1 million, of total revenue, respectively, and 101.7% and 105.2% of professional services revenue, respectively. For the six months ended September 30, 2008 and 2007, cost of professional services revenue represented 7.9%, or $71.5 million, and 7.1%, or $57.6 million, of total revenue, respectively, and 102.9% and 110.3% of professional services revenue, respectively. Cost of professional services revenue increased 20.6%, or $6.2 million, and 24.1%, or $13.9 million, during the quarter and six months ended September 30, 2008, respectively, as compared to the prior year periods. These period over period increases were attributable primarily to an increase in professional service enablement personnel and an increase in third party consulting fees associated with a larger volume of BSM implementations, including incremental costs associated with our acquisition of BladeLogic in April 2008, as well as the impact from changes in foreign exchange rates associated with international expenses.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of salaries, related personnel costs, sales commissions and costs associated with advertising, marketing, industry trade shows and sales seminars. For the quarters ended September 30, 2008 and 2007, selling and marketing expenses represented 29.3%, or $136.7 million, and 30.7%, or $129.1 million, of total revenue, respectively, and represented 30.6%, or $277.1 million, and 31.9%, or $257.0 million, of total revenue for the six months ended September 30, 2008 and 2007, respectively. Selling and marketing expenses increased 5.9%, or $7.6 million, and 7.8%, or $20.1 million, during the quarter and six months ended September 30, 2008, respectively, as compared to the prior year periods. These increases were attributable primarily to an increase in sales personnel cost and related variable compensation, resulting principally from our acquisition of BladeLogic in April 2008, and to a lesser degree an increase in share-based compensation expense and the impact from changes in foreign exchange rates associated with international expenses.

Research and Development Expenses

Research and development expenses consist primarily of salaries and 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 computer hardware and software costs, telecommunication costs and personnel costs associated with our development and production labs. For the quarters ended September 30, 2008 and 2007, research and development expenses represented 11.5%, or $53.7 million, and 11.8%, or $49.6 million, of total

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revenue, respectively, and represented 12.8%, or $115.5 million, and 11.8%, or $95.2 million, of total revenue for the six months ended September 30, 2008, and 2007, respectively. Research and development expenses increased 8.3%, or $4.1 million, and 21.3%, or $20.3 million, during the quarter and six months ended September 30, 2008, respectively, as compared to the prior year periods. These increases were attributable primarily to an increase in research and development personnel and related costs resulting principally from our acquisition of BladeLogic in April 2008 and a decrease in research and development personnel and related costs allocated to software development projects that were capitalized.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related personnel costs of executive management, finance and accounting, facilities management, legal and human resources. Other costs included in general and administrative expenses are fees paid for outside legal and accounting services, consulting projects and insurance. General and administrative expenses represented 10.3%, or $48.2 million, and 12.1%, or $50.8 million, of total revenue during the quarters ended September 30, 2008 and 2007, respectively, and represented 11.2%, or $101.7 million, and 12.6%, or $101.5 million, of total revenue during the six months ended September 30, 2008 and 2007, respectively. General and administrative expenses decreased 5.1%, or $2.6 million, during the quarter ended September 30, 2008 as compared to the prior year period, primarily due to a decrease in personnel cost and related variable compensation expense, including the impact of incremental costs capitalized in connection with upgrades and modifications to our enterprise resource planning system, partially offset by an increase in professional service and consulting fees and share-based compensation expense. General and administrative expenses remained relatively flat during the six months ended September 30, 2008 as compared to the prior year period, which is reflective primarily of an increase in professional service and consulting fees and share-based compensation expense, principally offset by a decrease in personnel cost and related variable compensation, including the impact of incremental costs capitalized in connection with upgrades and modifications to our enterprise resource planning system.

In-process Research and Development

During the six months ended September 30, 2008 and 2007, we expensed acquired in-process research and development (IPR&D) totaling $50.3 million and $2.2 million in connection with our first fiscal quarter acquisitions of BladeLogic and ProactiveNet, Inc., respectively. The amounts allocated to IPR&D represent the estimated fair values, based on risk-adjusted cash flows and historical costs expended, related to core research and development projects that were incomplete and had neither reached technological feasibility nor been determined to have an alternative future use pending achievement of technological feasibility as of the date of acquisition.

The BladeLogic IPR&D relates primarily to the development of a major new release to an existing core product that we plan to continue developing and expect to release in the second half of fiscal 2009. The estimated cost of completing these projects as of the acquisition date was approximately $7.4 million, which has not materially changed since the acquisition.

Amortization of Intangible Assets

Amortization of intangible assets consists primarily of the amortization of finite-lived customer contracts and relationships, developed product technology and tradenames recorded in connection with acquisitions. Amortization of intangible assets increased 155.9%, or $5.3 million, and 168.8%, or $10.8 million, during the quarter and six months ended September 30, 2008, respectively, as compared to the prior year periods. These increases were attributable to additional amortization associated with intangibles acquired in connection with fiscal 2008 and 2009 acquisitions, partially offset by the conclusion of the amortization of certain intangibles from earlier acquisitions.

Severance, Exit Costs and Related Charges

We have undertaken various restructuring and process improvement initiatives in recent years to reduce costs through the realignment of resources to focus on growth areas and the simplification, standardization and automation of key business processes. We recorded $1.5 million and $1.9 million in expense related to these actions during the quarters ended September 30, 2008 and 2007, respectively, and $7.9 million and $3.7 million in expense related to these actions during the six months ended September 30, 2008 and 2007, respectively. These expenses were attributable primarily to identified workforce reductions and associated cash separation packages paid or accrued by us. The separation charges for the quarter and six months ended September 30, 2008 relate to the identification of approximately 20 and 140 personnel for termination, respectively, consisting primarily of sales personnel in product areas that were not achieving desired profitability as well as the elimination of certain non-quota bearing positions, and to a lesser degree the reduction of certain research and development personnel. While we will reduce future operating expenses as a result of

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these fiscal 2009 actions, we anticipate that these reductions will be principally offset by incremental personnel-related expenses in other areas, including that related to additional customer facing personnel within our field sales organization. We will continue to evaluate additional actions that may be necessary in the future to achieve our business goals.

Other Income, Net

Other income, net, consists primarily of interest earned, realized gains and losses on investments and interest expense on our Notes and capital leases. Other income, net, for the quarters ended September 30, 2008 and 2007 was $3.2 million and $19.7 million, respectively, and for the six months ended September 30, 2008 and 2007 was $11.3 and $40.3 million, respectively. Other income, net, decreased 83.8%, or $16.5 million, and 72.0%, or $29.0 million, during the quarter and six months ended September 30, 2008 as compared to the prior year periods, primarily due to a decrease in interest income resulting from lower average investment yields on lower average investment balances and an increase in interest expense related to our Notes issued in June.

Income Taxes

Income tax expense was $38.9 million and $33.7 million for the quarters ended September 30, 2008 and 2007, respectively, resulting in effective tax rates of 35.8% and 30.3%, respectively. Income tax expense was $59.1 million and $60.3 million for the six months ended September 30, 2008 and 2007, respectively, resulting in effective tax rates of 45.4% and 31.3%, respectively. The effective tax rate is impacted primarily by the worldwide mix of estimated consolidated earnings before taxes and our policy of indefinitely re-investing earnings from certain low tax jurisdictions, changes in estimates related to our uncertain tax positions, changes in the valuation allowance recorded against our deferred tax assets, benefits associated with income attributable to both domestic production activities and the extraterritorial income exclusion and the non-deductible write-off of IPR&D expense associated with certain acquisitions. The increase in the effective tax rate for the current quarter was attributable primarily to current tax expense of $6.8 million related to an intercompany transfer of rights associated with the IPR&D from the BladeLogic acquisition. Additionally, the increase in the effective tax rate for the six months ended September 30, 2008 was attributable primarily to our write-off of IPR&D expense in connection with the BladeLogic acquisition, partially offset by a decrease attributable to the extraterritorial income exclusion.

Recently Issued Accounting Pronouncements

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS No. 161), which requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS No. 161 is effective for us beginning in the fourth quarter of fiscal 2009. Because SFAS No. 161 applies only to financial statement disclosures, it will not have any impact on our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)), which changes the accounting for business combinations including: (i) the measurement of acquirer shares issued in consideration for a business combination, (ii) the recognition of contingent consideration, (iii) the accounting for preacquisition gain and loss contingencies, (iv) the recognition of capitalized in-process research and development, (v) the accounting for acquisition-related restructuring costs, (vi) the treatment of acquisition related transaction costs, and (vii) the recognition of changes in the acquirer’s income tax valuation allowance. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of fiscal 2010. The impact of adoption of SFAS No. 141(R) on our financial position or results of operations is dependent upon the nature and terms of business combinations, if any, that we may consummate in fiscal 2010 and thereafter.

In April 2008, the FASB issued Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Based on our current operations, we do not expect that the adoption of FSP FAS 142-3 will have a material impact on our financial position or results of operations.

Liquidity and Capital Resources

At September 30, 2008, we had $1.0 billion in cash, cash equivalents and investments, approximately 37% of which was held by our international subsidiaries and was largely generated from our international operations. Our international operations have generated $149.2 million of earnings that we have determined will be invested indefinitely in our international operations. Were such earnings to be repatriated, we would incur a United States Federal income tax liability that is not currently accrued in our financial statements.

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In June 2008, we issued $300.0 million of Notes. Net proceeds to us after discount and issuance costs amounted to $295.6 million, which were used for general corporate purposes. The Notes bear interest at a rate of 7.25% per year payable semi-annually in June and December of each year. The Notes are redeemable at our option at any time in whole or, from time to time, in part at a redemption price equal to the greater of: (i) 100% of the principal amount of the Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted at the applicable treasury rate plus 50 basis points, plus, accrued and unpaid interest. The Notes are subject to the provisions of an indenture which includes covenants limiting, among other things, the creation of liens securing indebtedness and sale-leaseback transactions. As of September 30, 2008, we were in compliance with all such debt covenants.

As of September 30, 2008, we held auction rate securities with a par value of $72.2 million and an estimated fair value of $67.9 million. Our auction rate securities consist entirely of bonds issued by public agencies that are backed by student loans with at least a 97% guarantee by the federal government under the United States Department of Education’s Federal Family Education Loan Program. Substantially all of these bonds are currently rated AAA or equivalent by Moody’s and Standard and Poor’s. We do not have reason to believe that any of the underlying issuers of our auction rate securities are presently at risk or that the underlying credit quality of the assets backing our auction rate security investments has been impacted by the reduced liquidity of these investments. Based on our current ability to access cash and other short-term investments, our expected operating cash flows, and other sources of cash that we expect to be available, we do not anticipate the current lack of liquidity of these investments to have a material impact on our business strategy, financial condition, results of operations or cash flows.

We believe that our existing cash and investment balances and funds generated from operating and investing activities will be sufficient to meet our working and other capital requirements for the foreseeable future. In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and investments to fund such activities in the future. In the event additional needs for cash arise, we might find it advantageous to utilize third-party financing sources based on factors such as our then available cash and its source (i.e., cash held in the United States versus international locations), the cost of financing and our internal cost of capital.

Our cash flows were as follows during the six months ended September 30, 2008 and 2007:

	Six Months Ended September 30,
	2008			2007
	(In millions)
Net cash provided by operating activities	$	226.6		$	318.9
Net cash provided by (used in) investing activities		(842.5	)		61.8
Net cash provided by (used in) financing activities		157.0			(215.5	)
Effect of exchange rate changes on cash and cash equivalents		(19.1	)		13.8
Net change in cash and cash equivalents	$	(478.0	)	$	179.0

Cash Flows from Operating Activities

Our primary method for funding operations and growth has been cash flows generated from operating activities. Net cash provided by operating activities decreased $92.3 million during the six months ended September 30, 2008, as compared to the prior year period. This decrease was attributable primarily to higher cash receipts on financed receivables in the prior year period, partially offset by a reduction in cash payments on finance payables in the current period.

Cash Flows from Investing Activities

Net cash used in investing activities was $842.5 million during the six months ended September 30, 2008, as compared to net cash provided by investing activities of $61.8 million in the prior year period. This difference was attributable primarily to cash expended in the current period for our acquisition of BladeLogic and a period over period decrease in proceeds from maturities and sales of investments, partially offset by a period over period decrease in investment purchases and capitalized software development costs.

Cash Flows from Financing Activities

Net cash provided by financing activities was $157.0 million for the six months ended September 30, 2008 as compared to net cash used in financing activities of $215.5 million in the prior year period. This difference was attributable primarily to net proceeds

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received in the current period related to the issuance of our Notes, a period over period decrease in treasury stock purchases and a period over period increase in the excess tax benefit from share-based compensation.

Treasury Stock Purchases

Our Board of Directors previously authorized a total of $3.0 billion to repurchase common stock. During the quarter and six months ended September 30, 2008, we repurchased 3.1 million and 5.7 million shares, respectively, for $100.0 million and $200.0 million, respectively, under this stock repurchase program. From the inception of the stock repurchase authorization through September 30, 2008, we have purchased 109.7 million shares for $2.5 billion. In addition, during the quarter and six months ended September 30, 2008, we repurchased less than 0.1 million and 0.4 million shares, respectively, for $0.3 million and $16.1 million, respectively, to satisfy tax withholding obligations upon the lapse of restrictions on nonvested stock grants. The repurchase of stock is funded solely with cash generated from domestic operations and, therefore, affects our overall domestic versus international liquidity balances. See PART II. Item 2. Issuer Purchases of Equity Securities below for a monthly detail of treasury stock purchases for the quarter ending September 30, 2008.

Repurchases of our common stock will occur over time through open market purchases, through unsolicited or solicited privately negotiated transactions, or in such other manner as will comply with the provisions of the Securities Exchange Act of 1934 and the rules and regulations thereunder.

Available Information

Our internet website address is http://www.bmc.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our internet website free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our internet website and the information contained therein or connected thereto are not intended to be incorporated into this Quarterly Report on Form 10-Q.

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 marketable securities. 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 portfolio management strategy subsequent to March 31, 2008, therefore the risk profile of our market risk sensitive instruments remains substantially unchanged from the description in our Annual Report on Form 10-K for fiscal 2008.

Item 4. Controls and Procedures

Material Weakness Previously Disclosed

As discussed in Item 9A of our Annual Report on Form 10-K for fiscal 2008, as of March 31, 2008, we identified a material weakness in the design and operation of our internal controls over the accounting for income taxes related to the reconciliation, analysis and review procedures operating at that date. Although we have designed and implemented controls that we believe will remediate the material weakness, we are unable to conclude the material weakness has been remediated as of September 30, 2008 because many of the remedial actions we have taken are recent and therefore an insufficient amount of time has passed for us to verify that the additional remediation measures are operating effectively.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision of our principal executive officer (Chief Executive Officer) and principal financial officer (Chief Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, management has concluded that our disclosure controls and procedures were effective as of September 30, 2008.

Changes in Internal Control over Financial Reporting

25

During the second quarter of fiscal 2009, as part of our plan to address the aforementioned material weakness, we implemented enhanced reconciliation, analysis and review procedures related to our accounting for income taxes. These actions are reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are no items that require disclosure under this Item.

Item 1A. Risk Factors

The following risk factor is added to our risk factors as included in our Annual Report of Form 10-K for the year ended March 31, 2008:

There are risks associated with our outstanding indebtedness.

In June 2008, we issued $300.0 million of senior unsecured notes due 2018 and we may incur additional indebtedness in the future. Our ability to pay interest and repay the principal for our indebtedness is dependent upon our ability to manage our business operations and the other factors discussed in this section. There can be no assurance that we will be able to manage any of these risks successfully. In addition, changes by any rating agency to our outlook or credit rating could negatively affect the value and liquidity of both our debt and equity securities.

Item 2. Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased(1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program(2)	Total Dollar Value of Shares Purchased as Part of a Publicly Announced Program(2)		Approximate Dollar Value of Shares that may yet be Purchased Under the Program(1)
July 1-31, 2008	8,632	$	—	—	$	—	$	574,865,715
August 1-31, 2008	931,264	$	33.52	931,000		31,209,254	$	543,656,461
September 1-30, 2008	2,181,150	$	31.54	2,181,150		68,788,957	$	474,867,504
Total	3,121,046	$	32.13	3,112,150	$	99,998,211	$	474,867,504

(1) Includes 8,896 shares of our common stock withheld by us to satisfy employee withholding obligations.

(2) Our Board of Directors have previously authorized a total of $3.0 billion to repurchase stock. As of September 30, 2008, there was $474.9 million remaining in this stock repurchase program and the program does not have an expiration date.

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

At BMC Software’s Annual Meeting of Stockholders held on July 22, 2008, the following proposals were adopted by the margins indicated:

	NUMBER OF SHARES
	VOTED FOR	WITHHELD
1. To elect our nine directors, each to serve until the next annual meeting or until his/her respective successor has been duly elected and qualified.
B. Garland Cupp	168,948,518	7,430,833
Robert E. Beauchamp	169,151,459	7,227,892
Jon E. Barfield	159,663,921	16,715,430
Gary Bloom	170,042,112	6,337,239
Meldon K. Gafner	168,868,243	7,511,108
P. Thomas Jenkins	169,955,519	6,423,832
Louis J. Lavigne, Jr.	164,017,098	12,362,253
Kathleen A. O’Neil	159,759,954	16,619,397
Tom C. Tinsley	168,907,140	7,472,211

26

	NUMBER OF SHARES
	VOTED FOR	WITHHELD	ABSTAIN
2. To ratify the Board of Directors appointment of Ernst & Young LLP as our independent registered public accountants for the fiscal year ending March 31, 2009.	174,793,168	368,114	1,218,068

27

Item 6. Exhibits

(a) Exhibits.

10.5(d)	Amended and Restated BMC Software, Inc. Executive Deferred Compensation Plan.
31.1	Certification of the Chief Executive Officer of BMC Software, Inc. pursuant to Section 13a-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer of BMC Software, Inc. pursuant to Section 13a-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of the Chief Executive Officer of BMC Software, Inc. pursuant to Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of the Chief Financial Officer of BMC Software, Inc. pursuant to Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

28

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
October 31, 2008		Robert E. Beauchamp
		President and Chief Executive Officer
	By:	/s/ Stephen B. Solcher
October 31, 2008		Stephen B. Solcher
		Senior Vice President and Chief Financial Officer

29

EXHIBIT INDEX

10.5(d)	Amended and Restated BMC Software, Inc. Executive Deferred Compensation Plan.
31.1	Certification of the Chief Executive Officer of BMC Software, Inc. pursuant to Section 13a-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer of BMC Software, Inc. pursuant to Section 13a-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of the Chief Executive Officer of BMC Software, Inc. pursuant to Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of the Chief Financial Officer of BMC Software, Inc. pursuant to Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

30

EX-10.(5)D

Exhibit 10.5d

ADOPTION AGREEMENT

1.01	PREAMBLE
	By the execution of this Adoption Agreement the Plan Sponsor hereby [complete (a) or (b)]
	(a)	¨	adopts a new plan as of                      [month, day, year]
	(b)	x	amends and restates its existing plan as of January 1, 2008 [month, day, year] which is the Amendment Restatement Date. Except as otherwise provided in Appendix A, all amounts deferred under the Plan prior to the Amendment Restatement Date shall be governed by the terms of the Plan as in effect on the day before the Amendment Restatement Date.
			Original Effective Date: April 1, 1994 [month, day, year
			Pre-409A Grandfathering:      x  Yes    ¨  No, [If ‘yes’, complete Appendix B, “Summary of Grandfathered Provisions”]
1.02	PLAN
	Plan Name: BMC Software, Inc. Executive Deferred Compensation Plan
	Plan Year: January 1 – December 31
1.03	PLAN SPONSOR
	Name:			BMC Software, Inc.
	Address:			2101 CityWest Blvd., Houston, TX 77042
	Phone # :			713-918-8800
	EIN:			74-2126120
	Fiscal Yr:			April 1 – March 31
	Is stock of the Plan Sponsor, any Employer or any Related Employer publicly traded on an established securities market?
	x Yes        ¨ No

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March 2008

1.04	EMPLOYER
	The following entities have been authorized by the Plan Sponsor to participate in and have adopted the Plan (insert “Not Applicable” if none have been authorized):
	Entity	Publicly Traded on Est. Securities Market
		Yes	No
	N/A	¨	¨
		¨	¨
		¨	¨
		¨	¨
		¨	¨
		¨	¨
1.05	ADMINISTRATOR
	The Plan Sponsor has designated the following party or parties to be responsible for the administration of the Plan:

	Name:	The BMC Software, Inc. Employee Benefits Committee
	Address:	2101 CityWest Blvd., Houston, TX 77042
	Note:	The Administrator is the person or persons designated by the Plan Sponsor to be responsible for the administration of the Plan. Neither Fidelity Employer Services Company nor any other Fidelity affiliate can be the Administrator.
1.06	KEY EMPLOYEE DETERMINATION DATES
	The Employer has designated December 31 the Identification Date for purposes of determining Key Employees.
	In the absence of a designation, the Identification Date is December 31.
	The Employer has designated April 1 the effective date for purposes of applying the six month delay in distributions to Key Employees.
	In the absence of a designation, the effective date is the first day of the fourth month following the Identification Date.

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March 2008

2.01	PARTICIPATION
	(a)	x	Employees [complete (i), (ii) or (iii)]
		(i)	x	Eligible Employees are selected by the Employer.
		(ii)	¨	Eligible Employees are those employees of the Employer who satisfy the following criteria:
		(iii)	¨	Employees are not eligible to participate.
	(b)	x	Directors [complete (i), (ii) or (iii)]
		(i)	¨	All Directors are eligible to participate.
		(ii)	¨	Only Directors selected by the Employer are eligible to participate.
		(iii)	x	Directors are not eligible to participate.

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March 2008

3.01	COMPENSATION
	For purposes of determining Participant contributions under Article 4 and Employer contributions under Article 5, Compensation shall be defined in the following manner [complete (a) or (b) and select (c) and/or (d), if applicable]:
	(a)	x	Compensation is defined as:
			The Participant’s base salary payable by the Employer
			for a Plan Year, including deferrals made by the
			Participant under the Plan and any amounts deferred under
			a qualified cash or deferred arrangement under Section
			401(k) of the Code or a cafeteria plan under Section 125
			of the Code.
	(b)	¨	Compensation as defined in            [insert name of qualified plan] without regard to the limitation in Section 401(a)(17) of the Code for such Plan Year.
	(c)	¨	Director Compensation is defined as:
	(d)	¨	Compensation shall, for all Plan purposes, be limited to $            .
	(e)	¨	Not Applicable.
3.02	BONUSES
	Compensation, as defined in Section 3.01 of the Adoption Agreement, includes the following type of bonuses:
	Type			Will be treated as Performance Based Compensation
				Yes	No
	GICP			¨	x
	Executive Incentive Plan for SVPs			¨	x
	PS and SWC Bonus Plans			¨	x
				¨	¨
				¨	¨
	¨	Not Applicable.

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March 2008

4.01	PARTICIPANT CONTRIBUTIONS
	If Participant contributions are permitted, complete (a), (b), and (c). Otherwise complete (d).
	(a)	Amount of Deferrals
		A Participant may elect within the period specified in Section 4.01(b) of the Adoption Agreement to defer the following amounts of remuneration. For each type of remuneration listed, complete “dollar amount” and / or “percentage amount”.
		(i) Compensation Other than Bonuses [do not complete if you complete (iii)]
			Type of Remuneration		Dollar Amount		% Amount		Increment
					Min	Max	Min	Max
			(a)				0	50	1%
			(b)
			(c)
		Note: The increment is required to determine the permissible deferral amounts. For example, a minimum of 0% and maximum of 20% with a 5% increment would allow an individual to defer 0%, 5%, 10%, 15% or 20%.
		(ii) Bonuses [do not complete if you complete (iii)]
			Type of Bonus		Dollar Amount		% Amount		Increment
					Min	Max	Min	Max
			(a)				0	100	1%
			(b)
			(c)
		(iii) Compensation [do not complete if you completed (i) and (ii)]
			Dollar Amount		% Amount		Increment
			Min	Max	Min	Max
		(iv) Director Compensation
			Type of Compensation		Dollar Amount		% Amount		Increment
					Min	Max	Min	Max
			Annual Retainer
			Meeting Fees
			Other:
			Other:

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March 2008

(b)	Election Period
	(i)	Performance Based Compensation
		A special election period
		¨    Does            x    Does Not
		apply to each eligible type of performance based compensation referenced in Section 3.02 of the Adoption Agreement.
		The special election period, if applicable, will be determined by the Employer.
	(ii)	Newly Eligible Participants
		An employee who is classified or designated as an Eligible Employee during a Plan Year
		x    May            ¨    May Not
		elect to defer Compensation earned during the remainder of the Plan Year by completing a deferral agreement within the 30 day period beginning on the date he is eligible to participate in the Plan.
(c)	Revocation of Deferral Agreement
	A Participant’s deferral agreement
	x       Will
	¨        Will Not
	be cancelled for the remainder of any Plan Year during which he receives a hardship distribution of elective deferrals from a qualified cash or deferred arrangement maintained by the Employer. If cancellation occurs, the Participant may resume participation in accordance with Article 4 of the Plan.
(d)	No Participant Contributions
	¨        Participant contributions are not permitted under the Plan.

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March 2008

5.01	EMPLOYER CONTRIBUTIONS
	If Employer contributions are permitted, complete (a) and/or (b). Otherwise complete (c).
	(a)	Matching Contributions
		(i)		Amount
				For each Plan Year, the Employer shall make a Matching Contribution on behalf of each Participant who defers Compensation for the Plan Year and satisfies the requirements of Section 5.01(a)(ii) of the Adoption Agreement equal to [complete the ones that are applicable]:
				(A)			¨	[insert percentage] of the Compensation the Participant has elected to defer for the Plan Year
				(B)			x	An amount determined by the Employer in its sole discretion
				(C)			¨	Matching Contributions for each Participant shall be limited to $           and/or           % of Compensation.
				(D)			¨	Other:
				(E)			¨	Not Applicable [Proceed to Section 5.01(b)]
		(ii	)	Eligibility for Matching Contribution
				A Participant who defers Compensation for the Plan Year shall receive an allocation of Matching Contributions determined in accordance with Section 5.01(a)(i) provided he satisfies the following requirements [complete the ones that are applicable]:
				(A	)	¨		Describe requirements:
				(B	)	x		Is selected by the Employer in its sole discretion to receive an allocation of Matching Contributions
				(C	)	¨		No requirements

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March 2008

	(iii	)	Time of Allocation
			Matching Contributions, if made, shall be treated as allocated [select one]:
			(A	)	¨	As of the last day of the Plan Year
			(B	)	x	At such times as the Employer shall determine in it sole discretion
			(C	)	¨	At the time the Compensation on account of which the Matching Contribution is being made would otherwise have been paid to the Participant
			(D	)	¨	Other:
(b)	Other Contributions
	(i	)	Amount
			The Employer shall make a contribution on behalf of each Participant who satisfies the requirements of Section 5.01(b)(ii) equal to [complete the ones that are applicable]:
			(A	)	¨	An amount equal to            [insert number] % of the Participant’s Compensation
			(B	)	x	An amount determined by the Employer in its sole discretion
			(C	)	¨	Contributions for each Participant shall be limited to $
			(D	)	¨	Other:
			(E	)	¨	Not Applicable [Proceed to Section 6.01]

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March 2008

	(ii	)	Eligibility for Other Contributions
			A Participant shall receive an allocation of other Employer contributions determined in accordance with Section 5.01(b)(i) for the Plan Year if he satisfies the following requirements [complete the one that is applicable]:
			(A	)	¨	Describe requirements:
			(B	)	x	Is selected by the Employer in its sole discretion to receive an allocation of other Employer contributions
			(C	)	¨	No requirements
	(iii	)	Time of Allocation
			Employer contributions, if made, shall be treated as allocated [select one]:
			(A	)	¨	As of the last day of the Plan Year
			(B	)	x	At such time or times as the Employer shall determine in its sole discretion
			(C	)	¨	Other:
(c)	No Employer Contributions
	¨		Employer contributions are not permitted under the Plan.

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March 2008

6.01	DISTRIBUTIONS
	The timing and form of payment of distributions made from the Participant’s vested Account shall be made in accordance with the elections made in this Section 6.01 of the Adoption Agreement except when Section 9.6 of the Plan requires a six month delay for certain distributions to Key Employees of publicly traded companies.
	(a)	Timing of Distributions
		(i)	All distributions shall commence in accordance with the following [choose one]:
			(A)	¨	As soon as administratively feasible following the distribution event
			(B)	x	Monthly on specified day 15th [insert day]
			(C)	¨	Annually on specified month and day            [insert month and day]
			(D)	¨	Calendar quarter on specified month and day [          month of quarter (insert 1,2 or 3);          day (insert day)]
		(ii)	The timing of distributions as determined in Section 6.01(a)(i) shall be modified by the adoption of:
			(A)	x	Event Delay – Distribution events other than those based on Specified Date or Specified Age will be treated as not having occurred for six months [insert number of months].
			(B)	¨	Hold Until Next Year – Distribution events other than those based on Specified Date or Specified Age will be treated as not having occurred for twelve months from the date of the event if payment pursuant to Section 6.01(a)(i) will thereby occur in the next calendar year or on the first payment date in the next calendar year in all other cases.
			(C)	¨	Immediate Processing – The timing method selected by the Plan Sponsor under Section 6.01(a)(i) shall be overridden for the following distribution events [insert events]:
			(D)	¨	Not applicable.

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March 2008

(b)	Distribution Events
	Participants may elect the following payment events and the associated form or forms of payment. If multiple events are selected, the earliest to occur will trigger payment. For installments, insert the range of available periods (e.g., 5-15) or insert the periods available (e.g., 5,7,9).
				Lump Sum	Installments
	(i)	x	Specified Date	X	5, 10, 15 years
	(ii)	x	Specified Age	X	5, 10, 15 years
	(iii)	x	Separation from Service	X	5, 10, 15 years
	(iv)	¨	Separation from Service plus 6 months		years
	(v)	¨	Separation from Service plus            months [not to exceed            months]		years
	(vi)	¨	Retirement		years
	(vii)	¨	Retirement plus 6 months		years
	(viii)	¨	Retirement plus            months [not to exceed            months]		years
	(ix)	x	Later of Separation from Service or Specified Age	X	5, 10, 15 years
	(x)	x	Later of Separation from Service or Specified Date	X	5, 10, 15 years
	(xi)	x	Disability	X	5, 10, 15 years
	(xii)	x	Death	X	5, 10, 15 years
	(xiii)	¨	Change in Control		years
	The minimum deferral period for Specified Date or Specified Age event shall be three years.
	Installments may be paid [select each that applies]
	¨	Monthly
	¨	Quarterly
	x	Annually
(c)	Specified Date and Specified Age elections may not extend beyond age 99 [insert age or “Not Applicable” if no maximum age applies].

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March 2008

(d)	Payment Election Override
	Payment of the remaining vested balance of the Participant’s Account will automatically occur at the time specified in Section 6.01(a) of the Adoption Agreement in the form indicated upon the earliest to occur of the following events [check each event that applies and for each event include only a single form of payment]:

	EVENTS	FORM OF PAYMENT
¨	Separation from Service	Lump sum	Installments
¨	Separation from Service before Retirement	Lump sum	Installments
¨	Death	Lump sum	Installments
¨	Disability	Lump sum	Installments
x	Not Applicable

(e)	Involuntary Cashouts
	x	If the Participant’s vested Account at the time of his Separation from Service does not exceed $10,000 distribution of the vested Account shall automatically be made in the form of a single lump sum in accordance with Section 9.5 of the Plan.
	¨	There are no involuntary cashouts.
(f)	Retirement
	¨	Retirement shall be defined as a Separation from Service that occurs on or after the Participant [insert description of requirements]:
	x	No special definition of Retirement applies.

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March 2008

(g)	Distribution Election Change
	A Participant
	x	Shall
	¨	Shall Not
	be permitted to modify a scheduled distribution date and/or payment option in accordance with Section 9.2 of the Plan.
	A Participant shall generally be permitted to elect such modification two times.
	Administratively, allowable distribution events will be modified to reflect all options necessary to fulfill the distribution change election provision.
(h)	Frequency of Elections
	The Plan Sponsor
	x	Has
	¨	Has Not
	Elected to permit annual elections of a time and form of payment for amounts deferred under the Plan.

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March 2008

7.01	VESTING
	(a)	Matching Contributions
		The Participant’s vested interest in the amount credited to his Account attributable to Matching Contributions shall be based on the following schedule:
			¨	Years of Service	Vesting %
				0		(insert ‘100’ if there is immediate vesting)
				1
				2
				3
				4
				5
				6
				7
				8
				9
			x	Other: The Participant’s vested interest in the amount credited to his Account                 attributable to Matching Contributions shall be based on a schedule specified      in resolutions of the Compensation Committee or in an applicable employment   agreement.
			¨	Class year vesting applies.
			¨	Not applicable.
	(b)	Other Employer Contributions
		The Participant’s vested interest in the amount credited to his Account attributable to Employer contributions other than Matching Contributions shall be based on the following schedule:
			¨	Years of Service	Vesting %
				0		(insert ‘100’ if there is immediate vesting)
				1
				2
				3
				4
				5
				6
				7
				8
				9

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March 2008

	x	Other: The Participant’s vested interest in the amount credited to his Account
		attributable to Employer contributions other than Matching Contributions shall
		be based on a schedule specified in resolutions of the Compensation
		Committee or in an applicable employment agreement.
	¨	Class year vesting applies.
	¨	Not applicable.
(c)	Acceleration of Service
	A Participant’s vested interest in his Account will automatically be 100% upon the occurrence of the following events: [select the ones that are applicable]:
	(i)	x	Death
	(ii)	x	Disability
	(iii)	x	Change in Control
	(iv)	¨	Eligibility for Retirement
	(v)	¨	Other:
	(vi)	¨	Not applicable.
(d)	Years of Service
	(i)	A Participant’s Years of Service shall include all service performed for the Employer and
		x	Shall
		¨	Shall Not
		include service performed for the Related Employer.
	(ii)	Years of Service shall also include service performed for the following entities:

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March 2008

(iii)	Years of Service shall be determined in accordance with (select one)
	(A)	x	The elapsed time method in Treas. Reg. Sec. 1.410(a)-7
	(B)	¨	The general method in DOL Reg. Sec. 2530.200b-1 through b-4
	(C)	¨	The Participant’s Years of Service credited under [insert name of plan]
	(D)	¨	Other:
(iv)	¨ Not applicable.

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March 2008

8.01	UNFORESEEABLE EMERGENCY
	(a)	A withdrawal due to an Unforeseeable Emergency as defined in Section 2.24:
		x	Will
		¨	Will Not [if Unforeseeable Emergency withdrawals are not permitted, proceed to Section 9.01]
		be allowed.
	(b)	Upon a withdrawal due to an Unforeseeable Emergency, a Participant’s deferral election for the remainder of the Plan Year:
		x	Will
		¨	Will Not
		be cancelled. If cancellation occurs, the Participant may resume participation in accordance with Article 4 of the Plan.

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March 2008

9.01	INVESTMENT DECISIONS
	Investment decisions regarding the hypothetical amounts credited to a Participant’s Account shall be made by [select one]:
	(a)	x	The Participant or his Beneficiary
	(b)	¨	The Employer

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March 2008

10.01	GRANTOR TRUST
	The Employer [select one]:
	x	Does
	¨	Does Not
	intend to establish a grantor trust in connection with the Plan.

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March 2008

11.01	TERMINATION UPON CHANGE IN CONTROL
	The Plan Sponsor
	x	Reserves
	¨	Does Not Reserve
	the right to terminate the Plan and distribute all vested amounts credited to Participant Accounts upon a Change in Control as described in Section 9.7.
11.02	AUTOMATIC DISTRIBUTION UPON CHANGE IN CONTROL
	Distribution of the remaining vested balance of each Participant’s Account
	¨	Shall
	x	Shall Not
	automatically be paid as a lump sum payment upon the occurrence of a Change in Control as provided in Section 9.7.
11.03	CHANGE IN CONTROL
	A Change in Control for Plan purposes includes the following [select each definition that applies]:
	(a)	x	A change in the ownership of the Employer as described in Section 9.7(c) of the Plan.
	(b)	x	A change in the effective control of the Employer as described in Section 9.7(d) of the Plan.
	(c)	x	A change in the ownership of a substantial portion of the assets of the Employer as described in Section 9.7(e) of the Plan.
	(d)	¨	Not Applicable.

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March 2008

12.01	GOVERNING STATE LAW
	The laws of Texas shall apply in the administration of the Plan to the extent not preempted by ERISA.

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March 2008

EXECUTION PAGE

The Plan Sponsor has caused this Adoption Agreement to be executed this                          day of                 , 20            .

PLAN SPONSOR:	BMC Software, Inc.
By:
Title:

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March 2008

APPENDIX A

SPECIAL EFFECTIVE DATES

Not Applicable

- 23 -

March 2008

APPENDIX B

SUMMARY OF GRANDFATHERED PROVISIONS

1. Elective Withdrawal.

Subject to the approval of the BMC Software, Inc. Employee Benefits Committee (the “Committee”) in its sole discretion, a Participant may elect at any time while employed by the Employer, by following the election procedure prescribed by the Committee, to withdraw as a benefit all or a portion of his pre-2005 deferral account (the “Deferral Account”), subject to a withdrawal penalty of 15% of the amount of any such withdrawal (an “Elective Withdrawal”). Upon any such Elective Withdrawal, the 15% withdrawal penalty will be forfeited to the Employer. Further, upon any such withdrawal, such Participant’s participation in the Plan will terminate as of the end of the Plan Year in and no further deferrals will be made under the Plan on behalf of such Participant until the first day of the Plan Year that is at least twelve months after the date of such withdrawal.

If a Participant’s Deferral Account is deemed to be invested in more than one investment option, any Elective Withdrawal will be distributed pro rata from each investment option in which such Deferral Account is deemed to be invested. If a Participant’s Deferral Account contains one or more pre-2005 dated deferral subaccounts (as defined and referred to in the prior Plan document as “Dated Deferral Subaccounts”), then such withdrawal will be considered to have been distributed, first, from the Dated Deferral Subaccount with respect to which the earliest installment distribution would be made, then, from the Dated Deferral Subaccount with respect to which the next earliest installment distribution would be made, and continuing in such manner until all of such Dated Deferral Subaccounts have been exhausted or the entire amount of the Elective Withdrawal has been distributed.

2. Acceleration Pay-Out of Certain Benefits by the Committee.

(a)        If a Participant’s benefit payments attributable to his or her Deferral Account are to be paid in a form other than a single lump sum, cash payment and the aggregate amount to be paid with respect to such participant in any particular calendar year is less than $10,000, then the Committee may, in its sole discretion, elect to cause the entire remaining Deferral Account balance with respect to such participant to be paid in a single lump sum, cash payment.

(b)        If a Participant’s terminated his employment with the Employer and its subsidiaries after his Retirement Date or by reason of death or Disability and such Participant’s benefit payments are being, or are to be, paid in a form other than a single lump sum, cash payment, then such Participant (or his designated beneficiary in the event of the death of the Participant) may petition the Committee in writing to receive the remaining installment payments on an accelerated basis, including without limitation a single lump sum, cash payment. The Committee shall determine, in its sole discretion, whether to grant or deny such request.

(c)        For purposes of this Section 2 of Appendix B, the following terms shall have the meaning set forth below:

March 2008

(i)        Disability.    A Participant’s disability entitling him to benefits under the Employer’s long-term disability plan; provided, however, that if a Participant is not eligible to participate in such plan, then such Participant shall be considered to have incurred a “Disability” if he is permanently and totally unable to perform his duties for the Employer as a result of any medically determinable physical or mental impairment as supported by a written medical opinion to the foregoing effect by a physician selected by the Committee.

(ii)        Retirement Date.    The earlier of (i) the first date upon which a Participant has both completed ten or more years of Vesting Service and attained age 55 or (ii) the date upon which such Participant has attained age 65.

(iii)        Vesting Service.    The term “Vesting Service” shall have the same meaning as is assigned to such term under the BMC Software, Inc. Salary Reduction Profit Sharing Plan except that only Vesting Service accumulated after March 1, 1994 shall be considered for purposes of the Plan. Notwithstanding the foregoing, for purposes of determining the Retirement Date of an individual who is a Participant of the Plan and employed by the Employer on or after June 30, 1999, such individual shall be credited with the same Vesting Service under the Plan as he is credited with under the BMC Software, Inc. Salary Reduction Profit Sharing Plan.

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BMC Software, Inc.

Executive Deferred

Compensation Plan

IMPORTANT NOTE

This document has not been approved by the Department of Labor, Internal Revenue Service or any other governmental entity. An adopting Employer must determine whether the Plan is subject to the Federal securities laws and the securities laws of the various states. An adopting Employer may not rely on this document to ensure any particular tax consequences or to ensure that the Plan is “unfunded and maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees” under Title I of the Employee Retirement Income Security Act of 1974, as amended, with respect to the Employer’s particular situation. Fidelity Employer Services Company, its affiliates and employees cannot provide you with legal advice in connection with the execution of this document. This document should be reviewed by the Employer’s attorney prior to execution.

March 2008

TABLE OF CONTENTS

PREAMBLE
ARTICLE 1 – GENERAL
1.1	Plan
1.2	Effective Dates
1.3	Amounts Not Subject to Code Section 409A
ARTICLE 2 – DEFINITIONS
2.1	Account
2.2	Administrator
2.3	Adoption Agreement
2.4	Beneficiary
2.5	Board or Board of Directors
2.6	Bonus
2.7	Change in Control
2.8	Code
2.9	Compensation
2.10	Director
2.11	Disabled
2.12	Eligible Employee
2.13	Employer
2.14	ERISA
2.15	Identification Date
2.16	Key Employee
2.17	Participant
2.18	Plan
2.19	Plan Sponsor
2.20	Plan Year
2.21	Related Employer
2.22	Retirement
2.23	Separation from Service
2.24	Unforeseeable Emergency
2.25	Valuation Date
2.26	Years of Service
ARTICLE 3 – PARTICIPATION
3.1	Participation
3.2	Termination of Participation

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ARTICLE 4 – PARTICIPANT ELECTIONS
4.1	Deferral Agreement
4.2	Amount of Deferral
4.3	Timing of Election to Defer
4.4	Election of Payment Schedule and Form of Payment
ARTICLE 5 – EMPLOYER CONTRIBUTIONS
5.1	Matching Contributions
5.2	Other Contributions
ARTICLE 6 – ACCOUNTS AND CREDITS
6.1	Establishment of Account
6.2	Credits to Account
ARTICLE 7 – INVESTMENT OF CONTRIBUTIONS
7.1	Investment Options
7.2	Adjustment of Accounts
ARTICLE 8 – RIGHT TO BENEFITS
8.1	Vesting
8.2	Death
8.3	Disability
ARTICLE 9 – DISTRIBUTION OF BENEFITS
9.1	Amount of Benefits
9.2	Method and Timing of Distributions
9.3	Unforeseeable Emergency
9.4	Payment Election Overrides
9.5	Cashouts of Amounts Not Exceeding Stated Limit
9.6	Required Delay in Payment to Key Employees
9.7	Change in Control
9.8	Permissible Delays in Payment
9.9	Permitted Acceleration of Payment

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ARTICLE 10 – AMENDMENT AND TERMINATION
10.1	Amendment by Plan Sponsor
10.2	Plan Termination Following Change in Control or Corporate Dissolution
10.3	Other Plan Terminations
ARTICLE 11 – THE TRUST
11.1	Establishment of Trust
11.2	Grantor Trust
11.3	Investment of Trust Funds
ARTICLE 12 – PLAN ADMINISTRATION
12.1	Powers and Responsibilities of the Administrator
12.2	Claims and Review Procedures
12.3	Plan Administrative Costs
ARTICLE 13 – MISCELLANEOUS
13.1	Unsecured General Creditor of the Employer
13.2	Employer’s Liability
13.3	Limitation of Rights
13.4	Anti-Assignment
13.5	Facility of Payment
13.6	Notices
13.7	Tax Withholding
13.8	Indemnification
13.9	Successors
13.10	Disclaimer
13.11	Governing Law

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PREAMBLE

The Plan is intended to be a “plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended, or an “excess benefit plan” within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended, or a combination of both. The Plan is further intended to conform with the requirements of Internal Revenue Code Section 409A and the final regulations issued thereunder and shall be interpreted, implemented and administered in a manner consistent therewith.

ARTICLE 1 – GENERAL

1.1 Plan.  The Plan will be referred to by the name specified in the Adoption Agreement.

1.2 Effective Dates.

(a) Original Effective Date.  The Original Effective Date is the date as of which the Plan was initially adopted.

(b) Amendment Effective Date.  The Amendment Effective Date is the date specified in the Adoption Agreement as of which the Plan is amended and restated. Except to the extent otherwise provided herein or in the Adoption Agreement, the Plan shall apply to amounts deferred and benefit payments made on or after the Amendment Effective Date.

(c) Special Effective Date.  A Special Effective Date may apply to any given provision if so specified in Appendix A of the Adoption Agreement. A Special Effective Date will control over the Original Effective Date or Amendment Effective Date, whichever is applicable, with respect to such provision of the Plan.

1.3 Amounts Not Subject to Code Section 409A

Except as otherwise indicated by the Plan Sponsor in Section 1.01 of the Adoption Agreement, amounts deferred before January 1, 2005 that are earned and vested on December 31, 2004 will be separately accounted for and administered in accordance with the terms of the Plan as in effect on December 31, 2004. A summary of the grandfathered provisions is set forth in Appendix B of the Adoption Agreement.

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ARTICLE 2 – DEFINITIONS

Pronouns used in the Plan are in the masculine gender but include the feminine gender unless the context clearly indicates otherwise. Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context:

2.1 “Account” means an account established for the purpose of recording amounts credited on behalf of a Participant and any income, expenses, gains, losses or distributions included thereon. The Account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant or to the Participant’s Beneficiary pursuant to the Plan.

2.2 “Administrator” means the person or persons designated by the Plan Sponsor in Section 1.05 of the Adoption Agreement to be responsible for the administration of the Plan. If no Administrator is designated in the Adoption Agreement, the Administrator is the Plan Sponsor.

2.3 “Adoption Agreement” means the agreement adopted by the Plan Sponsor that establishes the Plan.

2.4 “Beneficiary” means the persons, trusts, estates or other entities entitled under Section 8.2 to receive benefits under the Plan upon the death of a Participant.

2.5 “Board” or “Board of Directors” means the Board of Directors of the Plan Sponsor.

2.6 “Bonus” means an amount of incentive remuneration payable by the Employer to a Participant.

2.7 “Change in Control” means the occurrence of an event involving the Plan Sponsor that is described in Section 9.7.

2.8 “Code” means the Internal Revenue Code of 1986, as amended.

2.9 “Compensation” has the meaning specified in Section 3.01 of the Adoption Agreement.

2.10 “Director” means a non-employee member of the Board who has been designated by the Employer as eligible to participate in the Plan.

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2.11 “Disabled” means a determination by the Administrator that the Participant is either (a) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (b) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or last for a continuous period of not less than twelve months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Employer. A Participant will be considered Disabled if he is determined to be totally disabled by the Social Security Administration or the Railroad Retirement Board.

2.12 “Eligible Employee” means an employee of the Employer who satisfies the requirements in Section 2.01 of the Adoption Agreement.

2.13 “Employer” means the Plan Sponsor and any other entity which is authorized by the Plan Sponsor to participate in and, in fact, does adopt the Plan.

2.14 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

2.15 “Identification Date” means the date as of which Key Employees are determined which is specified in Section 1.06 of the Adoption Agreement.

2.16 “Key Employee” means an employee who satisfies the conditions set forth in Section 9.6.

2.17 “Participant” means an Eligible Employee or Director who commences participation in the Plan in accordance with Article 3.

2.18 “Plan” means the unfunded plan of deferred compensation set forth herein, including the Adoption Agreement and any trust agreement, as adopted by the Plan Sponsor and as amended from time to time.

2.19 “Plan Sponsor” means the entity identified in Section 1.03 of the Adoption Agreement or any successor by merger, consolidation or otherwise.

2.20 “Plan Year” means the period identified in Section 1.02 of the Adoption Agreement.

2.21 “Related Employer” means the Employer and (a) any corporation that is a member of a controlled group of corporations as defined in Code Section 414(b) that includes the Employer and (b) any trade or business that is under common control as defined in Code Section 414(c) that includes the Employer.

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2.22 “Retirement” has the meaning specified in 6.01(f) of the Adoption Agreement.

2.23 “Separation from Service” means the date that the Participant dies, retires or otherwise has a termination of employment with respect to all entities comprising the Related Employer. A Separation from Service does not occur if the Participant is on military leave, sick leave or other bona fide leave of absence if the period of leave does not exceed six months or such longer period during which the Participant’s right to re-employment is provided by statute or contract. If the period of leave exceeds six months and the Participant’s right to re-employment is not provided either by statute or contract, a Separation from Service will be deemed to have occurred on the first day following the six-month period. If the period of leave is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where the impairment causes the Participant to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a 29 month period of absence may be substituted for the six month period.

Whether a termination of employment has occurred is based on whether the facts and circumstances indicate that the Related Employer and the Participant reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the Participant would perform after such date (whether as an employee or as an independent contractor) would permanently decrease to no more than 20 percent of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36 month period (or the full period of services to the Related Employer if the employee has been providing services to the Related Employer for less than 36 months). If a Participant continues to provide services to a Related Employer in a capacity other than as an employee, the Participant will not be deemed to have a termination of employment if the Participant is providing services at an annual rate that is at least 50 percent of the services rendered by such individual, on average, during the immediately preceding 36 month period of employment (or such lesser period of employment) and the annual remuneration for such services is at least 50 percent of the average annual remuneration earned during the such 36 calendar months of employment (or such lesser period of employment).

An independent contractor is considered to have experienced a Separation from Service with the Related Employer upon the expiration of the contract (or, in the case of more than one contract, all contracts) under which services are performed for the Related Employer if the expiration

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constitutes a good-faith and complete termination of the contractual relationship.

If a Participant provides services as both an employee and an independent contractor of the Related Employer, the Participant must separate from service both as an employee and as an independent contractor to be treated as having incurred a Separation from Service. If a Participant ceases providing services as an independent contractor and begins providing services as an employee, or ceases providing services as an employee and begins providing services as an independent contractor, the Participant will not be considered to have experienced a Separation from Service until the Participant has ceased providing services in both capacities.

If a Participant provides services both as an employee and as a member of the board of directors of a corporate Related Employer (or an analogous position with respect to a noncorporate Related Employer), the services provided as a director are not taken into account in determining whether the Participant has incurred a Separation from Service as an employee for purposes of a nonqualified deferred compensation plan in which the Participant participates as an employee that is not aggregated under Code Section 409A with any plan in which the Participant participates as a director.

If a Participant provides services both as an employee and as a member of the board of directors of a corporate related Employer (or an analogous position with respect to a noncorporate Related Employer), the services provided as an employee are not taken into account in determining whether the Participant has experienced a Separation from Service as a director for purposes of a nonqualified deferred compensation plan in which the Participant participates as a director that is not aggregated under Code Section 409A with any plan in which the Participant participates as an employee.

All determinations of whether a Separation from Service has occurred will be made in a manner consistent with Code Section 409A and the final regulations thereunder.

2.24 “Unforeseeable Emergency” means a severe financial hardship of the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, the Participant’s Beneficiary, or the Participant’s dependent (as defined in Code Section 152, without regard to Code section 152(b)(i), (b)(2) and (d)(i)(B); loss of the Participant’s property due to casualty; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.

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2.25 “Valuation Date” means each business day of the Plan Year.

2.26 “Years of Service” means each one year period for which the Participant receives service credit in accordance with the provisions of Section 7.01(d) of the Adoption Agreement.

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ARTICLE 3 – PARTICIPATION

3.1 Participation.  The Participants in the Plan shall be those Directors and employees of the Employer who satisfy the requirements of Section 2.01 of the Adoption Agreement.

3.2 Termination of Participation.  The Administrator may terminate a Participant’s participation in the Plan in a manner consistent with Code Section 409A. If the Employer terminates a Participant’s participation before the Participant experiences a Separation from Service the Participant’s vested Accounts shall be paid in accordance with the provisions of Article 9.

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ARTICLE 4 – PARTICIPANT ELECTIONS

4.1 Deferral Agreement.  If permitted by the Plan Sponsor in accordance with Section 4.01 of the Adoption Agreement, each Eligible Employee and Director may elect to defer his Compensation within the meaning of Section 3.01 of the Adoption Agreement by executing in writing or electronically, a deferral agreement in accordance with rules and procedures established by the Administrator and the provisions of this Article 4.

A new deferral agreement must be timely executed for each Plan Year during which the Eligible Employee or Director desires to defer Compensation. An Eligible Employee or Director who does not timely execute a deferral agreement shall be deemed to have elected zero deferrals of Compensation for such Plan Year.

A deferral agreement may be changed or revoked during the period specified by the Administrator. Except as provided in Section 9.3 or in Section 4.01(c) of the Adoption Agreement, a deferral agreement becomes irrevocable at the close of the specified period.

4.2 Amount of Deferral.  An Eligible Employee or Director may elect to defer Compensation in any amount permitted by Section 4.01(a) of the Adoption Agreement.

4.3 Timing of Election to Defer.  Each Eligible Employee or Director who desires to defer Compensation otherwise payable during a Plan Year must execute a deferral agreement within the period preceding the Plan Year specified by the Administrator. Each Eligible Employee who desires to defer Compensation that is a Bonus must execute a deferral agreement within the period preceding the Plan Year during which the Bonus is earned that is specified by the Administrator, except that if the Bonus can be treated as performance based compensation as described in Code Section 409A(a)(4)(B)(iii), the deferral agreement may be executed within the period specified by the Administrator, which period, in no event, shall end after the date which is six months prior to the end of the period during which the Bonus is earned, provided the Participant has performed services continuously from the later of the beginning of the performance period or the date the performance criteria are established through the date the Participant executed the deferral agreement and provided further that the compensation has not yet become ‘readily ascertainable’ with the meaning of Reg. Sec 1.409A-2(a)(8). In addition, if the Compensation qualifies as ‘fiscal year compensation’ within the meaning of Reg. Sec. 1.409A -2(a)(6), the deferral agreement may be made not later than the

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end of the Employer’s taxable year immediately preceding the first taxable year of the Employer in which any services are performed for which such Compensation is payable.

Except as otherwise provided below, an employee who is classified or designated as an Eligible Employee during a Plan Year or a Director who is designated as eligible to participate during a Plan Year may elect to defer Compensation otherwise payable during the remainder of such Plan Year in accordance with the rules of this Section 4.3 by executing a deferral agreement within the thirty (30) day period beginning on the date the employee is classified or designated as an Eligible Employee or the date the Director is designated as eligible, whichever is applicable, if permitted by Section 4.01(b)(ii) of the Adoption Agreement. If Compensation is based on a specified performance period that begins before the Eligible Employee or Director executes his deferral agreement, the election will be deemed to apply to the portion of such Compensation equal to the total amount of Compensation for the performance period multiplied by the ratio of the number of days remaining in the performance period after the election becomes irrevocable and effective over the total number of days in the performance period. The rules of this paragraph shall not apply unless the Eligible Employee or Director can be treated as initially eligible in accordance with Reg. Sec. 1.409A-2(a)(7).

4.4 Election of Payment Schedule and Form of Payment.

All elections of a payment schedule and a form of payment will be made in accordance with rules and procedures established by the Administrator and the provisions of this Section 4.4.

(a)        If the Plan Sponsor has elected to permit annual distribution elections in accordance with Section 6.01(h) of the Adoption Agreement the following rules apply. At the time an Eligible Employee or Director completes a deferral agreement, the Eligible Employee or Director must elect a distribution event (which includes a specified time) and a form of payment for the Compensation subject to the deferral agreement from among the options the Plan Sponsor has made available for this purpose and which are specified in 6.01(b) of the Adoption Agreement. Prior to the time required by Reg. Sec. 1.409A-2, the Eligible Employee or Director shall elect a distribution event (which includes a specified time) and a form of payment for any Employer contributions that may be credited to the Participant’s Account during the Plan Year. If an Eligible Employee or Director fails to elect a distribution event, he shall be deemed to have elected Separation from Service as the distribution event. If he fails to elect a form of payment, he shall be deemed to have elected a lump sum form of payment.

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(b)        If the Plan Sponsor has elected not to permit annual distribution elections in accordance with Section 6.01(h) of the Adoption Agreement the following rules apply. At the time an Eligible Employee or Director first completes a deferral agreement but in no event later than the time required by Reg. Sec. 1.409A-2, the Eligible Employee or Director must elect a distribution event (which includes a specified time) and a form of payment for amounts credited to his Account from among the options the Plan Sponsor has made available for this purpose and which are specified in Section 6.01(b) of the Adoption Agreement. If an Eligible Employee or Director fails to elect a distribution event, he shall be deemed to have elected Separation from Service in the distribution event. If the fails to elect a form of payment, he shall be deemed to have elected a lump sum form of payment.

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ARTICLE 5 – EMPLOYER CONTRIBUTIONS

5.1 Matching Contributions.  If elected by the Plan Sponsor in Section 5.01(a) of the Adoption Agreement, the Employer will credit the Participant’s Account with a matching contribution determined in accordance with the formula specified in Section 5.01(a) of the Adoption Agreement. The matching contribution will be treated as allocated to the Participant’s Account at the time specified in Section 5.01(a)(iii) of the Adoption Agreement.

5.2 Other Contributions.  If elected by the Plan Sponsor in Section 5.01(b) of the Adoption Agreement, the Employer will credit the Participant’s Account with a contribution determined in accordance with the formula or method specified in Section 5.01(b) of the Adoption Agreement. The contribution will be treated as allocated to the Participant’s Account at the time specified in Section 5.01(b)(iii) of the Adoption Agreement.

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ARTICLE 6 – ACCOUNTS AND CREDITS

6.1 Establishment of Account.  For accounting and computational purposes only, the Administrator will establish and maintain an Account on behalf of each Participant which will reflect the credits made pursuant to Section 6.2, distributions or withdrawals, along with the earnings, expenses, gains and losses allocated thereto, attributable to the hypothetical investments made with the amounts in the Account as provided in Article 7. The Administrator will establish and maintain such other records and accounts, as it decides in its discretion to be reasonably required or appropriate to discharge its duties under the Plan.

6.2 Credits to Account.  A Participant’s Account will be credited for each Plan Year with the amount of his elective deferrals under Section 4.1 at the time the amount subject to the deferral election would otherwise have been payable to the Participant and the amount of Employer contributions treated as allocated on his behalf under Article 5.

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ARTICLE 7 – INVESTMENT OF CONTRIBUTIONS

7.1 Investment Options.  The amount credited to each Account shall be treated as invested in the investment options designated for this purpose by the Administrator.

7.2 Adjustment of Accounts.  The amount credited to each Account shall be adjusted for hypothetical investment earnings, expenses, gains or losses in an amount equal to the earnings, expenses, gains or losses attributable to the investment options selected by the party designated in Section 9.01 of the Adoption Agreement from among the investment options provided in Section 7.1. If permitted by Section 9.01 of the Adoption Agreement, a Participant (or the Participant’s Beneficiary after the death of the Participant) may, in accordance with rules and procedures established by the Administrator, select the investments from among the options provided in Section 7.1 to be used for the purpose of calculating future hypothetical investment adjustments to the Account or to future credits to the Account under Section 6.2 effective as of the Valuation Date coincident with or next following notice to the Administrator. Each Account shall be adjusted as of each Valuation Date to reflect: (a) the hypothetical earnings, expenses, gains and losses described above; (b) amounts credited pursuant to Section 6.2; and (c) distributions or withdrawals. In addition, each Account may be adjusted for its allocable share of the hypothetical costs and expenses associated with the maintenance of the hypothetical investments provided in Section 7.1.

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ARTICLE 8 – RIGHT TO BENEFITS

8.1 Vesting.  A Participant, at all times, has the 100% nonforfeitable interest in the amounts credited to his Account attributable to his elective deferrals made in accordance with Section 4.1.

A Participant’s right to the amounts credited to his Account attributable to Employer contributions made in accordance with Article 5 shall be determined in accordance with the relevant schedule and provisions in Section 7.01 of the Adoption Agreement. Upon a Separation from Service and after application of the provisions of Section 7.01 of the Adoption Agreement, the Participant shall forfeit the nonvested portion of his Account.

8.2 Death.  The Plan Sponsor may elect to accelerate vesting upon the death of the Participant in accordance with Section 7.01(c) of the Adoption Agreement and/or to accelerate distributions upon Death in accordance with Section 6.01(b) or Section 6.01(d) of the Adoption Agreement. If the Plan Sponsor does not elect to accelerate distributions upon death in accordance with Section 6.01(b) or Section 6.01(d) of the Adoption Agreement, the vested amount credited to the Participant’s Account will be paid in accordance with the provisions of Article 9.

A Participant may designate a Beneficiary or Beneficiaries, or change any prior designation of Beneficiary or Beneficiaries in accordance with rules and procedures established by the Administrator.

A copy of the death notice or other sufficient documentation must be filed with and approved by the Administrator. If upon the death of the Participant there is, in the opinion of the Administrator, no designated Beneficiary for part or all of the Participant’s vested Account, such amount will be paid to his estate (such estate shall be deemed to be the Beneficiary for purposes of the Plan) in accordance with the provisions of Article 9.

8.3 Disability.  If the Plan Sponsor has elected to accelerate vesting upon the occurrence of a Disability in accordance with Section 7.01(c) of the Adoption Agreement and/or to permit distributions upon Disability in accordance with Section 6.01(b) or Section 6.01(d) of the Adoption Agreement, the determination of whether a Participant has incurred a Disability shall be made by the Administrator in its sole discretion in a manner consistent with the requirements of Code Section 409A.

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ARTICLE 9 – DISTRIBUTION OF BENEFITS

9.1 Amount of Benefits.  The vested amount credited to a Participant’s Account as determined under Articles 6, 7 and 8 shall determine and constitute the basis for the value of benefits payable to the Participant under the Plan.

9.2 Method and Timing of Distributions.  Except as otherwise provided in this Article 9, distributions under the Plan shall be made in accordance with the elections made or deemed made by the Participant under Article 4. Subject to the provisions of Section 9.6 requiring a six month delay for certain distributions to Key Employees, distributions following a payment event shall commence at the time specified in Section 6.01(a) of the Adoption Agreement. If permitted by Section 6.01(g) of the Adoption Agreement, a Participant may elect, at least twelve months before a scheduled distribution event, to delay the payment date for a minimum period of sixty months from the originally scheduled date of payment. The distribution election change must be made in accordance with procedures and rules established by the Administrator. The Participant may, at the same time the date of payment is deferred, change the form of payment but such change in the form of payment may not effect an acceleration of payment in violation of Code Section 409A or the provisions of Reg. Sec. 1.409A-2(b). For purposes of this Section 9.2, a series of installment payments is always treated as a single payment and not as a series of separate payments.

9.3 Unforeseeable Emergency.  A Participant may request a distribution due to an Unforeseeable Emergency if the Plan Sponsor has elected to permit Unforeseeable Emergency withdrawals under Section 8.01(a) of the Adoption Agreement. The request must be in writing and must be submitted to the Administrator along with evidence that the circumstances constitute an Unforeseeable Emergency. The Administrator has the discretion to require whatever evidence it deems necessary to determine whether a distribution is warranted, and may require the Participant to certify that the need cannot be met from other sources reasonably available to the Participant. Whether a Participant has incurred an Unforeseeable Emergency will be determined by the Administrator on the basis of the relevant facts and circumstances in its sole discretion, but, in no event, will an Unforeseeable Emergency be deemed to exist if the hardship can be relieved: (a) through reimbursement or compensation by insurance or otherwise, (b) by liquidation of the Participant’s assets to the extent such liquidation would not itself cause severe financial hardship, or

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(c) by cessation of deferrals under the Plan. A distribution due to an Unforeseeable Emergency must be limited to the amount reasonably necessary to satisfy the emergency need and may include any amounts necessary to pay any federal, state, foreign or local income taxes and penalties reasonably anticipated to result from the distribution. The distribution will be made in the form of a single lump sum cash payment. If permitted by Section 8.01(b) of the Adoption Agreement, a Participant’s deferral elections for the remainder of the Plan Year will be cancelled upon a withdrawal due to an Unforeseeable Emergency. If the payment of all or any portion of the Participant’s vested Account is being delayed in accordance with Section 9.6 at the time he experiences an Unforeseeable Emergency, the amount being delayed shall not be subject to the provisions of this Section 9.3 until the expiration of the six month period of delay required by section 9.6.

9.4 Payment Election Overrides.  If the Plan Sponsor has elected one or more payment election overrides in accordance with Section 6.01(d) of the Adoption Agreement, the following provisions apply. Upon the occurrence of the first event selected by the Plan Sponsor, the remaining vested amount credited to the Participant’s Account shall be paid in the form designated to the Participant or his Beneficiary regardless of whether the Participant had made different elections of time and /or form of payment or whether the Participant was receiving installment payments at the time of the event.

9.5 Cashouts Of Amounts Not Exceeding Stated Limit.  If the vested amount credited to the Participant’s Account does not exceed the limit established for this purpose by the Plan Sponsor in Section 6.01(e) of the Adoption Agreement at the time he separates from service with the Related Employer for any reason, the Employer shall distribute such amount to the Participant at the time specified in Section 6.01(a) of the Adoption Agreement in a single lump sum cash payment following such termination regardless of whether the Participant had made different elections of time or form of payment as to the vested amount credited to his Account or whether the Participant was receiving installments at the time of such termination. A Participant’s Account, for purposes of this Section 9.5, shall include any amounts described in Section 1.3.

9.6 Required Delay in Payment to Key Employees.  Except as otherwise provided in this Section 9.6, a distribution made on account of Separation from Service (or Retirement, if applicable) to a Participant who is a Key Employee as of the date of his Separation from Service (or Retirement, if applicable) shall not be made before the date which is six months after the Separation from Service (or Retirement, if applicable).

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(a) A Participant is treated as a Key Employee if (i) he is employed by a Related Employer any of whose stock is publicly traded on an established securities market, and (ii) he satisfies the requirements of Code Section 416(i)(1)(A)(i), (ii) or (iii), determined without regard to Code Section 416(i)(5), at any time during the twelve month period ending on the Identification Date.

(b) A Participant who is a Key Employee on an Identification Date shall be treated as a Key Employee for purposes of the six month delay in distributions for the twelve month period beginning on the first day of a month no later than the fourth month following the Identification Date. The Identification Date and the effective date of the delay in distributions shall be determined in accordance with Section 1.06 of the Adoption Agreement.

(c) The Plan Sponsor may elect to apply an alternative method to identify Participants who will be treated as Key Employees for purposes of the six month delay in distributions if the method satisfies each of the following requirements. The alternative method is reasonably designed to include all Key Employees, is an objectively determinable standard providing no direct or indirect election to any Participant regarding its application, and results in either all Key Employees or no more than 200 Key Employees being identified in the class as of any date. Use of an alternative method that satisfies the requirements of this Section 9.6(c ) will not be treated as a change in the time and form of payment for purposes of Reg. Sec. 1.409A-2(b).

(d) The six month delay does not apply to payments described in Section 9.9(a),(b) or (d) or to payments that occur after the death of the Participant. If the payment of all or any portion of the Participant’s vested Account is being delayed in accordance with this Section 9.6 at the time he incurs a Disability which would otherwise require a distribution under the terms of the Plan, no amount shall be paid until the expiration of the six month period of delay required by this Section 9.6.

9.7 Change in Control.  If the Plan Sponsor has elected to permit distributions upon a Change in Control, the following provisions shall apply. A distribution made upon a Change in Control will be made at the time specified in Section 6.01(a) of the Adoption Agreement in the form elected by the Participant in accordance with the procedures described in Article 4. Alternatively, if the Plan Sponsor has elected in accordance with Section 11.02 of the Adoption Agreement to require distributions upon a Change in Control, the Participant’s remaining vested Account shall be paid to the Participant or the Participant’s Beneficiary at the time specified in Section 6.01(a) of the Adoption Agreement as a single lump sum

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payment. A Change in Control, for purposes of the Plan, will occur upon a change in the ownership of the Plan Sponsor, a change in the effective control of the Plan Sponsor or a change in the ownership of a substantial portion of the assets of the Plan Sponsor, but only if elected by the Plan Sponsor in Section 11.03 of the Adoption Agreement. The Plan Sponsor, for this purpose, includes any corporation identified in this Section 9.7. All distributions made in accordance with this Section 9.7 are subject to the provisions of Section 9.6.

If a Participant continues to make deferrals in accordance with Article 4 after he has received a distribution due to a Change in Control, the residual amount payable to the Participant shall be paid at the time and in the form specified in the elections he makes in accordance with Article 4 or upon his death or Disability as provided in Article 8.

Whether a Change in Control has occurred will be determined by the Administrator in accordance with the rules and definitions set forth in this Section 9.7. A distribution to the Participant will be treated as occurring upon a Change in Control if the Plan Sponsor terminates the Plan in accordance with Section 10.2 and distributes the Participant’s benefits within twelve months of a Change in Control as provided in Section 10.3.

(a) Relevant Corporations.  To constitute a Change in Control for purposes of the Plan, the event must relate to (i) the corporation for whom the Participant is performing services at the time of the Change in Control, (ii) the corporation that is liable for the payment of the Participant’s benefits under the Plan (or all corporations liable if more than one corporation is liable) but only if either the deferred compensation is attributable to the performance of services by the Participant for such corporation (or corporations) or there is a bona fide business purpose for such corporation (or corporations) to be liable for such payment and, in either case, no significant purpose of making such corporation (or corporations) liable for such payment is the avoidance of federal income tax, or (iii) a corporation that is a majority shareholder of a corporation identified in (i) or (ii), or any corporation in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in a corporation identified in (i) or (ii). A majority shareholder is defined as a shareholder owning more than fifty percent (50%) of the total fair market value and voting power of such corporation.

(b) Stock Ownership.  Code Section 318(a) applies for purposes of determining stock ownership. Stock underlying a vested option is considered owned by the individual who owns the vested option (and the stock underlying an unvested option is not considered owned by the individual who holds the unvested option). If, however, a vested

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option is exercisable for stock that is not substantially vested (as defined by Treasury Regulation Section 1.83-3(b) and (j)) the stock underlying the option is not treated as owned by the individual who holds the option.

(c) Change in the Ownership of a Corporation.  A change in the ownership of a corporation occurs on the date that any one person or more than one person acting as a group, acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of such corporation. If any one person or more than one person acting as a group is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of a corporation, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation as discussed below in Section 9.7(d)). An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock. Section 9.7(c) applies only when there is a transfer of stock of a corporation (or issuance of stock of a corporation) and stock in such corporation remains outstanding after the transaction. For purposes of this Section 9.7(c), persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time or as a result of a public offering. Persons will, however, be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

(d) Change in the effective control of a corporation.  A change in the effective control of a corporation occurs on the date that either (i) any one person, or more than one person acting as a group, acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing thirty percent (30%) or more of the total voting power of the stock of such corporation, or (ii) a majority of members of the corporation’s board of directors is replaced during any twelve month period by directors whose

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appointment or election is not endorsed by a majority of the members of the corporation’s board of directors prior to the date of the appointment or election, provided that for purposes of this paragraph (ii), the term corporation refers solely to the relevant corporation identified in Section 9.7(a) for which no other corporation is a majority shareholder for purposes of Section 9.7(a). In the absence of an event described in Section 9.7(d)(i) or (ii), a change in the effective control of a corporation will not have occurred. A change in effective control may also occur in any transaction in which either of the two corporations involved in the transaction has a change in the ownership of such corporation as described in Section 9.7(c) or a change in the ownership of a substantial portion of the assets of such corporation as described in Section 9.7(e). If any one person, or more than one person acting as a group, is considered to effectively control a corporation within the meaning of this Section 9.7(d), the acquisition of additional control of the corporation by the same person or persons is not considered to cause a change in the effective control of the corporation or to cause a change in the ownership of the corporation within the meaning of Section 9.7(c). For purposes of this Section 9.7(d), persons will or will not be considered to be acting as a group in accordance with rules similar to those set forth in Section 9.7(c) with the following exception. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only with respect to the ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

(e) Change in the ownership of a substantial portion of a corporation’s assets.  A change in the ownership of a substantial portion of a corporation’s assets occurs on the date that any one person, or more than one person acting as a group (as determined in accordance with rules similar to those set forth in Section 9.7(d)), acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation or the value of the assets being disposed of determined without regard to any liabilities associated with such assets. There is no Change in Control event under this Section 9.7(e) when there is a transfer to an entity that is controlled by the shareholders of the transferring corporation immediately after the transfer. A transfer of assets by a

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corporation is not treated as a change in ownership of such assets if the assets are transferred to (i) a shareholder of the corporation (immediately before the asset transfer) in exchange for or with respect to its stock, (ii) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the corporation, (iii) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the corporation, or (iv) an entity, at least fifty (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in Section 9.7(e)(iii). For purposes of the foregoing, and except as otherwise provided, a person’s status is determined immediately after the transfer of assets.

9.8 Permissible Delays in Payment.  Distributions may be delayed beyond the date payment would otherwise occur in accordance with the provisions of Articles 8 and 9 in any of the following circumstances as long as the Employer treats all payments to similarly situated Participants on a reasonably consistent basis.

(a) The Employer may delay payment if it reasonably anticipates that its deduction with respect to such payment would be limited or eliminated by the application of Code Section 162(m). Payment must be made during the Participant’s first taxable year in which the Employer reasonably anticipates, or should reasonably anticipate, that if the payment is made during such year the deduction of such payment will not be barred by the application of Code Section 162(m) or during the period beginning with the Participant’s Separation from Service and ending on the later of the last day of the Employer’s taxable year in which the Participant separates from service or the 15th day of the third month following the Participant’s Separation from Service. If a scheduled payment to a Participant is delayed in accordance with this Section 9.8(a), all scheduled payments to the Participant that could be delayed in accordance with this Section 9.8(a) will also be delayed.

(b) The Employer may also delay payment if it reasonably anticipates that the making of the payment will violate federal securities laws or other applicable laws provided payment is made at the earliest date on which the Employer reasonably anticipates that the making of the payment will not cause such violation.

(c) The Employer reserves the right to amend the Plan to provide for a delay in payment upon such other events and conditions as the

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Secretary of the Treasury may prescribe in generally applicable guidance published in the Internal Revenue Bulletin.

9.9 Permitted Acceleration of Payment.  The Employer may permit acceleration of the time or schedule of any payment or amount scheduled to be paid pursuant to a payment under the Plan provided such acceleration would be permitted by the provisions of Reg. Sec. 1.409A-3(j)(4), including the following events:

(a) Domestic Relations Order.  A payment may be accelerated if such payment is made to an alternate payee pursuant to and following the receipt and qualification of a domestic relations order as defined in Code Section 414(p).

(b) Compliance with Ethics Agreements and Legal Requirements.  A payment may be accelerated as may be necessary to comply with ethics agreements with the Federal government or as may be reasonably necessary to avoid the violation of Federal, state, local or foreign ethics law or conflicts of laws, in accordance with the requirements of Code Section 409A.

(c) De Minimis Amounts.  A payment will be accelerated if (i) the amount of the payment is not greater than the applicable dollar amount under Code Section 402(g)(1)(B), (ii) at the time the payment is made the amount constitutes the Participant’s entire interest under the Plan and all other plans that are aggregated with the Plan under Reg. Sec. 1.409A-1(c)(2).

(d) FICA Tax.  A payment may be accelerated to the extent required to pay the Federal Insurance Contributions Act tax imposed under Code Sections 3101, 3121(a) and 3121(v)(2) of the Code with respect to compensation deferred under the Plan (the “FICA Amount”). Additionally, a payment may be accelerated to pay the income tax on wages imposed under Code Section 3401 of the Code on the FICA Amount and to pay the additional income tax at source on wages attributable to the pyramiding Code Section 3401 wages and taxes. The total payment under this subsection (d) may not exceed the aggregate of the FICA Amount and the income tax withholding related to the FICA Amount.

(e) Section 409A Additional Tax.  A payment may be accelerated if the Plan fails to meet the requirements of Code Section 409A; provided that such payment may not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Code Section 409A.

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(f) Offset.  A payment may be accelerated in the Employer’s discretion as satisfaction of a debt of the Participant to the Employer, where such debt is incurred in the ordinary course of the service relationship between the Participant and the Employer, the entire amount of the reduction in any of the Employer’s taxable years does not exceed $5,000, and the reduction is made at the same time and in the same amount as the debt otherwise would have been due and collected from the Participant.

(g) Other Events.  A payment may be accelerated in the Administrator’s discretion in connection with such other events and conditions as permitted by Code Section 409A.

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ARTICLE 10 – AMENDMENT AND TERMINATION

10.1 Amendment by Plan Sponsor.  The Plan Sponsor reserves the right to amend the Plan (for itself and each Employer) through action of its Board of Directors. No amendment can directly or indirectly deprive any current or former Participant or Beneficiary of all or any portion of his Account which had accrued and vested prior to the amendment.

10.2 Plan Termination Following Change in Control or Corporate Dissolution.  If so elected by the Plan Sponsor in 11.01 of the Adoption Agreement, the Plan Sponsor reserves the right to terminate the Plan and distribute all amounts credited to all Participant Accounts within the 30 days preceding or the twelve months following a Change in Control as determined in accordance with the rules set forth in Section 9.7. For this purpose, the Plan will be treated as terminated only if all agreements, methods, programs and other arrangements sponsored by the Related Employer immediately after the Change in Control which are treated as a single plan under Reg. Sec. 1.409A-1(c)(2) are also terminated so that all participants under the Plan and all similar arrangements are required to receive all amounts deferred under the terminated arrangements within twelve months of the date the Plan Sponsor irrevocably takes all necessary action to terminate the arrangements. In addition, the Plan Sponsor reserves the right to terminate the Plan within twelve months of a corporate dissolution taxed under Code Section 331 or with the approval of a bankruptcy court pursuant to 11 U. S. C. Section 503(b)(1)(A) provided that amounts deferred under the Plan are included in the gross incomes of Participants in the latest of (a) the calendar year in which the termination occurs, (b) the first calendar year in which the amount is no longer subject to a substantial risk of forfeiture, or (c) the first calendar year in which payment is administratively practicable.

10.3 Other Plan Terminations.  The Plan Sponsor retains the discretion to terminate the Plan if (a) all arrangements sponsored by the Plan Sponsor that would be aggregated with any terminated arrangement under Code Section 409A and Reg. Sec. 1.409A-1(c)(2) are terminated, (b) no payments other than payments that would be payable under the terms of the arrangements if the termination had not occurred are made within twelve months of the termination of the arrangements, (c) all payments are made within twenty-four months of the termination of the arrangements, (d) the Plan Sponsor does not adopt a new arrangement that would be aggregated with any terminated arrangement under Code Section 409A and the regulations thereunder at any time within the three year period following the date of termination of the arrangement, and (e) the termination does not occur proximate to a downturn in the financial health of the Plan sponsor. The Plan Sponsor also reserves the right to amend

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the Plan to provide that termination of the Plan will occur under such conditions and events as may be prescribed by the Secretary of the Treasury in generally applicable guidance published in the Internal Revenue Bulletin.

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ARTICLE 11 – THE TRUST

11.1 Establishment of Trust.  The Plan Sponsor may but is not required to establish a trust to hold amounts which the Plan Sponsor may contribute from time to time to correspond to some or all amounts credited to Participants under Section 6.2. If the Plan Sponsor elects to establish a trust in accordance with Section 10.01 of the Adoption Agreement, the provisions of Sections 11.2 and 11.3 shall become operative.

11.2 Grantor Trust.  Any trust established by the Plan Sponsor shall be between the Plan Sponsor and a trustee pursuant to a separate written agreement under which assets are held, administered and managed, subject to the claims of the Plan Sponsor’s creditors in the event of the Plan Sponsor’s insolvency. The trust is intended to be treated as a grantor trust under the Code, and the establishment of the trust shall not cause the Participant to realize current income on amounts contributed thereto. The Plan Sponsor must notify the trustee in the event of a bankruptcy or insolvency.

11.3 Investment of Trust Funds.  Any amounts contributed to the trust by the Plan Sponsor shall be invested by the trustee in accordance with the provisions of the trust and the instructions of the Administrator. Trust investments need not reflect the hypothetical investments selected by Participants under Section 7.1 for the purpose of adjusting Accounts and the earnings or investment results of the trust need not affect the hypothetical investment adjustments to Participant Accounts under the Plan.

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ARTICLE 12 – PLAN ADMINISTRATION

12.1 Powers and Responsibilities of the Administrator.  The Administrator has the full power and the full responsibility to administer the Plan in all of its details, subject, however, to the applicable requirements of ERISA. The Administrator’s powers and responsibilities include, but are not limited to, the following:

(a) To make and enforce such rules and procedures as it deems necessary or proper for the efficient administration of the Plan;

(b) To interpret the Plan, its interpretation thereof to be final, except as provided in Section 12.2, on all persons claiming benefits under the Plan;

(c) To decide all questions concerning the Plan and the eligibility of any person to participate in the Plan;

(d) To administer the claims and review procedures specified in Section 12.2;

(e) To compute the amount of benefits which will be payable to any Participant, former Participant or Beneficiary in accordance with the provisions of the Plan;

(f) To determine the person or persons to whom such benefits will be paid;

(g) To authorize the payment of benefits;

(h) To comply with the reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA;

(i) To appoint such agents, counsel, accountants, and consultants as may be required to assist in administering the Plan;

(j) By written instrument, to allocate and delegate its responsibilities, including the formation of an Administrative Committee to administer the Plan.

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12.2 Claims and Review Procedures.

(a) Claims Procedure.

If any person believes he is being denied any rights or benefits under the Plan, such person may file a claim in writing with the Administrator. If any such claim is wholly or partially denied, the Administrator will notify such person of its decision in writing. Such notification will contain (i) specific reasons for the denial, (ii) specific reference to pertinent Plan provisions, (iii) a description of any additional material or information necessary for such person to perfect such claim and an explanation of why such material or information is necessary, and (iv) a description of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the person’s right to bring a civil action following an adverse decision on review. Such notification will be given within 90 days (45 days in the case of a claim regarding Disability) after the claim is received by the Administrator. The Administrator may extend the period for providing the notification by 90 days (30 days in the case of a claim regarding Disability) if special circumstances require an extension of time for processing the claim and if written notice of such extension and circumstance is given to such person within the initial 90 day period (45 day period in the case of a claim regarding Disability). If such notification is not given within such period, the claim will be considered denied as of the last day of such period and such person may request a review of his claim.

(b) Review Procedure.

Within 60 days (180 days in the case of a claim regarding Disability) after the date on which a person receives a written notification of denial of claim (or, if written notification is not provided, within 60 days (180 days in the case of a claim regarding Disability) of the date denial is considered to have occurred), such person (or his duly authorized representative) may (i) file a written request with the Administrator for a review of his denied claim and of pertinent documents and (ii) submit written issues and comments to the Administrator. The Administrator will notify such person of its decision in writing. Such notification will be written in a manner calculated to be understood by such person and will contain specific reasons for the decision as well as specific references to pertinent Plan provisions. The notification will explain that the person is entitled to receive, upon request and free of charge,

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reasonable access to and copies of all pertinent documents and has the right to bring a civil action following an adverse decision on review. The decision on review will be made within 60 days (45 days in the case of a claim regarding Disability). The Administrator may extend the period for making the decision on review by 60 days (45 days in the case of a claim regarding Disability) if special circumstances require an extension of time for processing the request such as an election by the Administrator to hold a hearing, and if written notice of such extension and circumstances is given to such person within the initial 60-day period (45 days in the case of a claim regarding Disability). If the decision on review is not made within such period, the claim will be considered denied.

12.3 Plan Administrative Costs.  All reasonable costs and expenses (including legal, accounting, and employee communication fees) incurred by the Administrator in administering the Plan shall be paid by the Plan to the extent not paid by the Employer.

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ARTICLE 13 – MISCELLANEOUS

13.1 Unsecured General Creditor of the Employer.  Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of the Employer. For purposes of the payment of benefits under the Plan, any and all of the Employer’s assets shall be, and shall remain, the general, unpledged, unrestricted assets of the Employer. Each Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.

13.2 Employer’s Liability.  Each Employer’s liability for the payment of benefits under the Plan shall be defined only by the Plan and by the deferral agreements entered into between a Participant and the Employer. An Employer shall have no obligation or liability to a Participant under the Plan except as provided by the Plan and a deferral agreement or agreements. An Employer shall have no liability to Participants employed by other Employers.

13.3 Limitation of Rights.  Neither the establishment of the Plan, nor any amendment thereof, nor the creation of any fund or account, nor the payment of any benefits, will be construed as giving to the Participant or any other person any legal or equitable right against the Employer, the Plan or the Administrator, except as provided herein; and in no event will the terms of employment or service of the Participant be modified or in any way affected hereby.

13.4 Anti-Assignment.  Except as may be necessary to fulfill a domestic relations order within the meaning of Code Section 414(p), none of the benefits or rights of a Participant or any Beneficiary of a Participant shall be subject to the claim of any creditor. In particular, to the fullest extent permitted by law, all such benefits and rights shall be free from attachment, garnishment, or any other legal or equitable process available to any creditor of the Participant and his or her Beneficiary. Neither the Participant nor his or her Beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber, or assign any of the payments which he or she may expect to receive, contingently or otherwise, under the Plan, except the right to designate a Beneficiary to receive death benefits provided hereunder. Notwithstanding the preceding, the benefit payable from a Participant’s Account may be reduced, at the discretion of the administrator, to satisfy any debt or liability to the Employer.

13.5 Facility of Payment.  If the Administrator determines, on the basis of medical reports or other evidence satisfactory to the Administrator, that the recipient of any benefit payments under the Plan is incapable of handling his affairs by reason of minority, illness, infirmity or other incapacity, the Administrator may

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direct the Employer to disburse such payments to a person or institution designated by a court which has jurisdiction over such recipient or a person or institution otherwise having the legal authority under State law for the care and control of such recipient. The receipt by such person or institution of any such payments therefore, and any such payment to the extent thereof, shall discharge the liability of the Employer, the Plan and the Administrator for the payment of benefits hereunder to such recipient.

13.6 Notices.  Any notice or other communication to the Employer or Administrator in connection with the Plan shall be deemed delivered in writing if addressed to the Plan Sponsor at the address specified in Section 1.03 of the Adoption Agreement and if either actually delivered at said address or, in the case or a letter, 5 business days shall have elapsed after the same shall have been deposited in the United States mails, first-class postage prepaid and registered or certified.

13.7 Tax Withholding.  If the Employer concludes that tax is owing with respect to any deferral or payment hereunder, the Employer shall withhold such amounts from any payments due the Participant, as permitted by law, or otherwise make appropriate arrangements with the Participant or his Beneficiary for satisfaction of such obligation. Tax, for purposes of this Section 13.7 means any federal, state, local or any other governmental income tax, employment or payroll tax, excise tax, or any other tax or assessment owing with respect to amounts deferred, any earnings thereon, and any payments made to Participants under the Plan.

13.8 Indemnification. (a) Each Indemnitee (as defined in Section 13.8(e)) shall be indemnified and held harmless by the Employer for all actions taken by him and for all failures to take action (regardless of the date of any such action or failure to take action), to the fullest extent permitted by the law of the jurisdiction in which the Employer is incorporated, against all expense, liability, and loss (including, without limitation, attorneys’ fees, judgments, fines, taxes, penalties, and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Indemnitee in connection with any Proceeding (as defined in Subsection (e)). No indemnification pursuant to this Section shall be made, however, in any case where (1) the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness or (2) there is a settlement to which the Employer does not consent.

(b)    The right to indemnification provided in this Section shall include the right to have the expenses incurred by the Indemnitee in defending any Proceeding paid by the Employer in advance of the final disposition of the Proceeding, to the fullest extent permitted by the law of the jurisdiction in which the Employer is incorporated; provided that, if such law requires, the payment of such expenses incurred by the Indemnitee in advance of the final disposition of a Proceeding shall be made only on delivery to the Employer of

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an undertaking, by or on behalf of the Indemnitee, to repay all amounts so advanced without interest if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified under this Section or otherwise.

(c)  Indemnification pursuant to this Section shall continue as to an Indemnitee who has ceased to be such and shall inure to the benefit of his heirs, executors, and administrators. The Employer agrees that the undertakings made in this Section shall be binding on its successors or assigns and shall survive the termination, amendment or restatement of the Plan.

(d)  The foregoing right to indemnification shall be in addition to such other rights as the Indemnitee may enjoy as a matter of law or by reason of insurance coverage of any kind and is in addition to and not in lieu of any rights to indemnification to which the Indemnitee may be entitled pursuant to the by-laws of the Employer.

(e)  For the purposes of this Section, the following definitions shall apply:

(1)  ”Indemnitee” shall mean each person serving as an Administrator (or any other person who is an employee, director, or officer of the Employer) who was or is a party to, or is threatened to be made a party to, or is otherwise involved in, any Proceeding, by reason of the fact that he is or was performing administrative functions under the Plan.

(2)  “Proceeding” shall mean any threatened, pending, or completed action, suit, or proceeding (including, without limitation, an action, suit, or proceeding by or in the right of the Employer), whether civil, criminal, administrative, investigative, or through arbitration.

13.9 Successors.  The provisions of the Plan shall bind and inure to the benefit of the Plan Sponsor, the Employer and their successors and assigns and the Participant and the Participant’s designated Beneficiaries.

13.10 Disclaimer.  It is the Plan Sponsor’s intention that the Plan comply with the requirements of Code Section 409A. Neither the Plan Sponsor nor the Employer shall have any liability to any Participant should any provision of the Plan fail to satisfy the requirements of Code Section 409A.

13.11 Governing Law.  The Plan will be construed, administered and enforced according to the laws of the State specified by the Plan Sponsor in Section 12.01 of the Adoption Agreement.

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EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

OF BMC SOFTWARE, INC.

I, Robert E. Beauchamp, certify that:

1. I have reviewed this quarterly report on Form 10-Q of BMC Software, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 31, 2008

By:	/s/ ROBERT E. BEAUCHAMP
	Robert E. Beauchamp (Chief Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

OF BMC SOFTWARE, INC.

I, Stephen B. Solcher, certify that:

1. I have reviewed this quarterly report on Form 10-Q of BMC Software, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 31, 2008

By:	/s/ STEPHEN B. SOLCHER
	Stephen B. Solcher (Chief Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF

CHIEF EXECUTIVE OFFICER

OF BMC SOFTWARE, INC.

PURSUANT TO 18 U.S.C. § 1350

Based on my knowledge, I, Robert E. Beauchamp, Chief Executive Officer of BMC Software, Inc. (the “Company”), hereby certify that the accompanying report on Form 10-Q for the period ending September 30, 2008 and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “Report”) by the Company fully complies with the requirements of that section.

Based on my knowledge, I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ ROBERT E. BEAUCHAMP

Robert E. Beauchamp

October 31, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION OF

CHIEF FINANCIAL OFFICER

OF BMC SOFTWARE, INC.

PURSUANT TO 18 U.S.C. § 1350

Based on my knowledge, I, Stephen B. Solcher, Chief Financial Officer of BMC Software, Inc. (the “Company”), hereby certify that the accompanying report on Form 10-Q for the period ending September 30, 2008 and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “Report”) by the Company fully complies with the requirements of that section.

Based on my knowledge, I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ STEPHEN B. SOLCHER

Stephen B. Solcher

October 31, 2008